Introduction & Concepts. ICAI, 3 rd MAY CA Nitish Kirtikar

Transcription

1 Introduction & Concepts ICAI, 3 rd MAY 2014 CA Nitish Kirtikar

2 Contents Introduction and concepts 1. Introduction to IFRS 2. Conceptual framework for Financial reporting 3. Convergence process with IFRS in India and Indian Accounting Standards [Ind AS].

3 1. Introduction to IFRS

4 1. Introduction to IFRS IASC = International Accounting Standards Committee Formed in June Professional accountancy bodies of 9 countries [including US] Stated mission = formulate & publish in the public interest, basic standards to be observed in the presentation of audited accounts and financial statements Nine founders pledged = IASs adopted in respective home countries & promote worldwide acceptance. By 2000 IASs were endorsed by IOSCO [International Organisation of securities Commissions] and IFAC [International federation of accountants]. None of 9 founding countries had adopted in home countries.

5 1. Introduction to IFRS IASB = International Accounting Standard Board; IAS=International Accounting standards IASC = International Accounting Standards Committee 2001 IASC Headquartered in London; created in 1973; Standards Interpretation committee (SIC); Issued IASs; Part time members; poorly funded IASB Headquartered in London; took over from IASC in 2001; IFRS interpretations committee; Issued IFRSs; full time members; well funded Principle based standards Requirement to apply Substance over legal form principle Like transactions and events to be accounted uniformly throughout the world Alternative choices eliminated

6 1. Introduction to IFRS 2001 till date IASB issued 14 IFRSs and overhauled IASs inherited from IASC. More than 100 jurisdictions have adopted IFRS Producer of IFRS [IASB & IFRS foundation] = Did not pay attention to who the consumers were or exactly how they were using the product. Adoption of IFRS is not black or white [Yes or No] there are shades of grey Questions:- Is IFRS for listed companies only or unlisted as well? Is it only for some unlisted companies such as financial institutions? Is it required or permitted? Is it for consolidated financial statements only or also for separate financial statements? Is it for domestic listed companies only or foreign listed companies as well? Are IFRS written into law? Is there some sort of endorsement process, if yes, is it done in time? Did the jurisdiction add any disclosures or other requirements? Did it make any modifications? Did it change the effective dates? Does the process for translating IFRS from original English ensure a Faithful translation?

7 1. Introduction to IFRS February 2012 Board of Trustees of IFRS Foundation completed a strategy review and published a report. Global accounting standards in best interest of global economy Set up mechanism to highlight instances where jurisdictions are asserting compliance with IFRS without adopting IFRS fully :- Project initiated by IFRS Foundation

8 1. Introduction to IFRS Profiles completed for 122 jurisdictions Of the 122 jurisdictions studied, 115 have made a public statement in support of Global Accounting Standards [7 exceptions Albania, Bermuda, Cayman Islands, Egypt, Macao, Paraguay, and Switzerland] Of the 122 jurisdictions, 101 (83%) require IFRS for most or all domestic listed companies. The remaining 21 jurisdictions that do not yet require IFRS for all or most domestic listed companies do, use IFRS to some extent:- 10 permit IFRS for at least some listed companies [including India & Japan] 2 require IFRS for financial institutions (including Saudi Arabia and Uzbekistan] 2 others are in process of adopting IFRS (including Thailand and Indonesia) 7 use national standards (including China and US) Approach to endorsement in the 122 jurisdictions studied:- 52 jurisdictions no endorsement required 33 jurisdictions EU process followed 10 jurisdictions endorsement solely by a professional accounting body 12 jurisdictions endorsement solely by a Government agency 6 jurisdictions endorsement by Professional accounting body + Govt agency

9 1. Introduction to IFRS Profiles completed for 122 jurisdictions 4 Jurisdictions have adopted older versions of IFRS [Macedonia 2009 version; Myanmar 2010 version; Srilanka 2011 version; Venezuela 2008 version]. Modifications of IFRS are rare; EU describes carve out from IAS 39 Financial Instruments Recognition & Measurement, as a temporary. This carve out is used by fewer than 2 dozen of the 8000 listed companies in the EU 99.5% of EU listed companies use IFRS as issued by IASB. A few jurisdictions have deferred effective dates of several standards mainly IFRS10 (Consolidated Financial Statements), IFRS11 (Joint arrangements), and IFRS12(Disclosure of interests in Other Entities). Most of those deferrals terminated on Canada has deferred mandatory adoption of IFRS by rate regulated companies untill 2015.

