Ind AS 118 vs Ind AS 1 – End-to-End Overview
A comprehensive analysis of the high-level changes, expected impact, and preparation roadmap for the new Indian Accounting Standard.
1. Background and Current Status
Ind AS 118, "Presentation and Disclosure in Financial Statements", is a new Indian Accounting Standard proposed by ICAI's Accounting Standards Board (ASB) to replace Ind AS 1 "Presentation of Financial Statements". It is based on IFRS 18, issued by the IASB in April 2024, and is part of India's ongoing convergence with IFRS.
Implementation Timeline
Note: This is aligned with IFRS 18's effective date of 1 January 2027, while allowing Indian entities one extra quarter for transition.
2. Objective and Scope of Ind AS 118
Primary Objective
Sets out requirements for the presentation and disclosure of information in general purpose financial statements, focusing on improving the structure and transparency of the statement of profit and loss (P&L).
Scope & Boundaries
Applies to all entities preparing financial statements under Ind AS. It does not change recognition and measurement requirements in other Ind ASs; it changes how results are presented and explained.
It continues to require a complete set of financial statements (balance sheet, statement of profit and loss, statement of changes in equity, statement of cash flows, and notes), but refines how income and expenses are categorised and disclosed.
3. High-level Changes Introduced
At a high level, Ind AS 118 replaces Ind AS 1 while carrying forward many unchanged requirements (going concern, accrual basis, etc.). Key introductions include:
Five Mandatory P&L Categories
Introduces a mandatory structure for the P&L based on five distinct income and expense categories.
Operations
New Mandatory Subtotals
Includes mandatory calculation of operating profit and profit or loss before financing and income taxes.
MPM Disclosures
Requires explicit disclosures and reconciliations for management-defined performance measures (MPMs) like "adjusted EBITDA".
Aggregation Principles
Strengthens principles to avoid obscuring material information through excessive aggregation.
Operating Expenses
Detailed guidance on presentation by nature, function, or a mixed approach, with note disclosures required if function-wise is used.
Cash Flow Alignment
Aligns the starting point of the indirect method cash flow statement strictly with the new operating profit subtotal.
4. Overview of Existing Ind AS 1 (Baseline)
Ind AS 1 prescribes overall requirements for general-purpose financial statements to ensure comparability. It allows significant flexibility in P&L structure and subtotals.
- Complete Set: Balance sheet, P&L (including OCI), SOCIE, cash flows, notes, and comparative information.
- Key Principles: Emphasis on fair presentation, going concern, accrual basis, consistency, and materiality.
- Flexibility: Minimum line items on P&L face, but no standardised definition of "operating profit".
- Expense Classification: Requires classification by nature (e.g., employee benefits, depreciation) and does not allow a pure function-of-expense format.
5. Detailed Comparison: Ind AS 1 vs Proposed Ind AS 118
| Area | Current Ind AS 1 | Proposed Ind AS 118 | Practical Implications |
|---|---|---|---|
| Effective Date | In force for all Ind AS reporting entities; latest amendments effective from FY 2025-26. | Proposed for annual reporting periods beginning on or after 1 April 2027; calendar-year entities may adopt from 1 Jan 2027. | Two comparative periods will need re-presentation; project planning required starting FY 2026-27. |
| Overall Objective | Ensure comparable presentation of general purpose statements, with minimum structure/disclosures. | Same objective, but with explicit focus on improving communication of financial performance and comparability of P&L. | Conceptual continuity but a more rules-based framework; policies must be revisited and documented. |
| Income & Expense Categories | No mandatory classification; entities use judgement. | Mandatory categorisation into five categories: operating, investing, financing, income taxes, and discontinued operations. | Extensive mapping of chart of accounts required; new policies and robust documentation for borderline items. |
| Operating Profit Subtotal | Not defined; entities present "EBIT", "EBITDA" etc., using their own definitions leading to diversity. | Introduces mandatory defined subtotals ("operating profit" and "profit before financing and taxes") with detailed guidance. | Standardised operating profit enhances comparability but forces realignment of commonly used KPIs. |
| MPMs | No specific framework; non-GAAP measures governed mainly by SEBI/LODR. | Explicit definition of MPMs; requires a single note disclosing each MPM, its definition, purpose, and reconciliation. | Heightened discipline; finance teams must inventory existing KPIs and design robust reconciliations. |
5.2 Areas Largely Carried Forward
Many core principles of Ind AS 1 are carried forward into Ind AS 118, often with only editorial changes:
6. Expected Impact on Indian Companies
Systems, Processes & Chart of Accounts
Mandatory classification requires re-design of the chart of accounts, mapping rules, and reporting hierarchies in ERPs. Complex groups face sizeable data projects. Dashboards and templates must embed new subtotals, and automated cash flow reconciliation is crucial.
