Sunday, June 23, 2024

Disclose accounting policies in financial statements: Govt

New Delhi: Companies will have to be more transparent, starting from the reporting period on 1 April by disclosing the accounting policies used in preparing financial statements that can influence the decisions of investors, shareholders and lenders.

As part of their financial statements, companies have to disclose the accounting policies adopted in making the statements.

The new disclosure requirement is part of Indian Accounting Standards Amendment Rules, 2023 brought out by the ministry of corporate affairs, aligning these standards with changes in global best practices.

The new rules mandate that businesses have to disclose the “material accounting policy information” in their financial statements, replacing the earlier requirement of having to disclose “significant accounting policies”.

‘Material policies’ indicate the ability to influence decisions of financial statement users such as shareholders, investors and lenders. This, along with the new guidelines on deciding what is a material accounting policy information will go a long way in giving a clearer picture of the affairs of the company, experts said.

In addition, managements have to revisit their approach of disclosing ‘boiler-plate accounting policies’ in the annual reports and make disclosures more relevant and appropriate.

The move comes amid efforts to improve the quality of financial reporting. The National Financial Reporting Authority (NFRA) is taking up audit quality reviews of public interest entities and the government is working on further amending the Companies Act to make the regulatory regime for statutory auditors more robust.

“Auditors will have to evaluate and have a dialogue with the management about the subjective criteria for considering the accounting policies for preparation of Ind AS financial statement as ‘material accounting policy information’ and ‘immaterial’. This is to align with the International Accounting Standards,” said Bhavin Kapadia, partner, N.A. Shah Associates, a tax advisory firm.

The concept of ‘material accounting policy’ will improve the overall readability of the financial statement, said Shah. This amendment is introduced in the accounting standard on presentation of financial statements (Ind AS1).

The amendments allow companies to make information contained in financial statements more relevant and less cluttered, according to Sai Venkateshwaran, partner, KPMG in India.

There were also concerns about disclosures being done in a manner that obscures relevant information, Venkateshwaran said.

“Accounting policies are amongst the most detailed sections, and often contain boilerplate disclosures, which are essentially reproduction of guidance from the standard itself. The amendments now require companies to instead provide more contextualized commentary on how accounting policies have been applied specifically in the company’s context to one or more transactions or related transactions,” said Venkateshwaran. The focus is also on preventing relevant information from being obscured.

The revised Ind AS1 requires companies to review their accounting policies and ensure their relevance to their operations. This will lead to enhanced disclosure practices and improved transparency, which will benefit stakeholders such as investors, creditors and regulators, said Sandip Khetan, global head of accounting and reporting consulting at Uniqus Consultech, a global consulting firm.

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