10 1. Introduction to IFRS Profiles completed for 122 jurisdictions In majority of jurisdictions, the Auditor s Report refers to compliance with IFRS as issued by IASB Of the 122 jurisdictions, 70 jurisdictions where IFRS is required or permitted, the auditor s report refers to compliance with IFRS. In another, 33 jurisdictions, the auditors report refers to compliance with IFRS as adopted by the EU. In the remaining 19 jurisdictions, the auditors report refers to national standards in some of those cases, such as Hong Kong and Malaysia, the national standards are virtually identical to IFRS.

11 1. Introduction to IFRS IASB is monitored by IFRS Foundation IFRS standards setting process Setting the agenda Planning the project Developing & publishing the discussion paper Developing & publishing the exposure draft Developing & publishing the standard After the standard is issued

12 1. Introduction to IFRS What Are IFRSs? Definition of IFRSs : IAS 1.11 defines IFRSs as comprising: IFRS International Financial Reporting Standards; IAS International Accounting Standards; and IFRIC Interpretations originated by the International Financial Reporting Interpretations Committee (IFRIC) or SIC The former Standing Interpretations Committee (SIC).

13 1. Introduction to IFRS IFRS issued 2001 onwards IAS issued from 1973 to 2000 IFRS 1 First-time Adoption of International Financial Reporting Standards IFRS 2 Share-based Payment IFRS 3 Business Combinations IFRS 4 Insurance Contracts IFRS 5 Non-current Assets Held for Sale and Discontinued Operations IFRS 6 Exploration for and Evaluation of Mineral Resources IFRS 7 Financial Instruments: Disclosures IFRS 8 Operating Segments IAS 1 Presentation of Financial Statements IAS 2 Inventories IAS 7 Statement of Cash Flows IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors IAS 10 Events after the Reporting Period IAS 11 Construction Contracts IAS 12 Income Taxes IAS 16 Property, Plant and Equipment IFRS 9 Financial Instruments w.e.f IFRS10 Consolidation w.e.f IFRS11 Joint arrangement w.e.f IFRS12 Disclosure of interests in other entities w.e.f IFRS13 Fair value measurement w.e.f IFRS14 Regulatory Deferral Accounts mandatory from IAS 17 Leases IAS 18 Revenue IAS 19 Employee Benefits IAS 20 Accounting for Government Grants and Disclosure of Government Assistance IAS 21 The Effects of Changes in Foreign Exchange Rates IAS 23 Borrowing Costs IAS 24 Related Party Disclosures IAS 26 Accounting and Reporting by Retirement Benefit Plans

14 1. Introduction to IFRS IFRS issued 2001 onwards IAS issued from 1973 to 2000 IAS 28 Investments in Associates IAS 29 Financial Reporting in Hyperinflationary Economies IAS 31 Interests in Joint Ventures IAS 32 Financial Instruments: Presentation IAS 33 Earnings Per Share IAS 34 Interim Financial Reporting IAS 36 Impairment of Assets IAS 37 Provisions, Contingent Liabilities and Contingent Assets IAS 38 Intangible Assets IAS 39 Financial Instruments: Recognition and Measurement IAS 40 Investment Property IAS 41 Agriculture

15 1. Introduction to IFRS The goal with IFRS is to make international comparisons as easy as possible. More than 120 countries around the world currently require or permit IFRS reporting. All member states of the EU are required to use IFRS as adopted by the EU for listed companies since The US is also gearing towards IFRS. While some countries require all companies to adhere to IFRS, others merely allow it or try to coordinate their own country s standards to be similar.

