Ind-AS Implementation Issues. Himanshu Kishnadwala

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1 Ind-AS Implementation Issues Himanshu Kishnadwala

2 What is I-GAAP?

3 Accounting Standards in India Till 2006, Standards issued by ASB of ICAI were to be followed Companies (Accounting Standards) Rules, notified in Dec 2006 for companies [under sec 211(3C) of Companies Act 1956] Sec 133 of Companies Act, 2013 and Rule 7 of the Companies (Accounts) Rules, 2014 have also notified the same AS Under Sec 133 of the 2013 Act, National Financial Reporting Authority (NFRA) is to issue AS (will replace NACAS) AS 1 to AS 29 (except AS 8) (as amended) notified so far ICAI has also issued AS 30, 31, 32, but not notified by NACAS 2

4 What is I-GAAP? I-GAAP refers to: Notified Standards u/s 133 Accounting Standards issued by ICAI ICAI pronouncements: Statements Guidance Notes EACs Council Announcements on topical matters Application / Implementation Guides FAQs FAQs IndAS Transition Facilitation Group Bulletins (ITFG) 3

5 Changes in AS pursuant to notification of Ind AS MCA has issued a upgraded set of AS: These will be nearer to Ind AS Applicable for entities having net worth < 250 crores Several concessions/exemptions proposed in upgraded set of AS Certain difficult concepts to be omitted from the upgraded AS (e.g. fair value, derivative accounting., etc.) Companies (AS) Amendment Rules, 2016 notified on 30 th March 2016 (effective 1 st April 2016 or onwards) 7 standards replaced AS 2, 4, 10, 13, 14, 21, 29 AS 6 omitted 4

6 Amendments to Accounting Standards Name of the Standard AS 2 Valuation of Inventories AS 4 Contingencies and events after the Balance Sheet date AS 6 Depreciation Accounting Key Revision Aligned spare parts accounting with AS 10 Dividend declared after Balance Sheet date, but before the financial statements are approved for issue would be non adjusting item Requirements for depreciation are now incorporated in revised AS 10 5

7 Amendments to Accounting Standards Name of the Standard Key Revision AS 10 Fixed Assets Cost of an item of property, plant and equipment would be cash price equivalent at that date Component accounting mandatory (also mandated by Schedule II of Companies Act 2013) Depreciation method to be required to be reviewed at least at each financial year end Clarity on spare parts accounting definitions and recognition principles would be applicable to spare parts accounting Decommissioning liability on a discounted basis 6

8 Amendments to Accounting Standards Name of the Standard AS 13 Accounting of Investments AS 14 Accounting for Amalgamations AS 21 Consolidated Financial Statements AS 29 Provisions, Contingent Liabilities and Contingent Assets Key Revision Investment property to be accounted for in accordance with cost model as prescribed in revised AS 10 Limited Revision to include reference to 2013 Act in the standard A company without a subsidiary but with associates and JV to prepare CFS Decommissioning liability provision would be on discounted basis 7

9 What is IFRS?

10 What is IFRS? 1973 International Accounting Standards Committee (IASC) onwards International Accounting Standards Board (IASB) Future International Accounting Standards (IAS) IFRS series Standards IAS SIC Interpretations IFRS IFRIC Interpretations International Financial Reporting Standards (IFRS) 9

11 Structure of the IFRS Foundation and the Board IFRS Foundation Monitoring Board IFRS Council Advisory IFRS Foundation Trustees IFRS Foundation Accounting Standards Advisory Forum International Accounting Standards Boards IFRS Implementation Committee SME implementation group 10

12 What is IFRS? IFRS-IAS issued to date Conceptual Framework 16 IFRS 28 IAS 17 IFRIC 8 SIC IFRIC IFRS Interpretations Committee SIC Standards Interpretations Committee 11

13 What is IFRS? Principle based rather than Rule Based Principles encourage compliance whereas Rules can promote avoidance Contains very few alternatives Detailed Disclosure requirements Extensive Judgement required Involves subjectivity Extensive consultative process before final issuance of any Standard 12

14 How are IFRS developed? Agenda Consultation Research Programme Standards Development Implementation Request for information 3-5 year plan Research Discussion paper Agenda Proposal Exposure draft Final Standard Interpretation or narrowscope amendment Post implementation review 13

