Why Do Indian Companies Have to Maintain Accounts as Per Ind AS and IGAAP?
Indian companies operate under a dual accounting standard framework: Indian Accounting Standards (Ind AS) and Indian Generally Accepted Accounting Principles (IGAAP). The choice between these standards can significantly impact the financial reporting structure of companies. This article delves into the reasons why listed companies with net worth above 250 crore (Indian Rupees) are required to follow Ind AS, while smaller and medium-sized enterprises (SMEs) are currently not bound by these standards.
Ind AS for Listed Companies
Indian Accounting Standards (Ind AS) are a set of accounting standards that have been adopted for listed companies in India. Listed companies are those that are publicly traded and have a significant level of transparency and scrutiny. Ind AS are in line with the international accounting standards (IAS) issued by the International Accounting Standards Board (IASB). These standards aim to enhance the quality and comparability of financial reports.
Networth > 250 Crore: Compliance with Ind AS
For listed companies with a net worth exceeding 250 crore, compliance with Ind AS is mandatory. This threshold is designed to ensure that larger and more mature companies adhere to the higher standards of transparency and accountability. The adherence to Ind AS is critical to meet the increased scrutiny and regulatory requirements of the stock exchanges and other regulatory bodies in India.
IGAAP for SMEs: Cost-Benefit Analysis
Small and medium enterprises (SMEs) that are not listed do not need to follow Ind AS. Instead, they generally follow IGAAP, which stands for Indian Generally Accepted Accounting Principles. The primary reason for this difference in standards is the cost-benefit analysis. Maintaining accounts under Ind AS can be extremely costly for SMEs, as it requires significant resources and expertise, which smaller companies may not be able to afford.
The Cost-Benefit Dilemma for SMEs
The process of transitioning to Ind AS can involve substantial costs, including hiring specialized accounting staff, implementing new systems, and training employees. For SMEs, these costs can be prohibitive. On the other hand, IGAAP is typically less complex and more aligned with their operational needs. Therefore, it is often more practical and economical for SMEs to continue using IGAAP.
Converging IGAAP with Ind AS
A middle ground has been proposed to address the cost issues faced by SMEs while ensuring that the accounting standards are not discarded. Instead of creating a completely new set of standards, it is suggested to update the existing IGAAP framework to gradually converge with Ind AS standards. This approach acknowledges the differences in the accounting needs of smaller and larger companies. For instance, the recent amendments to AS10 on fixed assets have brought it closer in line with Ind AS16.
Separate Standards for SMEs in IFRS
In International Financial Reporting Standards (IFRS), there are separate sets of standards specifically tailored for SMEs. These standards are designed to be simpler and more cost-effective for small businesses to implement. Similarly, for SMEs in India, updating IGAAP to make them more compatible with Ind AS can be a pragmatic solution. The goal is to ensure that financial reporting remains accurate and transparent, while also being accessible and cost-effective for all sizes of businesses.
Conclusion
Indian companies face different requirements and challenges when it comes to the choice of accounting standards. Listed entities with substantial net worth are required to follow Ind AS to ensure high standards of financial transparency. However, for SMEs, the simpler and less costly IGAAP framework remains the preferred choice. The ongoing effort to converge IGAAP with Ind AS is a forward-looking approach that seeks to balance the need for higher standards with the practical realities faced by smaller companies. This evolution in accounting standards reflects the commitment to maintaining integrity in financial reporting while being mindful of the diverse needs of the business ecosystem.