16 1. Introduction to IFRS Current use of IFRS in G20 countries as at July 2011 Country Status for listed companies Argentina Required for financial years beginning on or after 1 January 2012 Australia Required for all private sector reporting entities and as the basis for public sector reporting since 2005 Brazil Required for consolidated financial statements of banks and listed companies from 31 December 2010 and for individual company accounts progressively since January 2008 Canada Required from 1 January 2011 for most listed entities and permitted for private entities including not-for-profit organisations China Substantially converged standards, active convergence initiatives; Hong Kong SAR adopted IFRSs for listed companies in 2005 European Union All member states of the EU are required to use IFRSs as adopted by the EU for consolidated financial statements of listed companies since 2005 France Required via EU adoption and implementation process since 2005 Germany Required via EU adoption and implementation process since 2005

17 1. Introduction to IFRS Current use of IFRS in G20 countries as at July 2011 Country Status for listed companies India Converging with IFRSs; implementation date of new converged standards to be confirmed Indonesia Convergence process ongoing; a decision about a target date for full compliance with IFRSs is expected to be made in 2012 Italy Required via EU adoption and implementation process since 2005 Japan Permitted from 2010 for a number of international companies; decision about mandatory adoption expected around 2012 Mexico Required from 2012 Republic of Korea Russia Required from 2011 Required for consolidated financial statements of banks since 2004, for insurance and listed companies from 2012 Saudi Arabia Not permitted for listed companies South Africa Required for listed entities since 2005 Turkey Required for listed entities since 2005 United Kingdom United States Required via EU adoption and implementation process since 2005 Allowed for foreign issuers in the US since 2007, no publicly traded US companies are permitted to use IFRSs; target date for substantial convergence between IFRSs and US GAAP is 2011; decision about possible adoption for US publicly traded companies expected in 2011

18 2. Conceptual Framework for Financial Reporting

19 2. Conceptual framework for Financial reporting The need for a formal conceptual framework is driven by the desire to ensure that accounting standards are not produced in a haphazard and fire-fighting manner The IASB framework envisages its role in being used for :- standard setting purposes, interpretation and application of standards and dealing with issues not covered in standards. The framework provides essential building blocks of the International Financial reporting standards

20 2. Conceptual framework for Financial reporting A conceptual framework is a statement of generally accepted theoretical principles which form the frame of reference for financial reporting. These theoretical principles provides the basis for the development of new accounting standards and the evaluation of those already in existence. The financial reporting process is concerned with providing information that is useful in the business and economic decision-making process. Therefore a conceptual framework will form the theoretical basis for :- determining which events should be accounted for, how they should be measured and how they should be communicated to the user.

21 2. Conceptual framework for Financial reporting Dangers of not having a conceptual framework:- Fundamental principles are tackled more than once in different standards, thereby producing contradictions and inconsistencies in basic concepts leads to ambiguity and it affects the true and fair concept of financial reporting US GAAP Large number of highly detailed standards produced by Financial Accounting Standards Board [FASB]. Created a financial reporting framework governed by specific rules rather than general principles. Benefits of having a framework:- Standard setting body act a an architect or designer building accounting rules on the foundation of sound, agreed principles Helps to bolster standard setters against political pressure from various lobby groups and interested parties. Such pressure would only prevail if it was acceptable under the conceptual framework.

22 2. Conceptual framework for Financial reporting Purpose of the framework as given in the Introduction:- a) Assist the Board of the IASB in the development of future IASs and in its review of existing IASs b) Assist the Board of the IASB in promoting harmonization of regulations, accounting standards and procedures relating to the presentation of financial statements by providing basis for reducing the number of alternate accounting treatments permitted by IASs c) Assist national standard-setting bodies in developing national standards d) Assist preparers of financial statements in applying IASs and in dealing with topics that have yet to form the subject of an IAS e) Assist auditors in forming an opinion as to whether financial statements conform with IASs f) Assist users of financial statements in interpreting the information contained in financial statements prepared in conformity with IASs g) Provide those who are interested in the work of IASB with information about its approach to the formulation of IASs (now IFRSs).