15 Global application of IFRS Currently, more than 149 countries require or permit listed entities use of IFRS. European Union (EU) required listed companies in its member states to follow IFRS from 2006 for CFS Most countries in Africa, America (except USA) have adopted IFRS China, Japan have recently adopted IFRS (with minor changes) USA is the only major country which has not yet adopted IFRS SEC, however, permits foreign companies to follow IFRS without doing a reconciliation with US GAAP On-going discussions between IASB-FASB for convergence into a single set of standards likely date 2018/2019 India had initially set date of 1 st April 2011 deferred mainly due to industry pressure and tax related issues New standards notified by MCA in Feb 2015 phase-wise applicability 14

16 Use of IFRS 149 profiles (as on 1 Jan 2017) Region That require IFRS for all or most domestic publicly accountable Entities Number of Jurisdictions surveyed That require IFRS as % of total jurisdictions in the region That permit or require IFRS for at least some (but not all or most) domestic publicly accountable Entities That neither require nor permit IFRS for any domestic publicly accountable Entities Europe % 1 0 Africa % 1 3 Middle East % 0 0 Asia-Oceania % 3 6 Americas % 8 2 Total % As % of % 84% 9% 7% GDP of 149 profiled jurisdictions represents 98.6% of the total world GDP. (2015 data) 15

17 IFRS Framework (Pillars of IFRS) Historical Cost is not relevant Time Value of Money Substance over Form Balance Sheet is the focus rather than the statement of profit and loss Fair Value more relevant for measurement of assets and liabilities Discounting to be done for future cash flows Contractual Substance over Legal Form Difference between 2 BS is Income statement 16

18 Fair value hierarchy Level 1 Full Information available Level 2 If not available, use quoted market prices for similar assets and liabilities Level 3 If not available, use other valuation techniques (most subjective) 17

19 What is IFRS? comparison of pages Number of Pages IFRS > 3,000 US GAAP > 17,000 I-GAAP > 1,000 Ind AS > 2,000 18

20 IFRS application in India

21 Adoption vs. Convergence Adoption: start applying IFRS from an announced date Convergence: modify IFRS to suit local requirements In India, ASB / NACAS decided to converge rather that adopt India accordingly issued a new set of standards called Ind AS These Ind AS contain certain carve-outs from IFRS 20

22 IFRS Implementation in India Converged Standards to be called Ind AS xx Changes in many Ind AS as compared to IFRS Ind AS finalized by ICAI and notified by MCA (NACAS) IAS / IFRS IAS 1 Ind AS 1 IAS 2 Ind AS 2 Corresponding Ind AS IFRS 1 Ind AS 101 IFRS 2 Ind AS 102 IFRIC and SIC incorporated within respective Ind AS itself 21

23 IFRS vs. Ind AS IFRS-IAS issued to date Conceptual Framework 16 IFRS 28 IAS 17 IFRIC 8 SIC Ind AS issued to date Conceptual Framework 14 Ind AS* 26 Ind AS** Included in Ind AS Included in Ind AS *IFRS 15: Revenue, IFRS 16 : Leases (effective later) **Ind AS 26 : Accounting and Reporting by Retirement Benefit Plans Ind AS 39: Financial Instruments: Recognition and Measurement - (since 109 is notified) 22

24 Timelines for Ind AS implementation July th Feb th Sept th Nov th Dec 2015 Announceme nt to implement Ind AS by Finance Minister in his Union Budget MCA issues Corporate road map for Cos. For implementation of Ind AS in 2 phases beginning from 1 st April, 2015 RBI recommends a road map to MCA for banks and NBFC s IRDA announces that insurance sector is to converge with Ind AS IRDA issues Discussion Paper on Ind AS implementation for insurance sector 23

25 Timelines for Ind AS implementation 18th Jan th Feb st March th March 2016 MCA announces a road map for implementation of Ind AS for SCBs (excluding RBI), insurance companies and NBFCs RBI issues a circular requiring SCBs to comply with Ind AS in phases beginning from 1 st April 2018 IRDA issues a circular for Ind AS implementation for all insurers in phases beginning from 1 st April 2018 MCA notifies a road map for implementation of Ind AS by NBFCs in phases beginning from 1 st April

26 Current Requirements Corporate Road Map Phase I Phase II Voluntary Adoption Year of Adoption FY FY FY or thereafter Comparative Year FY FY FY or thereafter Companies covered: Listed Companies All companies with net worth >= INR 500 crores Unlisted Companies All companies with net worth >= INR 500 crores Group Companies All companies listed or in the process of getting listed Companies having a net worth >= INR 250 crores Any company could voluntarily adopt Ind AS Applicable to holding, subsidiaries, joint ventures, or associates of companies covered in (a) and (b) above. This may also impact fellow subsidiary companies while preparing consolidated financial statements of the holding company. 25

