The standard is likely to have implications for finance information systems, internal controls and financial performance indicators used by management.
Companies are preparing to overhaul financial reporting as they gear up for the new Ind AS 118 rules.
Ind AS 118 is currently awaiting notification by the Ministry of Corporate Affairs. Changes to Schedule III of the Companies Act, which governs financial statement formats, are also expected. India has proposed implementation from April 1, 2027, for annual reporting periods beginning on or after that date, while IFRS 18 takes effect on January 1, 2027.
Companies have begun discussing transition plans, though their levels of preparedness vary, said Samir Shah, audit leader at Deloitte Haskins & Sells LLP. “The transition to IFRS 18 is increasingly becoming a boardroom issue,” he said.
Ketan Dalal, who chairs the audit committees of Zensar Technologies, Torrent Power and HDFC Life said, “Its objective is to improve comparability and comprehension. But in today’s challenging business environment, the transition will put considerable pressure on companies and audit committees.”
The lack of final rules and reporting formats is complicating preparations, with companies reluctant to commit to systems changes before the requirements are settled.
Currently, companies report expenses by nature. The new standard permits operating expenses by nature, function or both, depending on what provides users the most useful information, aligning India’s reporting rules more closely with global standards.“The biggest topic of discussion for corporates is whether the new requirements will result in a shift towards function-wise presentation” said Abhishek Rara, Partner at Price Waterhouse LLP. “For many entities that may need to adopt this presentation, the change could require significant modifications to their processes and ERP systems.”, he added.
Under functional reporting, expenses are classified by the activities they support, such as cost of sales, distribution, research and development, sales and marketing, and general and administrative expenses.
Employee benefits and depreciation, currently reported by nature, may need to be allocated across functions. Companies typically present a ‘gross margin’ subtotal under this approach.
The exercise could prove complex for companies whose cost-centre structures do not support functional allocations, requiring finance teams to work with technology, human resources and business functions to establish consistent allocation principles and supporting evidence.
“The hard part is making a well-supported determination of whether expenses should be presented by function, by nature or using a combination of both,” said Rara. “The answer may differ across industries and business models, and corporates will need to determine which presentation provides the most relevant summary to users.” he added.
Sudhir Soni, head of audit, BSR & Co LLP said that the changes could have implications for contracts and incentive structures linked to existing self defined sub-totals such as operating profit. “Depending on the arrangements, this could require amendments to contractual terms and discussions with the relevant counterparties,” he said.
Auditors say that Ind AS 118 could reshape how investors and analysts assess corporate performance by standardising key profit measures. It introduces defined categories and subtotals, including operating profit and profit before financing and income taxes. Companies must reconcile these with currently reported figures, while analysts may need to adjust models if expense reporting changes from nature to function.
“Defined categories, mandatory subtotals and disclosures around management-defined performance measures aim to address long-standing investor frustration: ‘operating profit’ and ‘adjusted EBITDA’ can mean different things across companies,” said Vishal Divadkar, managing partner, MSKA & Associates, a BDO International member firm.
The transition will also require changes beyond the accounting standard itself, particularly for listed companies and financial services businesses.
The MCA is expected to consider corresponding changes to Schedule III, while other regulators such as SEBI, the RBI and the IRDAI may also be evaluating the changes required to existing reporting formats, disclosures and sector-specific requirements.
Auditors say that the key will be timely and coordinated release of notifications of such changes. “For companies, this is an opportunity to look beyond compliance and reconsider how financial performance is communicated. The key will be to enhance clarity as the new requirements are embedded across the wider reporting framework,” said Sanjiv Pilgaonkar, Partner, Deloitte Haskins & Sells LLP.
While the final Indian requirements and related regulatory changes are awaited, companies can use the intervening period to undertake no-regret preparatory work, including mapping existing financial-statement lines to the proposed categories, identifying management-defined performance measures, assessing data and system requirements, and reviewing the implications for internal controls.
“Companies are already starting the preparatory work. While some aspects of implementation will necessarily depend on the final notified requirements, there is considerable work that can be undertaken now. Early preparation should put companies in a stronger position to implement the final requirements efficiently once the regulatory framework is settled.” Shah said.
Industry sources say the Indian standard has been finalised and notification is expected soon, although a possible one-year deferral is also under consideration. Neither development has been formally confirmed, and a sizable section of industry remains on the sidelines. “Companies want a clear implementation timetable once the final reporting formats and related guidance are available,” Divadkar said.
A deferral could provide more time to prepare but would widen the timing gap with IFRS 18, which is effective internationally for annual reporting periods beginning on or after Jan. 1, 2027.