23 2. Conceptual framework for Financial reporting IASB s framework provides a conceptual framework for all IASs / IFRSs In July 1989 the IASB (then IASC) produced a document Framework for the preparation and presentation of financial statements. The framework consists of several chapters and sections, following on after a preface and introduction. These chapters are as follows:- a) The objective of financial statements b) Underlying assumptions c) Qualitative characteristics of financial statements d) The elements of financial statements e) Recognition of the elements of financial statements f) Measurement of the elements of financial statements g) Concepts of capital and capital maintenance

24 2. Conceptual framework for Financial reporting A. Objective of financial statements is to provide information about the :- a) Financial position b) Financial performance c) And changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions Such financial statements will meet the needs of most users. The information is, however, restricted:- a) It is based on past events not expected future events b) It does not necessarily contain non-financial information The statements show the results of management s stewardship. A complete set of IFRS financial statements includes:- a) A Statement of financial position [balance sheet] b) A statement of comprehensive income [income statement] c) A statement of changes in equity d) A statement of changes in financial position [cash flow statement] e) Notes, other statements and explanatory material

25 2. Conceptual framework for Financial reporting B. Underlying assumptions:- a) Accrual basis:- The effects of transactions and other events are recognized when they occur (and not as cash or its equivalent is recovered or paid) and they are recorded in the accounting records and reported in the financial statements of the period to which they relate. Financial statements prepared using the accrual basis show users past transactions involving cash and also obligations to pay cash in the future and resources which represent cash to be received in the future. a) Going concern:- The enterprise is normally viewed as a going concern, that is, as continuing in operation for the foreseeable future. It is assumed that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the scale of its operations. It is assumed that the enterprise has no intention to liquidate or curtail major operations. If it did, then the financial statements would be prepared on a different (disclosed) basis.

26 2. Conceptual framework for Financial reporting C. Qualitative characteristics of financial statements Understandability Relevance Reliability Comparability Materiality Faithful representation Substance over form Neutrality Prudence Completeness

27 2. Conceptual framework for Financial reporting C. Qualitative characteristics of financial statements:- a) Understandability:- Complex matters should not be left out of financial statements simply due to its difficulty if it is relevant information. b) Relevance:- The predictive and confirmatory roles of information are interrelated. Information has the quality of relevance when it influences the economic decisions of users by helping them evaluate past, present or future events or confirming, or correcting their past evaluations. c) Reliability:- Information must also be reliable to be useful. The user must be able to depend on it being a faithful representation. Information has the quality of reliability when it is free from material error and bias and can be depended upon by users to represent faithfully that which is either purports to represent or could reasonably be expected to represent. d) Comparability:- Users must be able to compare the financial statements of an entity:- a) through time internal comparability; and b) with different entities external comparability

28 2. Conceptual framework for Financial reporting C. Qualitative characteristics of financial statements:- Constraints on relevant and reliable information:- a) Timeliness:- Balance between timeliness and the provision of reliable information. b) Balance between benefits and costs:- When information is provided, its benefits must exceed the costs of obtaining and presenting it. c) Balance between qualitative characteristics:- A trade off between qualitative characteristics is often necessary, the aim being to achieve an appropriate balance to meet the objective of financial statements.

29 2. Conceptual framework for financial reporting D. Elements of financial statements Measurement of financial position in the statement of financial position Measurement of performance in the statement of Comprehensive income Assets Liabilities Equity Income Expenses

30 2. Conceptual framework for financial reporting D. Elements of financial statements as given in the Framework for the preparation of the Financial statements Asset:- Asset is a resource controlled by an entity as a result of past events and from which future economic benefits are expected to flow Liability:- A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. Equity:- The residual interest in the asset of the entity after deducting all its liabilities. It presents the cumulative net results of the past transactions and other events affecting the entity since day one of its inception. Income:- Income is the increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that results in increase in equity, other than those relating to contributions from equity participants. It encompasses both revenue and gains. Revenue arises in the normal course of business by its ordinary activities and is referred by different names likes sales, fees, commission, rent, interest, dividend, royalty etc. Expense:- It is the decrease in economic benefits during the accounting period in the form of outflows or depletion of assets or incurrence of liabilities those results in decrease in equity, other than those relating to contribution to equity participants. It encompasses both losses and expenses that arise in the course of ordinary activity of the entity.

