A question often asked is: Do the customary practices in accounting still continue? The answer seems to be — “the old order changeth yielding place to new.” Accounting can no longer be judged by applying customary law. There are a few changes worth taking note of.
Objectives of revised Ind AS standards
The new Ind AS numbered from 101 begins with a preamble. It says that the objective is to specify the reporting requirements or improve the relevance or comparability of the reporting entity's information in the financial statements. The original aim of prescribing accounting treatment for recognition of revenue has got erased. Now, these are principles an entity shall apply to report useful information to users . More than one Standard, example — disclosure of interest in other entities, is wholly devoted to only reporting.
The swing is positively from accounting to reporting.
Some time-honoured tenets given a go by
The reporting prescriptions of Ind-AS Standards are aimed at decision-usefulness. For a set of information to be decision-useful, we look for two primary decision-specific qualities — relevance and reliability. There is no disputing the fact reliability is the touchstone for an auditor to extend true-and-fair-view assurance. In the recent overhaul of the conceptual framework and re-aligning it with IASB's framework, the tenet of reliability has been removed and substituted with “faithful representation.” The argument is that though the term reliability has been replaced, the intent and purpose remain unaltered.
There is a strong view that the framework is meant for standard-setting activity. This means standard-setters can evolve prescriptions that do not include the tenet of reliability. The preparers will adhere to those standards. But, while certifying the financials or in their adherence to SA 540 or similar SAs, auditors will necessarily have to ensure reliability. An auditor can only make a plea that the audit pieces of evidence collected by him are reliable, without touching on whether the accounting and reporting standards are being complied with are founded on the tenet of reliability.
One Ind AS says: in the absence of an Ind AS that specifically applies to a transaction, other event or condition, management shall use its judgement in developing and applying an accounting policy that results in information that is reliable . For example, where an entity has to select an accounting policy for Carbon Credit or for demerger-type transactions (for which there are no prescriptions in Ind AS), reliability comes into play. There is a dilemma here.
Overhauled definitions of some fundamental terms
Take the two fundamental terms in accounting — asset and liability. Both these terms have been redefined. Until recently, an asset was described as a resource controlled by an entity, as a result of past events, and from which future economic benefits are expected to flow. This term now stands redefined as a present economic resource controlled by an entity due to past events. And the economic resource is explained as rights that have the “potential” to produce economic benefits. The concept of probable flow of economic benefits has been dispensed with, perhaps because the probability is linked to uncertainty. Instead, a new idea, “economic resource,” has been introduced to be read with asset and liability. Would it be correct to say that there is no uncertainty element embedded in that resource that is capable of producing benefits? There is uncertainty in my answer.
A liability was considered a present obligation arising from past events, the settlement of which is expected to result in an outflow of resources. This is no longer so. A liability is a present obligation of an entity to transfer an economic resource due to past events. One wonders whether this new definition of liability has been brought in to justify the recognition of today's value of tomorrow's accruing obligations as “liability towards the right of use” under an operating lease.
Another redefined term is control. An entity controls an economic resource if it has the present ability to direct the use of the economic resource to obtain (or substantially all) the economic benefits that flow from it .
What is critical is that control over an entity is not the same as control over an asset. Some nuances may float up in practice.
New arrivals
It is no longer pain-free to keep pace with the speed and rapidity with which accounting prescriptions are getting amended. New Ind AS 116 (Leases) was notified on March 30, with applicability from April 1. It contained radical changes in accounting methodology, requiring Lessees to recognise operating leases in BS. Some may not even fathom the compulsions of a change in accounting, but the resulting debt-equity is not free from questioning by lenders.
Standards are getting complex. The sheer size of Ind AS 115 (revenue from contracts with customers) is mind-boggling. Does the length and complexity of standards not make compliance difficult in such cases? It is tempting to ask a question: How many of us have read this standard at least once fully and entirely and grasped the prescriptions correctly?
One difficulty faced by NBFCs in the application of Ind AS is the provisioning norms for NPAs. RBI has issued guidance — or a carve-out — mandating NBFCs to compare the impairment as per IRACP and Ind AS 109 and recognise provisioning at an amount higher than the two.
Some practical difficulties that arise in computing regulatory capital and regulatory ratios still continue.
The much-debated ones
That Ind AS focuses on consolidated financial statements, fair value measurements, and prescribes detailed disclosures have been debated extensively. If the journey is towards reporting, and if the investor relies on the current status of what is embedded in future values, we should better offer to him what meets his needs.
The journey in this profession that began with accounting has, after a long haul, reached possibly the mid-way junction of financial reporting. But not its final destination yet. One expects to proceed to sustainability and integrated reporting and will unstoppably move further towards climate-related disclosures.
(The writer is a Coimbatore-based chartered accountant.)