27 Phase I Date of Transition Ind AS opening BS First Ind AS Financial ` Statements 1 st April, st March, st March, th June, th September th December th June, th September th December 2016 For Interim reporting Comparative Period 15 th September, th December, th February, 2017 Equity and profit reconciliations Reporting Date 26

28 Phase II April March April March Opening balance sheet 1 April 2016 Comparative for 31 March 2017 Financial Statements for the year ended 31 March

29 Road Map of Ind AS adoption: Banking, NBFC s and Insurance Companies Current Requirements Banking & Insurance Companies NBFC s - Phase I NBFC s - Phase II Year Adoption Comparative Year of FY FY FY FY FY FY

30 How many Ind AS are issued? Notification dated 16 February 2015: Companies (Indian Accounting Standards) Rules, Ind AS notified effective from 1 st April, 2015 Rule 4 states: The Companies and their auditors shall comply with the Indian Accounting Standards (Ind AS) Notification dates 30 th March 2016: Companies (Indian Accounting Standards)(Amendment) Rules, 2016 Gives roadmap for Banks and NBFCs for Ind AS implementation Ind AS 115 omitted Ind AS 11 and Ind AS 18 notified Several other Ind AS amended Total Ind AS now applicable: 40 Notification dated 6 th April 2016: Schedule III of Companies Act 2013 amended to prescribe format for Ind AS financial statements 29

31 Major Carve-Outs

32 Key Carve Outs in Ind AS - Mandatory Accounting Area Ind AS requirements IFRS requirements Law accounting standards overrides Law would override accounting standards. It would imply that court schemes whereby expenses are charged to reserves may be grandfathered and also possibly for future schemes (subject to compliance with other regulatory requirements) Not covered specifically 31

33 Key Carve Outs in Ind AS - Mandatory Accounting Area Ind AS requirements IFRS requirements Previous GAAP Provides an additional option/ choice to determine the deemed cost on transition to Ind AS Ind AS 101, First-time Adoption of Indian Accounting Standards, specifies the previous GAAP as the one which is applied by companies for their reporting requirements in India immediately before Ind AS i.e. existing notified standards Ind AS 101 allows an additional choice to consider previous GAAP carrying values as deemed cost for Property, Plant and Equipment, Intangible Asset, or Investment Property acquired prior to the transition date Previous GAAP is the basis of accounting that a first-time adopter used immediately before adopting IFRS IFRS 1, First-time Adoption of IFRS does not provide this option 32

34 Key Carve Outs in Ind AS - Mandatory Accounting Area Ind AS requirements IFRS requirements Foreign currency convertible bonds - treatment of conversion Option Recognition of embedded foreign currency conversion option as equity Conversion option treated as derivative and carried at fair value Business acquisitions gain on bargain purchase Recognition of bargain purchase gains in a business combination as capital reserve Bargain purchase gains in a business combination recognised as income in the statement of PL 33

35 Key Carve Outs in Ind AS - Mandatory Accounting Area Classification of loan with covenant breaches Lease rental recognition Investment in associates gain on bargain purchase Ind AS requirements Entities to continue classifying loans as noncurrent even in case of breach of a material provision if, before the approval of the FS, the lender agrees not to demand payment No straight-lining for escalation of lease rentals in line with expected general inflation Excess of the investor s share of the net fair value of the investee s identifiable assets and liabilities over the cost of investment to be transferred to the capital reserve IFRS requirements Loans reclassified as current liability Requires straight-lining of lease rentals Excess recognised as income in the statement of PL 34

36 Key Carve Outs in Ind AS - Mandatory Accounting Area Ind AS requirements IFRS requirements Revenue recognition from sale of real estate IFRIC 15, Agreements for Construction of Real Estate will not be applicable under Ind AS 18, Revenue for real estate developers. GN on Accounting of Real Estate Transactions for IndAS companies issued by ICAI. IFRIC 15 focuses on accounting for revenue and associated expenses by entities that undertake construction of real estate directly or through subcontractors. IFRIC 15 provides guidance on determining revenue from construction of real estate should be accounted for in accordance with IAS 11, Construction Contracts or IAS 18 and the timing of revenue recognition. 35