31 2. Conceptual framework for financial reporting E. Recognition of the elements of financial statements An asset is recognized when: - it is probable that any future economic benefits associated with the item will flow to the entity; and the asset has a cost or value that can be measured reliably A liability is recognized when:- it is probable that there will be an outflow of economic benefits as a result of settlement of a present obligation and the amount at which settlement will take place can be measured reliably The term probable is not defined in the Framework, not is it generally defined in the standards when it is used in such standards. However, IAS37 Provisions, contingent liabilities and contingent assets specifies that, for the purpose of that standard, probable means more likely than not Contingent assets / Contingent liabilities are not recognized.

32 2. Conceptual framework for financial reporting E. Recognition of the elements of financial statements Income is recognized : - in the statement of profit and loss when an increase in future economic benefits related to an increase in an asset or a decrease of a liability has arisen that can be measured reliably Expense is recognized:- in the statement of profit and loss when a decrease in future economic benefits related to a decrease in an asset or an increase of a liability has arisen that can be measured reliably. Matching costs with revenues :- Expenses are recognized in the statement of profit and loss on the basis of a direct association between the costs incurred and the earning of specific items of income. Simultaneous or combined recognition of revenues and related expenses has historically had a significant influence. However, it has been de-emphasised in recent standard setting as the predominance of the balance sheet approach has grown.

33 2. Conceptual framework for financial reporting E. Recognition of the elements of financial statements Transactions with shareholders [in their capacity as owners / shareholders] The definitions of income and expenses exclude capital transactions with equity participants. Transactions recognized directly in equity: - Capital contributions from shareholders benefits received or exchanged directly with owners in their capacity as owners Eg 1:- Shareholder pays considerably more than fair value (FV) for the inventory:- Transaction is split into a capital transaction and a revenue transaction. Proceeds equal to FV of inventory would be recognized in profit and loss, with the remaining proceeds being recognized directly in equity as a contribution from shareholders. Eg 2 :- Inventory given without consideration to a shareholder. Argued that shareholder received a benefit from the entity in is capacity as shareholder.

34 2. Conceptual framework for financial reporting F. Measurement of the elements of financial statements 1. Historical cost:- Assets recorded at cash or cash equivalents paid or the fair value of the consideration given to acquire them at the time of their acquisition. Liabilities recorded at proceeds received in exchange for the obligation, or in some circumstances (for example income taxes) at the equivalents expected to be paid to satisfy the liability in the normal course of business 2. Current cost:- Assets carried at cash or cash equivalents that would have to be paid if the same or an equivalent assets was acquired currently. Liabilities are carried at the undiscounted amount of cash or cash equivalents that would be required to settle the obligation currently 3. Realizable (settlement) value :- Assets are carried at the amount of cash or cash equivalents that could be obtained by selling the asset in an orderly disposal. Liabilities are carried at their settlement values; that is; the undiscounted amounts of cash or cash equivalents expected to be paid to satisfy the liabilities in the normal course of business 4. Present value:- Assets are carried at present discounted value of the future net cash inflows that the item is expected to generate in the normal course of business. Liabilities are carried at the present discounted value of the future net cash outflows expected to be required to settle the liabilities in the normal course of business. 5. Fair value:- Assets are carried at amount which they could be exchanged, or a liability settled between knowledgeable willing parties in an arm s length transaction.

35 Historical cost concept 35 Assets are recorded at the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire them at the time of their acquisition. Liabilities are recorded at the amount of proceeds received in exchange for the obligation, or in some circumstances (for example, income taxes), at the amounts of cash or cash equivalents expected to be paid to satisfy the liability in the normal course of business. 35 IFRS Foundation 30 Cannon Street London EC4M 6XH UK.