Policies, Controls & Documentation
Entities need formal policies on "main business activities", criteria for unusual items, governance of MPMs, and operating expense presentation logic. ICFR controls must ensure consistent classification reviewed by audit committees.
Governance & Investor Communication
MPMs in public communications (earnings calls, releases) must match the audited note. CFOs and IR teams must align narrative messaging to avoid inconsistency between financial statements and external communications.
Sector-Specific Implications
- Banks & Financials: Classification of interest/fee income relies heavily on the "main business activity" concept.
- Capital-intensive: Disposals of PPE may move between operating/investing based on business models.
- Tech & Services: High use of non-GAAP falls strictly under the MPM framework.
Transition & Comparatives
Retrospective application means restating at least one year of comparative info. Requires mapping historic trial balances, auditing past judgements, and clear communication to investors.
7. Interaction with Schedule III
Schedule III to the Companies Act 2013 prescribes minimum formats. It already states that where standards require a change, Schedule III formats automatically stand modified.
However, NFRA and experts note that Ind AS 118 will necessitate formal amendments to Division II of Schedule III and SEBI's LODR formats. MCA is likely to constitute a group post-notification to recommend changes.
8. Practical Preparation Roadmap
With an effective date of 1 April 2027, companies need to capture data under the new structure by FY 2026-27 to provide comparatives. Here is the multi-year roadmap:
Diagnostic & Assessment
Now - FY 2025-26
Diagnostic & Assessment
Now - FY 2025-26
Perform gap analysis (Ind AS 1 vs 118). Identify affected line items, non-GAAP measures, systems, and reporting.
Policy Design & Governance
FY 2025-26
Policy Design & Governance
FY 2025-26
Define main activities, MPM policy, unusual items criteria. Obtain board approval and align with global group policies.
Systems & Data Changes
FY 2025-27
Systems & Data Changes
FY 2025-27
Reconfigure chart of accounts and ERPs for 5 categories and subtotals. Build data capture for MPM reconciliations.
Dry Runs & Parallel Reporting
FY 2026-27
Dry Runs & Parallel Reporting
FY 2026-27
Prepare mock financials under Ind AS 118 while reporting under Ind AS 1 to test classifications, train staff, and auditors.
Stakeholder Communication
From FY 2026-27
Stakeholder Communication
From FY 2026-27
Explain KPI changes to investors. Update earnings releases and MD&A to align with new subtotals and MPM notes.
Go-Live
FY 2027-28 onwards
Go-Live
FY 2027-28 onwards
Publish first set of Ind AS 118-compliant statements, including restated comparatives and updated statutory formats.
9. Key Takeaways
Summary
- Ind AS 118 is a comprehensive rewrite of the P&L framework, converged with IFRS 18, effective from 1 April 2027.
- It mandates five specific categories, new subtotals, and strict rules around Management Performance Measures (MPMs).
- The focus is strictly on presentation, not measurement, but it fundamentally impacts how companies communicate their performance metrics.
- Regulatory frameworks like Schedule III and SEBI LODR are expected to evolve in tandem to accommodate these structures.
- Companies must begin gap diagnostics and system reconfiguration early to generate restated comparatives by FY 2026-27.
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