On March 31, 2023, the Ministry of Corporate Affairs (MCA) announced some changes to the Indian Accounting Standards.
While most of the announcements are not expected to have any significant impact on the financial statements of companies, disclosures of accounting policies change with effect from the current financial year after the amendment to Ind AS 1-Presentation of Financial Statements. Till date, entities were supposed to disclose significant accounting policies.
After the amendment, they are mandated to disclose material accounting policies. For users of financial statements the question now is — would accounting policies remain similar or would they change a lot due to the shift from significant to material?
Ind AS 1 states that an entity shall disclose material accounting policy information. Accounting policy information is considered material if, when considered together with other information included in an entity’s financial statements, it can reasonably be expected to influence decisions that the primary users of general-purpose financial statements make based on those financial statements.
Ind AS 1 states that an accounting policy is expected to be material if users of an entity’s financial statements would need it to understand other material information in the financial statements. It is possible that this could be due to a change in the accounting policy, change in some of the options that accounting standards provide, the accounting policy relates to an area that needs significant judgment and estimates or the accounting for that transaction is complex.
Accounting policy information that focuses on how an entity has applied the requirements of Ind AS to its own circumstances provides entity-specific information that is more useful to users of financial statements. The standard goes on to state that accounting policy information that relates to immaterial transactions, events or conditions need not be disclosed.
Ind AS 1 then goes to make a few bizarre statements. It states that accounting policy information may nevertheless be material because of the nature of the related transactions, other events, or conditions even if the amounts are immaterial.
However, not all accounting policy information relating to material transactions, other events or conditions, is itself material. It is important that if an entity discloses immaterial accounting policy information, such information should not obscure material accounting policy information.
Guidance needed
However, MCA should provide some implementation guidance or examples which explain the intent of the above sentences which on occasion contradict each other. After reading all this, users of financial statements could still ask: “What has changed regarding disclosure of accounting policies?” Entities normally disclose their accounting policy on significant areas of operations such as revenue, employee benefits, borrowing costs, leases, equipment, business combinations and financial instruments.
After the MCA notification, these accounting policies would continue to be disclosed provided the amounts involved are material. For instance, an entity may not disclose their accounting policy for borrowing costs if the amount is expected to be immaterial. Similarly, if there is a material change in the provision for impairment of Trade Receivables as compared to the previous year, an entity may provide additional information of the estimates involved.
If there is a change in the business model for accounting of financial instruments, the accounting policy is expected to disclose this change along with the impact. It is apparent that the MCA is repeating the language used in International Financial Reporting Standards (IFRS) since India has transitioned from International Accounting Standards.
The writer is a chartered accountant