36 Cost-based IFRS measures Few things measured at historical cost unimpaired land (IAS 16 + IAS 40 cost model) unimpaired indefinite life intangibles (IAS 38) unimpaired inventories (IAS 2) Cost-based measures are more common unimpaired depreciated historic cost (IAS 16) unimpaired amortised historical cost (IAS 38) amortised cost (IFRS 9) Impairment changes to a fair value or other measure IFRS Foundation 30 Cannon Street London EC4M 6XH UK.

37 ASSET TYPE MEASUREMENT AT INITIAL RECOGNITION COST MODEL BASIS OF IMPAIRMENT TEST IAS 2 Inventory Cost of purchase and/or conversion costs and costs to get the item to the location and condition for sale Cost unless impaired Lower of cost (initial recognition) and net realisable value IAS 16 Property, Plant and Equipment IAS 38 Intangibles Assets Purchase costs + construction costs + costs to bring to the location and condition necessary to be capable of operating in the manner intended by management. Purchase costs + development costs + costs to bring to the location and condition necessary to be capable of operating as intended by management Accounting policy choice: cost less accumulated depreciation and impairment, if any Accounting policy choice: cost less accumulated amortisation (unless indefinite life asset) and amortisation, if any Compare carrying amount to recoverable amount. Recoverable amount is greater of value in use and fair value less disposal costs (IAS 36) IAS 40 Investment Property IFRS 9 Financial Instruments 2010 IFRS Foundation. 30 Cannon Street London EC4M 6XH UK. Cost including transaction costs Fair value 37 Accounting policy choice: cost less accumulated depreciation (unless land) and impairment (if any) For particular business models amortised cost IAS 39 specifies impairment rules

38 Measurement Inventories are initially measured at cost. The cost of inventory includes costs of purchase and production or conversion. cost does not include abnormal wastage, administrative overheads that are not production costs and selling costs. Cost is assigned to each item of unique inventory using specific identification. FIFO or weighted average cost are used for ordinarily interchangeable inventory items. LIFO is prohibited. Inventory can be a qualifying asset in terms of IAS 23 Borrowing Costs IFRS Foundation 30 Cannon Street London EC4M 6XH UK. 38

39 Measurement PPE is initially recognised at cost Cost includes: purchase costs construction costs costs to bring to the location and condition necessary to be capable of operating in the manner intended by management Subsequent costs qualify for capitalisation if they meet the asset recognition criteria IFRS Foundation 30 Cannon Street London EC4M 6XH UK. 39

40 Measurement continued After initial recognition entity chooses to measure PPE either: at cost less accumulated depreciation and accumulated impairment (cost model); or at fair value less subsequent accumulated depreciation and accumulated impairment (revaluation model). IFRS Foundation 30 Cannon Street London EC4M 6XH UK. 40

41 Judgements and estimates Cost of some items includes significant estimates costs of dismantling, removal, restoration costs of self constructed PPE Depreciation requires: identifying significant components to be depreciated separately estimating useful life and residual value identifying the depreciation method that reflects most closely the consumption of the service potential of the item of PPE IFRS Foundation 30 Cannon Street London EC4M 6XH UK. 41

42 Measurement Intangible assets are measured initially at cost. Thereafter, intangible assets are usually measured using the cost model cost less accumulated amortisation (unless indefinite life) and impairment, if any. An intangible asset with a finite useful life is amortised and tested for impairment similarly to PPE. An intangible asset with an indefinite useful life is not amortised, but is tested annually for impairment or where evidence of impairment exists. IFRS Foundation 30 Cannon Street London EC4M 6XH UK. 42

43 Judgements and estimates Control of an asset arises when the entity has the power to obtain future economic benefits from the underlying resource and to restrict the access of other to those benefits. Intangible items of value to an entity may not be controlled by it, eg the assembled workforce and customer relationships. Research phase expenditures cannot be capitalised as assets. Development phase expenditures are capitalised when the specified criteria for asset recognition are satisfied. IFRS Foundation 30 Cannon Street London EC4M 6XH UK. 43

