MCA's Ind AS Amendment Rules 2026: ESG Loans, SPPI Test and Hedge Accounting Explained
MCA has notified the Companies (Indian Accounting Standards) Amendment Rules, 2026, amending five Ind AS standards for periods beginning 1 April 2026. Here is what changes for ESG-linked loans, financial instrument classification, and renewable energy power purchase agreements — and what management and auditors should review before FY 2026-27 close.
CA Harun Raaj
Chartered Accountant · Harun Raaj & Associates
Legal basis: Companies Act, 2013, Sections 133 and 469 — Effective: 1 April 2026 (annual reporting periods beginning on or after). Source: MCA Notification G.S.R. 725(E) dated 12 August 2026. Last reviewed by CA Harun Raaj: September 2026.
The Ministry of Corporate Affairs has notified the Companies (Indian Accounting Standards) Amendment Rules, 2026 vide Notification G.S.R. 725(E) dated 12 August 2026, issued under Sections 133 and 469 of the Companies Act, 2013, in consultation with the National Financial Reporting Authority. The amendments apply to annual reporting periods beginning on or after 1 April 2026 — they first affect FY 2026-27 financial statements.
Key point: Five Ind AS standards — 109, 107, 7, 101 and 110 — are amended, with the most consequential change affecting how ESG-linked loans and investments are classified under the SPPI test in Ind AS 109.
What Changed and Why
The amendments move India's Ind AS framework closer to IASB's IFRS standards, responding to three developments: post-implementation review findings on financial instrument classification, the growing use of ESG-linked lending, and the rise of nature-dependent (solar and wind) power purchase agreements.
The Five Amended Standards
Ind AS 109 — Financial Instruments (Classification and Measurement)
Ind AS 109 governs how financial assets are classified and measured — at fair value through profit or loss (FVTPL), fair value through other comprehensive income (FVOCI), or amortised cost. Classification turns on the SPPI test (Solely Payments of Principal and Interest).
Banks and lenders increasingly offer loans with interest rates that step up or step down based on sustainability KPIs, such as a company's ESG rating or carbon-reduction targets. The amendment clarifies how such features interact with the SPPI test. Where an ESG-linked feature is not genuinely contingent on credit risk, the instrument may fail SPPI and must be measured at FVTPL, which affects profit-and-loss volatility. The amendment also provides guidance on classification of certain settlement instruments used in digital payment infrastructure.
Illustrative example: ABC Private Limited, a mid-size manufacturer, holds a term loan where the interest rate reduces by 0.25% if the company achieves a stated reduction in Scope 1 emissions. Under the 2026 amendment, ABC and its statutory auditor must re-examine whether this feature causes the loan to fail SPPI. If it does, the loan must be measured at FVTPL rather than amortised cost — a material change for companies that previously classified such loans at amortised cost.
Ind AS 107 — Financial Instruments: Disclosures
Companies must now describe, in the notes to financial statements, the nature and quantum of ESG-linked features in their financial liabilities and the basis on which they concluded the SPPI test is or is not met.
Ind AS 7 — Statement of Cash Flows
Annual improvements clarify the classification of specific cash flows. There is no fundamental change to the indirect or direct method framework.
Ind AS 101 — First-time Adoption
Transition relief provisions are updated to align with the amended Ind AS 109. Companies transitioning to Ind AS during FY 2026-27 — for example, Phase II companies crossing the net worth threshold — benefit from the specified transition reliefs.
Ind AS 110 — Consolidated Financial Statements
Annual improvements address narrow application questions on control assessment and non-controlling interests.
Nature-Dependent Electricity Contracts
The amendment introduces specific guidance for contracts to purchase electricity from nature-dependent sources such as solar farms, wind parks, and hydro power. These contracts may qualify for the own-use exemption under Ind AS 109 if the company takes physical delivery for its own consumption, or they may require financial instrument treatment if there is a net-settlement mechanism or the company does not physically consume all the electricity. This determination is fact-specific. Companies in manufacturing or infrastructure with long-term renewable energy power purchase agreements should review their accounting treatment before FY 2026-27 close.
Who Is Affected
What Management and Auditors Should Do Now
- Review all financial assets, particularly loans given and investments in debt instruments, for SPPI compliance and flag any instruments with ESG-linked features.
- Review financial liabilities that carry ESG triggers, including borrowings from banks with sustainability-linked interest adjustment clauses.
- Update hedge accounting documentation for any changes to hedged items or hedging instruments arising from the amendment, before the first reporting date under the new rules.
- Assess renewable energy power purchase agreements to determine whether the own-use exemption applies or financial instrument treatment is required.
- Update accounting policy disclosures across all affected areas ahead of FY 2026-27 reporting.
- Auditors should update risk assessments under SA 315(R) and identify financial instrument classification as a significant risk where ESG-linked instruments exist.
The information in this article is based on MCA Notification G.S.R. 725(E) dated 12 August 2026. Application to specific facts requires professional judgment, and management and statutory auditors should work through the classification and disclosure implications together well before FY 2026-27 close.
I'm CA Harun Raaj, Visakhapatnam. If your company has ESG-linked borrowings, renewable energy PPAs, or is transitioning to Ind AS in FY 2026-27, reach out to discuss how this notification applies to your financial statements.
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See Also
Frequently Asked Questions
When do the Companies (Ind AS) Amendment Rules 2026 take effect?
The amendments apply to annual reporting periods beginning on or after 1 April 2026, under MCA Notification G.S.R. 725(E) dated 12 August 2026. For most companies this means the financial statements are first affected for FY 2026-27.
Does this affect companies applying old Indian GAAP (Accounting Standards)?
No. The Companies (Ind AS) Amendment Rules 2026 apply only to companies required to prepare financial statements under Indian Accounting Standards. Companies applying old AS 1-32 are not affected.
How does the amendment affect ESG-linked loans under Ind AS 109?
The amendment clarifies how ESG-linked interest rate features interact with the SPPI test in Ind AS 109. Where the ESG-linked feature is not genuinely contingent on credit risk, the loan may fail SPPI and must be measured at FVTPL instead of amortised cost.
If a company already classified an ESG-linked loan at amortised cost, must it restate prior years?
If the SPPI conclusion was correct under the old rules but changes only because of the 2026 amendment, this is a prospective change from 1 April 2026, not a restatement. If the prior classification was always incorrect regardless of the amendment, restatement may be required, and auditors should assess this carefully.
When must Ind AS 107 disclosures for ESG-linked instruments first appear?
These enhanced disclosures, describing the nature and quantum of ESG-linked features and the SPPI conclusion reached, must first appear in financial statements for the annual period beginning on or after 1 April 2026 — the FY 2026-27 financial statements for most companies.
Are unlisted companies below the Ind AS net worth threshold affected?
No. Per the applicability table under the notification, unlisted companies below the ₹250 crore net worth threshold that continue applying old AS are not covered by these amendments.
How does the amendment treat renewable energy power purchase agreements?
The notification introduces specific guidance for contracts to purchase electricity from nature-dependent sources such as solar, wind, and hydro. These may qualify for the own-use exemption under Ind AS 109 if the company physically consumes the electricity, or require financial instrument treatment where there is net settlement or partial consumption — a fact-specific determination.
Do NBFCs need to apply these Ind AS amendments?
NBFC applicability is governed by separate RBI/MCA notifications, so NBFCs should verify whether and how the amended standards apply to them rather than assuming automatic coverage under this notification.
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