37 Key Carve Outs in Ind AS Optional Accounting Area Ind AS requirements IFRS requirements Foreign exchange fluctuations Accounting policies of joint ventures (JVs) and associates Option to continue the policy adopted for accounting for exchange differences arising from translation of long-term foreign currency monetary items recognised in the financial statements for the period ending immediately before the beginning of the first Ind AS financial reporting period as per the previous GAAP Option not to align the accounting policy of associates and JVs with that of the parent, if impracticable. Requires recognition of exchange rate fluctuations on longterm foreign currency monetary items in the statement of PL Requires of policies. alignment accounting 36

38 Key Carve In s in Ind AS Accounting Area Ind AS requirements IFRS requirements Common control Appendix C of Ind AS 103, Business Combination, provides specific guidance on common control and deals with accounting for business combinations of entities or businesses under common control. IFRS 3, Business Combination, excludes from its scope business combination of entities under common control. 37

39 Other Major Changes in Ind AS vis-à-vis IFRS not resulting in Carve-outs

40 Ind AS 1 Presentation of Financial Statements IFRS/IAS IAS 1 provides an option either to follow the single statement approach or to follow the two statement approach. IAS 1 requires that items of dissimilar nature or function shall be presented separately unless these are immaterial Ind AS Ind AS 1 allows only the single statement approach with statement of PL and OCI presented in two sections. In Ind AS 1 such paras have been modified to include words except when required by law. Para 31 provides that specific disclosure required by IFRS need not be provided if the information is not material. 39

41 Ind AS 7 Statement of Cash Flows IFRS/IAS IAS 7 gives an option to classify the interest paid and interest and dividends received as item of operating cash flows. Ind AS Ind AS 7 does not provide such an option and requires these items to be classified as items of financing activity and investing activity, respectively. 40

42 Ind AS 12 Income Taxes IFRS/IAS IAS 12 allow the option of deducting specified grant from the cost of the related assets. Ind AS Ind AS 12 does-not allow the option of deducting specified grant from the cost of the related asset as this option is not permitted. 41

43 Ind AS 18 Revenue IFRS/IAS No specific guidance Ind AS Para 1A is inserted in Ind AS 18 which states that recognition of interest is dealt in this standard whereas measurement of interest is dealt in accordance with Ind AS 109, Financial Instruments. Para 1B is inserted in Ind AS 18, which prescribes the impairment of any contractual right to receive cash or another financial asset arising from this standard, shall be dealt in accordance with Ind AS 109, Financial Instruments. 42

44 Ind AS 19 Employee Benefits IFRS/IAS IAS 19, the government bonds can be used only where there is no deep market of high quality corporate bonds. Ind AS According to Ind AS 19, the rate to be used to discount post employment benefit obligations (both funded and unfunded) shall be determined by reference to the market yields on government bonds. 43

45 Ind AS 20 Accounting for Government Grants and Government Assistance IFRS/IAS IAS 20 gives an option to measure nonmonetary government grants either at their fair value or at nominal value. IAS 20 gives an option to present the grants related to assets, including nonmonetary grants at fair value in the balance sheet either by setting up the grant as deferred income or by deducting the grant in arriving at the carrying amount of the asset. Ind AS Ind AS 20 requires measurement of such grants only at their fair value. Ind AS 20 requires presentation of such grants in balance sheet only by setting up the grant as deferred income. 44

46 Ind AS 21 The Effects of Changes in Foreign Exchange Rates IFRS/IAS When there is a change in functional currency, IAS 21 requires disclosure of that fact and the reason for the change in functional currency. Ind AS Ind AS 21 requires an additional disclosure of the date of change in functional currency. 45

47 Ind AS 23 Borrowing Costs IFRS/IAS No specific guidance Ind AS Ind AS 23 provides guidance as to how the adjustment prescribed in Para 6(e) i.e. exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs, is to be determined. 46

48 Ind AS 24 Related Parties Disclosures IFRS/IAS No specific guidance Ind AS In Ind AS 24, disclosures which conflict with confidentiality requirements of statute/regulations are not required to be made since Accounting Standards cannot override legal/regulatory requirements. 47

49 Ind AS 27 Separate Financial Statements IFRS/IAS IAS 27 requires to disclose the reason for preparing separate financial statements if not required by law. IAS 27 allows the entities to use the equity method to account for investment in Subsidiaries, Joint Ventures and Associates in their Separate Financial Statements (SFS) Ind AS In India, since the Companies Act mandates preparation of separate financial statements, such requirement has been removed in Ind AS 27. This option is not given in Ind AS 27, as the equity method is not a measurement basis like cost and fair value but is a manner of consolidation and therefore would lead to inconsistent accounting conceptually. 48

