Accounting Standards India: AY 2025-26 Compliance

Accounting Standards in India: A Practical Guide for AY 2025-26

Nearly 60% of Indian businesses struggle with the complexities of accounting standards, leading to potential compliance issues and financial misstatements. As a business owner or finance professional, you need a clear understanding of the applicable accounting standards in India for the Assessment Year (AY) 2025-26 (Financial Year 2024-25). This guide provides a practical overview of the key standards, their implications, and how to ensure compliance.

The Landscape of Accounting Standards

In India, the accounting framework is primarily governed by the following:

• Indian Accounting Standards (Ind AS): These are converged with International Financial Reporting Standards (IFRS) and are applicable to specific classes of companies based on their size and listing status.
• Accounting Standards (AS): These are issued by the Institute of Chartered Accountants of India (ICAI) and are applicable to companies that do not fall under the Ind AS regime.
• Income Computation and Disclosure Standards (ICDS): These standards are issued by the Central Board of Direct Taxes (CBDT) and are used for computing income under the Income Tax Act, 1961.
• Goods and Services Tax (GST) Laws: The GST Act and related rules impact how transactions are recorded and reported.

Indian Accounting Standards (Ind AS)

Ind AS represents a significant shift towards globally accepted accounting practices. The Ministry of Corporate Affairs (MCA) has notified Ind AS, and their applicability is based on specific criteria.

Applicability Criteria:

Ind AS is mandatory for:

• Listed Companies: All companies whose equity or debt securities are listed or are in the process of being listed on any stock exchange in India or outside India.
• Unlisted Companies:
  • Companies having a net worth of ₹250 crore or more.
  • Holding, subsidiary, joint venture, or associate companies of companies covered above.

Phased Implementation:

The implementation of Ind AS has been phased. As of AY 2025-26, most large and mid-sized companies are already under the Ind AS regime. However, understanding the specific Ind AS applicable to your business is crucial. For example, Ind AS 116 on Leases has significantly impacted companies with substantial lease arrangements.

Key Ind AS to Watch Out For:

• Ind AS 1: Presentation of Financial Statements
• Ind AS 2: Inventories
• Ind AS 7: Statement of Cash Flows
• Ind AS 8: Accounting Policies, Changes in Accounting Estimates and Errors
• Ind AS 12: Income Taxes
• Ind AS 16: Property, Plant and Equipment
• Ind AS 19: Employee Benefits
• Ind AS 20: Accounting for Government Grants and Disclosure of Government Assistance
• Ind AS 21: The Effects of Changes in Foreign Exchange Rates
• Ind AS 23: Borrowing Costs
• Ind AS 33: Earnings Per Share
• Ind AS 36: Impairment of Assets
• Ind AS 37: Provisions, Contingent Liabilities and Contingent Assets
• Ind AS 38: Intangible Assets
• Ind AS 102: Share-based Payment
• Ind AS 103: Business Combinations
• Ind AS 109: Financial Instruments
• Ind AS 115: Revenue from Contracts with Customers
• Ind AS 116: Leases

Impact of Ind AS:

Ind AS adoption requires significant changes in accounting systems, processes, and internal controls. You need to invest in training your accounting team and potentially seek expert advice to ensure a smooth transition. The shift to Ind AS also affects key financial ratios and performance indicators, requiring a fresh perspective on financial analysis.

"The adoption of Ind AS has brought greater transparency and comparability to Indian financial reporting. However, businesses must invest in robust systems and processes to ensure accurate and compliant reporting. Ignoring these changes can lead to significant penalties and reputational damage." - CA. Rohan Sharma, Partner, ABC & Co.

Accounting Standards (AS)

For companies not covered under Ind AS, the Accounting Standards (AS) issued by ICAI remain applicable. These standards provide a framework for recognizing, measuring, presenting, and disclosing financial information. Ensure your accounting practices adhere to the relevant AS to maintain compliance.

