Companies will have to adopt more detailed revenue recognition ways from April 1 as the government has notified a new accounting standard.
The corporate affairs ministry has notified Indian Accounting Standard (Ind AS) 115 which would be effective from the new financial year, starting Sunday.
According to experts, Ind AS 115 will help in more transparent accounting of revenues and have an impact on companies operating in diverse sectors, including technology, real estate and telecom.
The objective of Ind AS 115 is to establish the principles that an entity should apply to report useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer, as per the ministry’s notification.
The standard requires an entity to recognise revenue “to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services”, it noted.
Once it is in force, the other two standards Ind AS 18 and 11, which are related to revenue and construction contracts, would be withdrawn.
Leading consultancy EY India said the effect of Ind AS 115 on entities would vary and some might face significant changes in revenue recognition.
Former ICAI President Manoj Fadnis said Ind AS 115 would help in having “more accurate and transparent accounting” ways. However, companies might face challenges in implementing the standard in the first quarter of the next financial year, he added.
Sandip, Khetan, National Leader and Partner (Financial Accounting Advisory Services) at EY India said Ind AS 115 is going to significantly change the revenue of companies especially in sectors like EPC, technology, mining and metals, real estate, telecom and e-commerce.
“The standard is likely to affect the measurement, recognition…and disclosure of revenue, which is typically an entity’s most important financial performance indicator — keenly scrutinised by investors and analysts,” he said.
Ashish Gupta, Director at Grant Thornton Advisory Pvt Ltd, said the notification is a welcome step towards aligning the new standard to the global adoption of IFRS 15.
“Companies in all spheres, manufacturing, services, technology, infrastructure, shall be impacted as there are quite significant new concepts on the recognition, measurement of revenue and disclosure of additional information,” he said.
Ind AS is converged with International Financial Reporting Standards (IFRS).