44 Judgements and estimates continued Amorisation requires: identifying a finite useful life intangible asset estimating useful life (residual value is usually assumed to be zero unless there is an active market) identifying the amortisation method that reflects most closely the consumption of the service potential of the item of the intangible asset. Impairment testing requires many estimates (see IAS 36). IFRS Foundation 30 Cannon Street London EC4M 6XH UK. 44

45 Initial measurement An investment property is measured initially at cost. The cost of a property interest held under a lease is measured in accordance with IAS 17 Leases at the lower of the fair value of the property interest and the present value of the minimum lease payments. IFRS Foundation 30 Cannon Street London EC4M 6XH UK. 45

46 Subsequent measurement For subsequent measurement an entity must adopt either the fair value model or the cost model for all investment properties. All entities must estimate the fair value of investment property, either for measurement (if the entity uses the fair value model) or for disclosure (if it uses the cost model). Measure fair value in accordance with IFRS 13 Fair Value Measurement. IFRS Foundation 30 Cannon Street London EC4M 6XH UK. 46

47 Cost model Investment property is measured at cost less accumulated depreciation and any accumulated impairment losses (ie using the cost model in IAS 16 Property, Plant and Equipment). Similar impairment consideration and principles must be applied. IFRS Foundation 30 Cannon Street London EC4M 6XH UK. 47

48 2. Conceptual framework for financial reporting G. Capital maintenance adjustments Concepts of capital maintenance Financial capital maintenance:- 1) Profit is earned only if Financial amount of net assets at the end of the period > Financial amount of net assets at beginning, after excluding any distributions to and contributions from owners during the period. 2) Does not require use of particular basis of measurement Physical capital maintenance:- 1) Profit is earned only if physical productive capacity (or resources or funds needed to achieve that capacity) at the end of the period > physical productive capacity at the beginning, after excluding any distributions to and contributions from owners during the period 2) Requires adoption of current cost basis of measurement Selection of the measurement bases and concept of capital maintenance will determine the accounting model for preparation of financial statements. The framework is applicable to a range of accounting models.

49 2. Conceptual framework for financial reporting QUIZ - Consider the following situations. In each case, do we have an asset or liability within the definitions given by the Framework? Give reasons for your answer. a) A ltd purchased a patent for Rs. 20,000. The patent gives the company sole use of a particular manufacturing process which will save Rs a year for the next 5 years. b) B Ltd paid C Ltd Rs. 10,000 to set up a car repair shop, on condition that priority treatment is given to cars from the company s fleet. c) D ltd provides a warranty with every car sold by it

50 2. Conceptual framework for financial reporting Solution to Quiz - Answers:- a) This is an asset although an intangible one. There is a past event, control and future economic benefits (through cost savings). b) This cannot be classified as an asset. B Ltd has no control over the car repair shop and it is difficult to argue that there are future economic benefits. c) This is a liability; the business has taken on an obligation. It would be recognized when the warranty is issued rather than when a claim is made.

51 3. Convergence process with IFRS in India and Indian Accounting Standards [Ind AS].

52 3. Convergence process with IFRS in India and Indian Accounting Standards [Ind AS] India has opted to converge with IFRS [and not adopt IFRS]. Process of convergence carried out by Ministry of Corporate Affairs [MCA] through wide ranging consultative exercise with all the stakeholders. Made some changes known as Carve out options Converged IFRS known as Indian Accounting Standards [Ind AS] Thus there has to be some differences between IFRS as adopted by IASB and the Ind AS.

