Financial statements of companies, which are heavily relied upon by investors and stakeholders to assess the operations and profitability, will undergo an overhaul to enable better understanding as the ministry of corporate affairs has introduced a new rule on accounting standards. According to the amendment, companies will now have to disclose “material accounting policy information” as against the practice of “significant accounting policies”.
“An entity shall disclose material accounting policy information….Accounting policy information is material, if when considered together with other information included in an entity’s financial statements, it can reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements,” said the Companies (Indian Accounting Standards) Amendment Rules, 2023.
An entity is likely to consider accounting policy material to its financial statements in cases where it has changed its accounting policy in the reporting period which has led to a material change in financial statements or chosen the accounting policy from one or more Ind AS. Other situations could be where the accounting policy relates to an area for which an entity is required to make significant judgements or assumptions or even if the accounting required for them is complex and users of the entity’s financial statements would otherwise not understand those material transactions.
The new rules, which come into effect for annual reporting periods starting April 1, 2023, are also aligned with International Financial Reporting Standards.
Experts said these will result in better disclosures by companies and will get a better understanding of the statements.
Sandip Khetan, Global Head, AR (Accounting and Reporting) Consulting, Uniqus Consultech said “Companies need to carefully evaluate and apply the same as they prepare the financial statements for the quarter ended June 30, 2023. In addition, companies need to put in effective governance around disclosure practices so that they are in alignment with changing regulatory requirements.”
Alignment with IFRS helps global investors to compare quality of disclosures made by companies with the peer group in other markets as well, he further said.
Pramod Jain, a Chartered Accountant, said, “The basic purpose of the change is to ensure that only relevant and material information is shared in the financial statements and it is not bulky. The disclosures should not merely have information that is known and for the sake of it. Also, Ind AS defines materiality but not significant.”