Ind As Traps

Ind AS Traps

Ind AS is IFRS with carve-outs. The carve-outs and the transition dates are where models break. This skill lists the treatments that actually change conclusions.

Who applies what

• Ind AS: mandatory for all listed companies (and companies above prescribed net-worth thresholds) and their holding, subsidiary, associate and joint-venture entities.
• AS (previous Indian GAAP): still used by smaller unlisted companies. When you pull a subsidiary's or a supplier's financials from MCA, check which framework it reports under before comparing to the listed parent.
• Ind AS 117 (insurance contracts) applies to insurers on its own timeline — check the notified date before comparing insurance financials across periods.

Ind AS 116 — Leases. The single biggest distortion.

Every lease over 12 months (bar low-value assets) comes on balance sheet as a right-of-use (ROU) asset and a lease liability.

What it does to the P&L:

Before: Rent expense inside EBITDA
After:  Depreciation on ROU asset (below EBITDA)
      + Interest on lease liability (below EBITDA)

Consequences:

• EBITDA rises and EBITDA margin expands with no operating change
• Debt rises — the lease liability is debt
• EPS falls in early years and rises later: interest is front-loaded on a declining liability balance, so total early-year charge exceeds straight-line rent
• CFO rises, because the principal portion of lease payments moves to financing activities. A retailer's "improving cash conversion" may be entirely Ind AS 116.

Who is most affected: organised retail, QSR, hospitals, hotels, aviation, warehousing/3PL, co-working, and any franchise-heavy consumer model.

Rules:

• If you count the lease liability in EV, use post-116 EBITDA. Never mix.
• When comparing to a pre-116 historical series, restate one side or truncate the history. Say which.
• Check the lease liability maturity note and the discount rate used — a company using an implausibly high incremental borrowing rate shrinks the reported liability.

Ind AS 115 — Revenue from contracts with customers

Five-step model. The traps:

• Over time vs point in time. Real estate, EPC, construction and long-cycle capital goods recognise revenue over time only if the strict criteria are met. Indian real estate moved from percentage-of-completion to largely completion-based recognition on adoption — revenue series across that transition are not comparable.
• Principal vs agent. Gross vs net revenue presentation. This is the number that makes an e-commerce, travel or distribution business look 10× larger or smaller. Always check the accounting policy note before using a revenue growth number, and before comparing two platform businesses.
• Variable consideration: discounts, rebates, returns and volume incentives are estimated and constrained. A change in the estimate flows through revenue.
• Contract assets and contract liabilities (unbilled revenue, advances from customers). Unbilled revenue rising faster than revenue is a red flag — revenue recognised but not yet invoiced. Track the ratio.
• Significant financing component: long payment terms are unwound as interest income, inflating other income.

Ind AS 109 — Financial instruments

• Expected Credit Loss (ECL) replaces incurred loss. For NBFCs and banks, provisioning is model-driven and management-judgement-heavy. Compare the ECL provision against the RBI's IRACP norms — regulated lenders disclose the difference, and a persistently large gap where ECL is lower deserves scrutiny.
• Fair value through P&L (FVTPL) for many investments: mark-to-market gains and losses hit the P&L and create earnings volatility unrelated to operations. Strip them.
• Fair value through OCI (FVOCI): gains bypass the P&L entirely and sit in other comprehensive income. A company can be growing book value substantially through OCI while reported PAT stagnates — always read the statement of changes in equity, not just the P&L.
• Derivatives and hedge accounting: forex gains and losses on borrowings can swing PBT for importers and companies with ECB exposure.

Ind AS 103 — Business combinations

• Purchase price allocation creates intangibles (brands, customer relationships, technology) that amortise, depressing reported EBIT for years after an acquisition.
• Goodwill is not amortised but is tested annually for impairment. A large goodwill balance that has never been impaired despite a deteriorating acquired business is a flag.
• Common control transactions (Appendix C) are accounted at book value with restatement of prior periods — a group restructuring can silently restate several years of history. Check whether the comparatives were restated before computing any growth rate.
• Bargain purchase gain goes to capital reserve under Ind AS (an India carve-out from IFRS, which routes it to P&L). Watch for this when comparing to a foreign acquirer.

Ind AS 110 / 111 / 28 — Consolidation

• Control, not ownership, drives consolidation. An entity below 50% can be consolidated; one above 50% may not be.
• Associates and JVs are equity-accounted — a single line in the P&L. A company can carry a large share of its economics off the face of its statements. Read the associate note.
• Structured entities and de-facto control disclosures are worth reading in group structures.

Ind AS 36 / 38 — Impairment and intangibles

• Development costs are capitalised when criteria are met. Aggressive capitalisation inflates EBIT and moves cost to depreciation. Track capitalised development spend / total R&D over time.
• Impairment testing uses value-in-use with management's own cash flow forecasts and discount rate. The disclosed discount rate and terminal growth in the impairment note are a free look at management's own assumptions — and often disagree with the guidance they give on the concall.

Ind AS 19 — Employee benefits

• Gratuity and pension actuarial gains/losses go to OCI, not P&L. Reported employee cost understates the economic cost when assumptions shift.
• Check the actuarial assumptions note: discount rate, salary escalation, attrition. An unusually high discount rate shrinks the liability.

Ind AS 12 — Income taxes

• Deferred tax asset (DTA) recognition requires probable future taxable profit. A loss-making company carrying a large DTA is asserting a recovery. A DTA write-off is a management admission.
• MAT credit entitlement is a DTA. Companies migrating to the 22% concessional regime forfeit unused MAT credit — a one-time hit that appears as an exceptional item.

Ind AS 1 / 7 presentation traps

• "Exceptional items" is not an Ind AS-defined line; Indian companies use it liberally. Always rebuild an adjusted P&L yourself.
• Cash flow classification: interest paid can be classified in operating or financing; dividends received in operating or investing. Two companies can report very different CFO with identical economics. Read the accounting policy and normalise before comparing CFO.
• Other comprehensive income is where FVOCI gains, actuarial gains/losses and foreign currency translation live. Total comprehensive income tells a different story from PAT more often than analysts assume.

Ind AS vs IFRS — the carve-outs that matter

Ind AS is converged but not identical. The differences that change numbers:

• Bargain purchase gains to capital reserve (Ind AS) vs P&L (IFRS)
• Certain foreign-currency-monetary-item translation options carried over from previous Indian GAAP
• Presentation and terminology differences that break automated comparison tools

When benchmarking an Indian company against a US filer, remember the US filer is on US GAAP, not IFRS, adding a second layer of difference — particularly for leases (ASC 842 keeps operating leases inside operating expense for the income statement, so US EBITDA is not comparable to Ind AS 116 EBITDA).

The working checklist

Before using any Indian financial series:

1. Ind AS or previous GAAP? For every entity in the comparison.
2. Any restatement of comparatives this year? Why?
3. Any change in accounting policy or estimate disclosed?
4. Post- or pre-Ind AS 116 for the whole series?
5. Revenue gross or net (principal vs agent)?
6. What is inside "exceptional items" and "other income"?
7. What is in OCI that is not in PAT?
8. Standalone or consolidated — consistently, on both sides?

Hard rules

• Cite the note number for every accounting point you make.
• When a metric jumps and the accounting policy note changed in the same year, the accounting is the default explanation until proven otherwise.
• Never compare an Indian company's EBITDA to a US GAAP peer's EBITDA without stating the lease treatment on both sides.
• Standards are amended by MCA notification. Verify the applicable version for the reporting period rather than assuming the current text applied historically.