53 3. Convergence process with IFRS in India and Indian Accounting Standards [Ind AS] Category Nature of carve out Practical example First category of carve outs Second category of carve outs Third category of carve outs Removal of policy choices Additional policy choices (alternate policies that diverge from IFRS) Significant mandatory deviations Entities other than financial institutions - IAS7 permits classification of interest & dividend paid / received as CF from Operating activities. Ind AS7 requires classification as financing & investing activities respectively. IAS21 requires exchange fluctuation on LT FC monetary assets / liabilities to be expensed off immediately in P&L account. Ind AS21 gives option to defer exchange differences over period of underlying asset / liability. IFRS3 requires bargain purchase on business combination to be recognized in Profit & loss account. Ind AS requires same to be recognized in OCI and accumulated in equity as Capital reserve.

54 3. Convergence process with IFRS in India and Indian Accounting Standards [Ind AS] IFRS gives better access to global capital markets IFRS provides impetus to cross border acquisitions Will improve the quality and consistency of information / avoid multiple reporting An IFRS balance sheet will be closer to economic value

55 3. Convergence process with IFRS in India and Indian Accounting Standards [Ind AS] Codification of Ind AS IFRS Ind-AS IFRS 1,2,3,4,5,6,7,8,9,10,11,12,13,14 Ind-As 101,102,103,104,105,106,107,108 & 109 IAS IFRIC & SIC Separate Ind-As 1.40 No Separate IFRIC & SIC,in form of Appendix that too forming integral part of the Standard.

56 3. Convergence process with IFRS in India and Indian Accounting Standards [Ind AS] Differing terminology IFRS Ind-AS Statement of Financial Position Statement of comprehensive income Statement of Cash flow Statement of changes in equity Balance sheet Statement of Profit and loss Statement Cash flow Part of Balance sheet and not a separate statement

57 3. Convergence process with IFRS in India and Indian Accounting Standards [Ind AS] How Ind AS s are different from IFRS? Certain standards have not been adopted And certain standards have been adopted with changes carved out option

58 3. Convergence process with IFRS in India and Indian Accounting Standards [Ind AS] Standards not adopted? IAS 41 : Agriculture IFRIC 15 : Agreement for the construction of real estate IAS 26 : Accounting and Reporting by Retirement Benefit Plans IFRIC 4 : Determining whether an arrangement contains a Lease IFRIC 12 : Service Concession Arrangements IFRS 6 : IFRS 6 Exploration for and Evaluation of Mineral Resources

59 3. Convergence process with IFRS in India and Indian Accounting Standards [Ind AS] Standards deferred IFRIC 4 : Determining whether an arrangement contains a Lease IFRIC 12 : Service Concession Arrangements IFRS 6 : IFRS 6 Exploration for and Evaluation of Mineral Resources

60 3. Convergence process with IFRS in India and Indian Accounting Standards [Ind AS] Presentation One statement Two statements Profit & Loss items + Other Comprehensive income Income statement Other Comprehensive income The second statement starts with the Profit or loss for the year

61 3. Convergence process with IFRS in India and Indian Accounting Standards [Ind AS] In the statement of Comprehensive Income [i.e. single statement approach ], an entity is required to at least include following line items: Single statement approach For example the following amounts should be presented 1. Revenue 2. Finance costs 3. Share of profit / Loss of associate or joint venture 4. Tax expense 5. Profit or loss 6. Each component (Net of tax) of other comprehensive income classified by nature 7. Total Comprehensive income Statement of comprehensive income

62 3. Convergence process with IFRS in India and Indian Accounting Standards [Ind AS] Two options of presentation Nature of items Functional Revenue Other income Changes in inventories of finished goods and WIP Raw materials & consumables used Employee benefits expense Depreciation & amortization expense Other expenses Total expenses Profit before tax Revenue Cost of sales Gross profit Other income Distribution costs Administrative expense Other expenses Profit before tax

63 3. Convergence process with IFRS in India and Indian Accounting Standards [Ind AS] Statement of Comprehensive Income Income statement Income less expenses excluding components of Other comprehensive income Other comprehensive income Income & Expenses (including reclassification adjustments) that are not recognized in P & L as required or permitted by other IFRS Total Comprehensive income Change in equity from Transactions & Other events Other than with owners in their capacity as owners

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