ICAI to Replace Ind AS 1 with Ind AS 118 by April 2027: Overhaul of Schedule III, P&L Subtotals, and MPM Disclosures
In an ambitious move to harmonize Indian financial reporting with global benchmarks, the Institute of Chartered Accountants of India (ICAI) has expedited development of Ind AS 118 (Presentation and Disclosure in Financial Statements). Slated to formally supersede Ind AS 1 from April 1, 2027, this new accounting standard represents the most profound structural shift in Indian corporate financial reporting since the initial rollout of the Indian Accounting Standards in 2015.
Modelled closely after the International Accounting Standards Board's (IASB) newly published IFRS 18, Ind AS 118 directly targets long-standing inconsistencies in how companies structure their statements of profit and loss, compute operating margins, and disclose alternate performance metrics. For Chief Financial Officers (CFOs), statutory auditors, and tax professionals, the upcoming transition demands far more than minor disclosure tweaks—it requires a thorough re-engineering of general ledgers, Chart of Accounts, and statutory reporting frameworks.
Statutory Context: Sections 129 & 133 of the Companies Act, 2013
Under Section 133 of the Companies Act, 2013, the Central Government prescribes accounting standards on the recommendation of the National Financial Reporting Authority (NFRA) in consultation with ICAI. Because Section 129 mandates that financial statements comply with both applicable accounting standards and Schedule III, the rollout of Ind AS 118 will necessitate simultaneous legislative amendments to Schedule III by the Ministry of Corporate Affairs (MCA).
1. The Core Pillars of Ind AS 118: What Changes in Financial Statements?
While Ind AS 1 provided broad flexibility in presenting expenses and revenues, it led to stark comparability challenges across corporate India. Ind AS 118 introduces three structural pillars designed to eliminate ambiguity:
A. Standardized Subtotals in the Statement of Profit and Loss
Under current Ind AS 1 norms, companies often compute "Operating Profit" or "EBITDA" using bespoke definitions, complicating inter-firm comparisons. Ind AS 118 replaces this discretion by mandating three distinct reporting categories within the Statement of Profit and Loss:
- Operating Category: Includes all income and expenses arising from the entity's core ongoing operations, irrespective of whether they are volatile or unusual. It serves as the default residual category.
- Investing Category: Encompasses returns from investments, cash equivalents, and assets that generate standalone returns (e.g., dividends, interest from external loans, rental income from investment properties).
- Financing Category: Isolates transactions relating to capital structure, liabilities incurred to raise finance, and associated interest expenses.
Crucially, Ind AS 118 mandates two standard subtotals for all entities: Operating Profit and Profit Before Financing and Income Taxes. This creates an unvarying, standardized metric for operational performance across listed and unlisted entities alike.
B. Rigorous Aggregation and Disaggregation Rules
A persistent audit concern has been the excessive bundling of material expenditures under ambiguous heads such as "Other Expenses" or "Miscellaneous Income." Ind AS 118 introduces comprehensive guidance requiring that items with differing economic characteristics must not be aggregated. If an item is material, it must be explicitly shown on the face of the P&L or within granular notes, accompanied by a quantitative and qualitative explanation.
C. Transparency for Management-Defined Performance Measures (MPMs)
Listed entities frequently rely on non-GAAP or non-Ind AS metrics—such as Adjusted EBITDA, Free Cash Flow, or Core PAT—in their investor presentations and Director's Reports. Ind AS 118 formally brings Management-Defined Performance Measures (MPMs) under the umbrella of audited financial statement disclosures.
Entities utilizing MPMs will be legally required to:
- Provide a direct reconciliation between the MPM and the closest standard Ind AS subtotal.
- Explain why the measure provides useful insights into financial performance.
- Disclose the income tax and non-controlling interest (NCI) effects attributable to each reconciling item.
2. Consequential Overhaul of Schedule III and SEBI Formats
The operationalization of Ind AS 118 cannot happen in isolation. The ICAI is actively coordinating with the Ministry of Corporate Affairs (MCA) to draft comprehensive amendments to Schedule III (Division II) of the Companies Act, 2013, which currently prescribes the presentation format for Ind AS compliant companies.
Similarly, the Securities and Exchange Board of India (SEBI) will need to overhaul Regulation 33 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR). The quarterly financial result submission templates will be updated to reflect mandatory operating profit subtotals and standardized line items, eliminating disparities between quarterly investor releases and statutory annual reports.
Beyond Ind AS 118: Ind AS 120 and Emerging Accounting Frontiers
Alongside Ind AS 118, ICAI's Accounting Standards Board (ASB) is developing Ind AS 120 (Regulatory Assets and Regulatory Liabilities) to govern rate-regulated sectors such as power, utilities, and public transport infrastructure.
Furthermore, working groups are actively researching codified guidance for Virtual Digital Assets (VDAs/Cryptocurrency) under Section 2(47A) of the Income-tax Act, as well as addressing anomalies in recycling items through Other Comprehensive Income (OCI).
3. Practical Impact: Ind AS 1 vs. Ind AS 118
| Parameter | Current Regime (Ind AS 1) | Proposed Regime (Ind AS 118) |
|---|---|---|
| Operating Profit | Not statutorily defined; left to entity policy. | Mandatory, standardized subtotal on the face of P&L. |
| Classification of Income/Expense | Categorized by Nature or Function without strict bins. | Strictly divided into Operating, Investing, and Financing. |
| Non-GAAP / Alternate Metrics | Disclosed outside audited statements (investor decks). | Audited disclosure with explicit reconciliation and tax impact. |
| Line Item Disaggregation | Permits large "Other Expenses" aggregates if under 1% threshold. | Strict principles against aggregating items of dissimilar nature. |
4. Strategic Roadmap: Actionable Checklist for Finance Teams
While the proposed effective date is April 1, 2027, the transition requires presenting comparative numbers for FY 2026-27. Finance departments should begin planning across several fronts:
- Enterprise Resource Planning (ERP) Realignment: Reconfigure enterprise systems (SAP, Oracle) to split operational, investing, and financing flows directly at transaction posting.
- Review of Key Performance Indicators (KPIs): Audit current management metrics. Any non-GAAP metric shared externally must undergo internal audit validation to prepare for audited MPM disclosure.
- Debt Covenant Assessment: Operating profit adjustments will impact key debt ratios (e.g., Interest Coverage, Debt-to-EBITDA). Engage lending institutions early to prevent covenant friction.
- Tax Accounting Synchronization: Assess the downstream impact on MAT (Section 115JB) calculations as statutory P&L line items undergo structural shifts.
Final Outlook
The transition to Ind AS 118 marks a defining milestone in Indian capital markets transparency. By standardizing the anatomy of the income statement and regulating performance metrics, ICAI and MCA are bridging the gap between management reporting and statutory compliance. Finance leaders must utilize the runway between now and 2027 to prepare their teams, systems, and stakeholders for this historic shift.