Preparing financial statements under Ind AS (Indian Accounting Standards) ensures transparency, comparability, and consistency in financial reporting. Ind AS is based on International Financial Reporting Standards (IFRS), which means the financial statements under Ind AS align closely with global best practices.

Overview of Financial Statements under Ind AS

There are four main financial statements required under Ind AS:

1. Balance Sheet (Statement of Financial Position)
2. Statement of Profit and Loss (Income Statement)
3. Statement of Cash Flows
4. Statement of Changes in Equity

Each of these statements plays a vital role in communicating the financial health of an organization. Let’s explore the preparation process for each of them:

1. Balance Sheet (Statement of Financial Position)

The Balance Sheet provides a snapshot of a company’s assets, liabilities, and equity at a specific point in time. It must adhere to the structure prescribed by Ind AS 1 (Presentation of Financial Statements).

Key Components:

• Assets:
  • Non-current assets: Property, plant, equipment, intangible assets, financial assets, etc.
  • Current assets: Cash, receivables, inventories, short-term investments, etc.
• Liabilities:
  • Non-current liabilities: Long-term debt, deferred tax liabilities, etc.
  • Current liabilities: Short-term borrowings, payables, provisions, etc.
• Equity: The difference between assets and liabilities, representing shareholders’ interest.

Presentation:

• Assets and liabilities are classified as current or non-current.
• The total of assets should equal the total of liabilities and equity (Balance Sheet Equation: Assets = Liabilities + Equity).

2. Statement of Profit and Loss (Income Statement)

The Statement of Profit and Loss provides a summary of the company’s performance over a specific period. It includes revenues, expenses, gains, and losses. It reflects whether the company made a profit or incurred a loss during the reporting period.

Key Components:

• Revenue: Revenue from operations, other income, etc.
• Expenses: Cost of sales, operating expenses, administrative expenses, etc.
• Profit or Loss for the Period: The net result after subtracting expenses from revenue.

Presentation:

• Ind AS 1 requires the statement to include a single statement format that covers both profit and other comprehensive income, or a two-statement format (profit and loss statement and a separate statement of other comprehensive income).
• The classification by nature or function of expense can be chosen.

3. Statement of Cash Flows

The Statement of Cash Flows reports on a company’s cash inflows and outflows over a specific period. It categorizes cash movements into three areas: operating, investing, and financing activities.

Key Components:

• Operating Activities: Cash from core business operations (e.g., cash received from customers and cash paid to suppliers).
• Investing Activities: Cash from buying and selling long-term assets (e.g., investments in property or equipment).
• Financing Activities: Cash from issuing and repaying debt, issuing stock, and paying dividends.

Presentation:

• Ind AS 7 governs cash flow statements. The indirect method of presenting operating cash flows is more commonly used, though the direct method is also allowed.
• The net increase or decrease in cash during the period is calculated.

4. Statement of Changes in Equity

This statement provides an overview of the changes in the company’s equity during the reporting period, such as:

• Issue of shares
• Repurchase of shares
• Dividend payments
• Profit or loss for the period
• Other comprehensive income

Key Principles in Preparing Financial Statements under Ind AS

The preparation of financial statements under Ind AS follows a set of guiding principles designed to ensure that the statements are accurate and comparable. Some of the main principles include:

1. Fair Value Measurement: Ind AS emphasizes the fair value of assets and liabilities, particularly for financial instruments (Ind AS 109). This differs from the historical cost method used in some other accounting standards.

2. Accrual Basis: Financial statements must be prepared on an accrual basis, meaning that revenues and expenses are recognized when they are earned or incurred, not when cash is received or paid (Ind AS 1).

3. Going Concern Assumption: Financial statements should be prepared with the assumption that the company will continue its operations in the foreseeable future unless there is evidence to the contrary (Ind AS 1).

4. Consistency: The accounting policies applied in preparing financial statements should be consistent from one period to the next (Ind AS 8). Any changes in accounting policies should be disclosed and explained.

5. Presentation of Other Comprehensive Income: Other comprehensive income includes items that are not recognized in the profit and loss statement, such as unrealized gains or losses on certain investments and foreign currency translation adjustments (Ind AS 1).

6. Disclosure: Financial statements under Ind AS require extensive disclosures in the footnotes to provide more context about the numbers reported in the main financial statements (Ind AS 1, Ind AS 107, etc.).

Steps to Prepare Financial Statements under Ind AS

1. Identify the Reporting Period: Determine the period for which the financial statements are being prepared (quarterly, annual, etc.).

2. Collect Financial Data: Gather all financial data, including transactions, invoices, receipts, and other financial records, based on accrual accounting.

3. Classify Assets and Liabilities: Classify assets and liabilities into current and non-current categories. Ensure the correct valuation of assets using fair value or amortized cost as required under Ind AS.

4. Prepare Income Statement: Calculate revenues, expenses, gains, and losses during the period, ensuring compliance with the relevant Ind AS standards (e.g., Ind AS 115 for revenue recognition).

5. Prepare the Balance Sheet: List assets, liabilities, and equity. Ensure compliance with the going concern assumption and present a true and fair view of the company’s financial position.

6. Prepare the Cash Flow Statement: Identify cash flows from operating, investing, and financing activities, following the indirect or direct method as per Ind AS 7.

7. Prepare the Statement of Changes in Equity: Capture any changes in equity, such as net profit, dividends, and other adjustments.

8. Review and Disclose: Ensure all disclosures required by Ind AS are made, including notes to the financial statements that provide additional context for figures presented.