India will adopt the new Ind AS 118 accounting standard starting April 1, 2027. This update requires companies to classify income and expenses into five specific categories, improving transparency in profit and loss statements. While net profit calculations remain unchanged, listed companies must prepare for restated comparative financial data and audited management performance measures.
The National Financial Reporting Authority (NFRA) is set to introduce Ind AS 118, a new accounting standard that will significantly change how Indian companies present their financial performance. Expected to be effective for fiscal years starting on or after April 1, 2027, the standard aims to provide investors with clearer and more consistent data. While the core calculation of net profit remains the same, the way companies display their income and expenses in the profit and loss statement will undergo a major transformation.
New Classification Categories
Under the new standard, companies must classify all income and expense items into five mandatory categories: operating, investing, financing, income taxes, and discontinued operations. The introduction of operating, investing, and financing categories is a new requirement for Indian accounting standards. This change is designed to help investors better understand where a company generates its money and how it uses its resources. Specialized businesses, such as banks and non-banking financial companies (NBFCs), will need to carefully assess whether their core activities qualify as investing or financing, as their classification requirements will differ from those of manufacturing or service firms.
Impact on Financial Statements and IPOs
The implementation of Ind AS 118 requires a lead time of at least one year. Companies will need to restate their comparative financial information to align with the new format. This means that when businesses report their results for the quarter ending June 2027, they must also provide restated figures for previous periods. For companies planning an Initial Public Offering (IPO) in the 2028 fiscal year, the regulation will require the restatement of financial data for the preceding three years. This process will necessitate significant updates to company information systems and financial closing processes.
Audit for Management Measures
A notable change involves Management-Defined Performance Measures (MPMs). Many companies currently share their own custom profit subtotals in earnings presentations to highlight specific performance aspects. Under Ind AS 118, if a company uses these measures externally, they must be disclosed in a single note, including a clear explanation of how they are calculated and reconciled to the standard accounting profit. Because these MPMs will now be subject to audit, the standard aims to reduce potential inconsistencies in how companies present their internal performance metrics to the market. Furthermore, the standard mandates new, specific subtotals like operating profit or loss, which will provide a more standardized view of company health across different sectors.