Key Accounting Standards (AS):

• AS 1: Disclosure of Accounting Policies
• AS 2: Valuation of Inventories
• AS 3: Cash Flow Statements
• AS 4: Contingencies and Events Occurring After the Balance Sheet Date
• AS 5: Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies
• AS 6: Depreciation Accounting (Now superseded by AS 10)
• AS 7: Construction Contracts
• AS 9: Revenue Recognition
• AS 10: Property, Plant and Equipment
• AS 11: The Effects of Changes in Foreign Exchange Rates
• AS 12: Accounting for Government Grants
• AS 13: Accounting for Investments
• AS 14: Accounting for Amalgamations
• AS 15: Employee Benefits
• AS 16: Borrowing Costs
• AS 17: Segment Reporting
• AS 18: Related Party Disclosures
• AS 19: Leases
• AS 20: Earnings Per Share
• AS 21: Consolidated Financial Statements
• AS 22: Accounting for Taxes on Income
• AS 23: Accounting for Investments in Associates in Consolidated Financial Statements
• AS 24: Discontinuing Operations
• AS 25: Interim Financial Reporting
• AS 26: Intangible Assets
• AS 27: Financial Reporting of Interests in Joint Ventures
• AS 28: Impairment of Assets
• AS 29: Provisions, Contingent Liabilities and Contingent Assets

Income Computation and Disclosure Standards (ICDS)

ICDS are a set of standards notified by the CBDT that govern the computation of income for tax purposes. These standards are applicable to all taxpayers following the mercantile system of accounting. ICDS aims to bring consistency in the computation of taxable income.

Key ICDS to Understand:

• ICDS I: Accounting Policies
• ICDS II: Valuation of Inventories
• ICDS III: Construction Contracts
• ICDS IV: Revenue Recognition
• ICDS V: Tangible Fixed Assets
• ICDS VI: The Effects of Changes in Foreign Exchange Rates
• ICDS VII: Government Grants
• ICDS VIII: Securities
• ICDS IX: Borrowing Costs
• ICDS X: Provisions, Contingent Liabilities and Contingent Assets

Alignment with Income Tax Act:

While ICDS provides guidelines for income computation, it's crucial to remember that the provisions of the Income Tax Act, 1961, prevail. Any conflict between ICDS and the Act is resolved in favor of the Act. For example, Section 43CA of the Income Tax Act deals with the computation of income from transfer of certain assets other than capital assets, where the stamp duty value exceeds the declared consideration.

Practical Implications:

ICDS can significantly impact your tax liability. For instance, the method of inventory valuation or revenue recognition can affect the amount of taxable income. You need to carefully assess the impact of ICDS on your business and ensure that your tax computations are aligned with these standards. Keep abreast of updates to ICDS to ensure accurate tax filings. Consider using AI for CFO to streamline compliance.

Goods and Services Tax (GST) Accounting

The implementation of GST has fundamentally changed how businesses account for indirect taxes. GST requires meticulous record-keeping, accurate invoice generation, and timely filing of returns. Proper GST accounting is crucial for claiming input tax credit and avoiding penalties.

Key Aspects of GST Accounting:

• GST Registration: If your aggregate turnover exceeds ₹20 lakh (₹10 lakh for specific category states), you are required to register under GST. See the new business guide for GST Registration.
• Invoice Generation: GST-compliant invoices are mandatory for all taxable supplies. E-invoicing is now mandatory for businesses with a turnover exceeding ₹5 crore.
• Input Tax Credit (ITC): You can claim ITC on the GST paid on inputs used for making taxable supplies. However, ITC can be denied due to various reasons, such as non-payment to suppliers within 180 days or incorrect invoice details.
• GST Returns: You are required to file monthly or quarterly GST returns, such as GSTR-1, GSTR-3B, and GSTR-9 (Annual Return). Late filing attracts penalties and interest.
• GST Reconciliation: Reconciling your books of accounts with the GST returns filed is essential to identify and rectify any discrepancies. Tools like TRACES 2.0 are invaluable for TDS reconciliation.

Recent Changes in GST:

The GST landscape is constantly evolving with frequent notifications and circulars issued by the CBIC. Stay updated with these changes to ensure your accounting practices are compliant. Recent changes include amendments to e-invoicing rules, ITC eligibility, and return filing procedures. Also, be aware of how GST impacts specific sectors, such as the impact on car sales.

Penalties for Non-Compliance:

Non-compliance with GST laws can attract hefty penalties. Late filing of returns can result in a penalty of ₹200 per day (subject to a maximum of ₹5,000). Incorrect invoice generation or claiming ineligible ITC can lead to penalties up to 100% of the tax evaded. Ensure you have robust internal controls to prevent GST non-compliance.

