MCA Notifies Amendments to Indian Accounting Standards

The Ministry of Corporate Affairs has notified the Companies (Indian Accounting Standards) Amendment Rules, 2026, to further amend the Companies (Indian Accounting Standards) Rules, 2015. The Central Government has aligned several Indian Accounting Standards (Ind AS) with recent international developments, including Annual Improvements to Ind AS (2024), amendments to the classification and measurement of financial instruments, and new requirements for contracts referencing nature-dependent electricity. The amendments come into force on the date of their publication in the Official Gazette and are generally applicable for annual reporting periods beginning on or after 1 April 2026.

These amendments stem from the International Accounting Standards Board’s (IASB) ongoing work to keep accounting standards relevant to modern business practices. Three key developments drove these changes:

Background: Why These Changes Were Made

• The rise of “green” and sustainability-linked financing

In recent years, banks and financial institutions have increasingly offered loans and bonds with interest rates tied to environmental or social targets. For example, a company might receive a lower interest rate if it reduces its carbon emissions by a certain percentage, or face a higher rate if it misses the target. These are commonly called “sustainability-linked” or “ESG-linked” financial instruments.

The existing accounting standards (IFRS 9 / Ind AS 109) were written before these instruments became common. A key question arose: should these loans be accounted for at their original cost (“amortised cost”) like a traditional loan, or must they be measured at fair value with gains and losses flowing through the income statement? The answer depends on whether the loan’s cash flows are “solely payments of principal and interest” (SPPI), which is a technical test that determines how the instrument is classified. The old rules did not clearly address whether an interest rate adjustment tied to an ESG target would fail this test. The IASB clarified that such features do not automatically disqualify a loan from amortised cost treatment, provided the basic structure remains that of a straightforward lending arrangement.

• Practical problems with electronic payments

When a company pays a supplier through an electronic transfer (NEFT, RTGS, or similar systems), there is often a gap between when the company initiates the payment and when the money actually arrives in the supplier’s account. A simple question with no clear answer under the old rules: on which date should the company remove the payable from its books, i.e., the day it clicks “send” or the day the funds settle? Different companies were following different practices, creating inconsistency in financial reporting. The IASB’s amendments now clarify that, as a general rule, a liability is removed when it is actually settled. However, if the payment system meets strict conditions (the payment cannot be reversed, the company cannot access the funds, and settlement risk is negligible), the company may choose to treat the liability as settled earlier.

• Renewable energy contracts and the “own use” problem

Many companies are signing long-term contracts to buy electricity from wind farms or solar plants, often called Power Purchase Agreements (PPAs). These contracts help companies lock in green energy and meet sustainability commitments. However, wind and solar generation is unpredictable: a windy day produces more electricity than the company needs, while a calm day produces less. When the company receives more electricity than it can use, it typically sells the excess back to the grid.

Under the old rules, a contract to buy a physical commodity (like electricity) for the company’s own use is generally kept outside the scope of financial instrument accounting, i.e., it is simply treated as a purchase contract. But if the company regularly sells excess electricity, does that mean the contract is really being used for trading rather than own use? If so, the contract would need to be accounted for as a derivative, measured at fair value every reporting period, with potentially volatile gains and losses in the income statement. This was creating a significant compliance burden and unintended accounting volatility for companies genuinely buying renewable energy for their own consumption.

The IASB’s solution introduces a “net purchaser” test: if the company is, overall, buying more electricity than it sells over the contract period, the contract can still qualify for the own-use exemption, even if the company occasionally sells surplus power. This removes uncertainty for companies investing in renewable energy.

Who is affected by these amendments?

While the renewable energy and ESG themes may seem industry-specific, these amendments have broad relevance:

• All companies may be affected by the electronic payment settlement rules, especially those operating across multiple banking systems or jurisdictions.
• Companies with sustainability-linked borrowings—including those with loans tied to diversity targets, water usage, safety metrics, or other non-financial KPIs. These entities should review their classification of these instruments under the new guidance.
• Companies purchasing renewable energy—whether through formal PPAs or other long-term contracts with wind, solar, or hydro generators. These entities should assess whether their contracts fall within or outside the scope of Ind AS 109.
• Investors in equity instruments designated at fair value through other comprehensive income (FVOCI) will face enhanced disclosure requirements.
• First-time adopters of Ind AS should note the revised transition guidance for hedge accounting.

Summary of Amendments

The following sections provide a summary of the amendments to Ind AS 101, Ind AS 107, and Ind AS 109.

• Renewable energy and power purchase agreements: Entities with contracts to purchase nature-dependent electricity (e.g., wind or solar PPAs) should reassess scope under Ind AS 109. The new paragraphs B2.7–B2.8 introduce a “net purchaser” test to determine whether such contracts qualify for “own use” treatment. Entities are also subject to enhanced disclosure requirements under Ind AS 107 paragraphs 30A–30C.
• Sustainability-linked and ESG-linked financial instruments: The classification of financial assets with contingent features tied to ESG metrics (e.g., interest rate adjustments linked to carbon emissions reductions) has been clarified. New paragraphs B4.1.8A and B4.1.10A of Ind AS 109 confirms that such features do not automatically fail the solely payments of principal and interest (SPPI) test, provided the contractual cash flows before and after the contingent event are consistent with a basic lending arrangement. Entities must also provide new disclosures under Ind AS 107 paragraphs 20B–20D.
• FVOCI equity investment disclosures: Enhanced disclosures are required for each class of equity investments designated at fair value through other comprehensive income under amended paragraphs 11A and 11B of Ind AS 107, including disaggregated fair value gains/losses relating to derecognised and retained investments, and transfers within equity on derecognition.
• Transition: The amendments generally require retrospective application under Ind AS 8 (see paragraphs 7.2.47–7.2.49 for classification and measurement amendments and paragraphs 7.2.51–7.2.53 for nature-dependent electricity contracts). However, restatement of prior periods is optional (and permitted only without hindsight). Where prior periods are not restated, the cumulative effect is recognised as an adjustment to opening retained earnings (or other component of equity) at the date of initial application.
• Electronic payment settlement: The practical expedient in new paragraphs B3.3.8–B3.3.10 permits entities to deem financial liabilities settled before the formal settlement date where strict conditions regarding irrevocability, access to cash and insignificance of settlement risk are met.
• Hedge accounting for nature-dependent electricity: New section 6.10 permits designation of a variable nominal amount of forecast electricity transactions as the hedged item when the hedging instrument is a contract referencing nature-dependent electricity. Existing hedging relationships may be discontinued and redesignated to take advantage of this relief.
• Disclosure relief in the first year: Entities are relieved from providing comparative-period disclosures for the new disclosure requirements where prior periods are not restated. The general requirement under Ind AS 8 paragraph 28(f) to disclose quantitative information on changes in accounting policies is also relaxed in the first year of application for certain amendment packages.