Ind AS 118 explained, how India's new rules will change the profit you read

Every listed company in India has a favourite number. Sometimes it is operating profit. Sometimes it is adjusted EBITDA. Sometimes it is a figure the company invented for the purpose of liking it. A new accounting standard called Ind AS 118 is designed to make those numbers mean the same thing from one company to the next, and audit committees have started to take it seriously.

What Ind AS 118 is

Ind AS 118 is India's version of IFRS 18, the global standard on how financial statements are presented. According to the IFRS Foundation, IFRS 18 replaces IAS 1 and is effective for annual reporting periods beginning on or after 1 January 2027. It does three main things:

• It requires two new defined subtotals in the statement of profit or loss, operating profit and profit before financing and income taxes.
• It requires companies to disclose management-defined performance measures, the custom subtotals they use in public communication.
• It adds new principles for grouping and splitting line items.

In India, the Economic Times reports that Ind AS 118 is awaiting notification by the Ministry of Corporate Affairs, with changes to Schedule III of the Companies Act also expected. The proposed start is 1 April 2027, for annual periods beginning on or after that date. Industry sources told the paper that a one year deferral is also under consideration, though neither the notification nor a deferral has been formally confirmed.

Why it matters to anyone who reads results

The headline change is comparability. MSKA and Associates managing partner Vishal Divadkar told ET that defined categories, mandatory subtotals and disclosures on management measures aim to fix a long-standing investor frustration, that operating profit and adjusted EBITDA can mean different things at different companies. In plain terms, the custom number does not disappear. It just has to show its working.

The second change is how expenses are presented. Indian companies currently report expenses by nature, such as employee costs and depreciation. The new standard permits presentation by nature, by function or both, depending on what is most useful. Under the function approach, expenses sit under activities such as cost of sales, distribution, research and development, sales and marketing, and general and administrative costs, and companies typically show a gross margin subtotal.

That sounds like rearranging furniture. It is closer to rewiring the house. Price Waterhouse partner Abhishek Rara told ET that a shift to function-wise presentation could require significant changes to processes and ERP systems. Employee benefits and depreciation may need to be allocated across functions, which is hard for companies whose cost centres were never built that way.

The parts nobody puts in the press release

Two practical issues stand out in the ET report. First, contracts. BSR and Co audit head Sudhir Soni said contracts and incentive structures linked to self-defined subtotals such as operating profit may need amendments and discussions with counterparties. If a bonus depends on a number and the number changes, someone will want a meeting.

Second, timing. Companies are reluctant to commit to systems changes before the final rules and formats are settled. Deloitte audit leader Samir Shah said the transition to IFRS 18 is increasingly becoming a boardroom issue. Regulators such as SEBI, the RBI and IRDAI may also need to update reporting formats.

What a finance team can do now

The ET report lists no-regret work that does not depend on the final notification:

• Map current financial statement lines to the proposed categories.
• List every management-defined performance measure used in results, decks and calls.
• Assess the data and system changes needed, especially for any shift to function-wise reporting.
• Review the effect on internal controls, contracts and incentive plans.

The wider reporting picture

Ind AS 118 arrives while listed companies are already doing more disclosure work elsewhere. Business Responsibility and Sustainability Reporting is mandatory for the top 1,000 listed companies, and several of its indicators measure how many employees are trained and on what. Earth5R's corporate sustainability training maps its programmes to those BRSR indicators and returns a completion register for the filing. Accounting is about to get more comparable. The rest of the annual report would like a word.