Comparison of Accounting Frameworks

Practical Steps for Compliance

1. Assess Applicability: Determine which accounting standards (Ind AS or AS) and ICDS are applicable to your business.
2. Update Accounting Systems: Ensure your accounting software and systems are configured to comply with the relevant standards.
3. Train Your Team: Provide adequate training to your accounting team on the requirements of Ind AS, AS, ICDS, and GST.
4. Seek Expert Advice: Consult with qualified chartered accountants or accounting professionals for guidance on complex accounting issues.
5. Maintain Proper Documentation: Keep accurate and complete records of all financial transactions to support your financial statements and tax returns.
6. Regular Review: Conduct regular reviews of your accounting practices to identify and rectify any potential non-compliance issues. Consider outsourcing accounts payable for efficiency.
7. Stay Updated: Keep abreast of the latest amendments and notifications issued by the MCA, ICAI, CBDT, and CBIC.

The Role of Technology

Technology plays a crucial role in streamlining accounting compliance. Accounting software with built-in compliance features can help you automate tasks, reduce errors, and ensure adherence to accounting standards. Cloud-based accounting solutions offer real-time access to financial data and facilitate collaboration among team members. Explore AI Accounting to improve business compliance.

Specific Compliance Considerations for AY 2025-26

• Companies Act, 2013: Ensure compliance with the Companies Act, 2013, including timely filing of financial statements (Form AOC-4) and annual returns (Form MGT-7) with the MCA. Penalties for late filing can be substantial.
• Tax Audit: If your turnover exceeds ₹10 crore (or ₹1 crore under certain conditions), you are required to get your accounts audited under Section 44AB of the Income Tax Act. The deadline for filing the tax audit report (Form 3CA/3CB-3CD) is typically September 30th of the assessment year.
• TDS Compliance: Ensure timely deduction and remittance of Tax Deducted at Source (TDS) on various payments. File TDS returns (Form 24Q, 26Q, 27Q) within the prescribed deadlines. Late filing attracts penalties and interest. Refer to the guide for TRACES 2.0.
• PAS 6: Comply with PAS 6 Applicability & ISIN Rules 9A/9B if applicable to your company.

By understanding and implementing these accounting standards, you can ensure that your business remains compliant and financially sound in AY 2025-26. Remember to adapt your strategies to address bookkeeping issues.

FAQs

What is the difference between Ind AS and AS?

Ind AS are converged with IFRS and are applicable to larger companies based on their net worth and listing status. AS are issued by ICAI and are applicable to companies that do not fall under the Ind AS regime. Ind AS generally involve more fair value measurements and complex accounting treatments compared to AS.

How does ICDS impact my tax liability?

ICDS provides guidelines for computing income for tax purposes. It can affect the timing and amount of taxable income recognized. For example, ICDS on revenue recognition can impact when revenue is recognized for tax purposes, which can affect your tax liability.

What are the key GST compliance requirements for AY 2025-26?

Key GST compliance requirements include obtaining GST registration if your turnover exceeds the threshold, generating GST-compliant invoices, claiming input tax credit correctly, and filing GST returns (GSTR-1, GSTR-3B, GSTR-9) on time. E-invoicing is mandatory for businesses exceeding ₹5 crore turnover.

What are the penalties for non-compliance with accounting standards?

Penalties for non-compliance vary depending on the nature of the violation. Late filing of financial statements or tax returns can attract monetary penalties. Incorrect reporting or non-compliance with accounting standards can lead to reputational damage and legal consequences. GST penalties can be up to 100% of the tax evaded.

Where can I find the latest updates on accounting standards in India?

You can find the latest updates on accounting standards on the websites of the Ministry of Corporate Affairs (www.mca.gov.in), the Institute of Chartered Accountants of India (www.icai.org), the Central Board of Direct Taxes (www.incometax.gov.in), and the GST portal. You should also subscribe to professional journals and newsletters to stay informed about the latest developments.

How can technology help in complying with accounting standards?

Accounting software with built-in compliance features can automate tasks, reduce errors, and ensure adherence to accounting standards. Cloud-based accounting solutions offer real-time access to financial data and facilitate collaboration. AI-powered tools can help with tasks like invoice processing, reconciliation, and fraud detection. These tools can free up your time to focus on more strategic initiatives, such as cost control in construction projects.

What if my company is undergoing OPC Registration? Are the accounting standards the same?

Yes, even if your company is registered as an OPC, the same accounting standards apply based on your turnover and other criteria. Ensure you understand the specific requirements that apply to your business structure.

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Disclaimer

This article is for educational purposes only and does not constitute professional legal, tax, or financial advice. Consult a qualified professional for specific advice.