50 Ind AS 33 Earnings Per Share IFRS/IAS IAS 33 provides that when an entity presents both CFS and SFS, it may give Earnings Per Share (EPS) related information in CFS only Ind AS Ind AS 33 requires Earnings Per Share (EPS) related information to be disclosed both in CFS and SFS 49

51 Ind AS 34 Interim Financial Reporting IFRS/IAS No specific guidance Ind AS A footnote has been added to Para 1 of Ind AS 34, Interim Financial Reporting that Unaudited Financial Results required to be prepared and presented under Clause 41 of Listing Agreement with stock exchanges is not an Interim Financial Report as defined in paragraph 4 of this Standard. 50

52 Ind AS 40 Investment Property IFRS/IAS IAS 40 permits both Cost model and Fair Value model (except in some situations) for measurement of investment properties after initial recognition. IAS 40 permits treatment of property interest held in an operating lease as investment property, if the definition of investment property is otherwise met and fair value model is applied. In such cases, the operating lease would be accounted as if it were a finance lease. Ind AS Ind AS 40 permits only the Cost Model. Since Ind AS 40 prohibits the use of fair value model, this treatment is prohibited in Ind AS 40. Also the expression investment property under a finance or operating lease appearing in IAS 40 has been modified as investment property under finance lease in Ind AS

53 Ind AS 101 First-time Adoption of Indian Accounting Standards IFRS/IAS IFRS 1 provides various examples of first IFRS Financial Statements. IFRS 1 provide various examples of instances when an entity does not apply this IFRS. IFRS 1 requires the first-time adopter shall exclude from its opening Balance Sheet any item recognized in accordance with previous GAAP that does not qualify for recognition as an asset or liability under IFRS. The first-time adopter shall account for the resulting change in the retained earnings as at the transition date except in certain specific instances where it requires adjustment in the goodwill. Ind AS Ind AS 101 specifies that an entity s first Ind AS FSs are the first annual FSs in which the entity adopts Ind AS in accordance with Ind AS Ind AS 101 does not provide examples of instances. Similar to IFRS, but the specific instances where it requires adjustment in Goodwill can be adjusted in Capital Reserve. 52

54 Ind AS 101 First-time Adoption of Indian Accounting Standards IFRS/IAS IFRS 1 provides for transitional adjustment requiring companies to apply the provisions of IAS 23 prospectively after the transition date to IFRS. IAS 23 provided an option to expense out such borrowing cost. Ind AS This Para has not been included in Appendix D of Ind AS 101 since this was considered as not relevant in Indian situation as existing AS 16 always required an entity to capitalize borrowing costs. 53

55 Ind AS 105: Non-current Assets Held for Sale and Discontinued Operations IFRS/IAS IFRS 5 prescribes the conditions for classification of a non-current asset (or disposal group) as held for sale. Ind AS In Ind AS 105, a clarification has also been added that the non-current asset (or disposal group) cannot be classified as held for sale, if the entity intends to sell it in distant future. 54

56 Ind AS 108 Operating Segments IFRS/IAS IFRS 8 requires that the standard shall apply to : the separate or individual financial statements of an entity: i. whose debt or equity instruments are traded in a public market or ii. that files, or is in the process of filing, its financial statements with a securities commission or other regulatory organization for the purpose of issuing any class of instruments in a public market; and the CFS of a group with a parent who is included in (a) above Ind AS This has been deleted in the Ind AS 108 as the applicability or exemptions to the Indian Accounting Standards are governed by the Companies Act and the Rules made thereunder. 55

57 Ind AS 109 Financial Instruments IFRS/IAS IFRS 9 provides an option to apply requirements of IAS 39 Financial Instruments: Recognition and Measurement for fair value hedge of the interest rate exposure of a portfolio of financial assets or financial liabilities Ind AS The said option has been removed in Ind AS

58 Ind AS 114 Regulatory Deferral Accounts IFRS/IAS No specific guidance No specific guidance Ind AS Appendix A Defined terms of Ind AS 114 have been modified to clarify that Guidance Note of Accounting for Rate Regulated Activities would be considered as the previous GAAP for the purpose of Ind AS 114. Under paragraph 6 of Ind AS 114, a footnote has been added to clarify the application of requirements of previous GAAP in the case of an entity subject to rate regulation coming into existence after Ind AS coming into force or an entity whose activities become subject to rate regulation as defined in this Ind AS subsequent to preparation and presentation of its first Ind AS financial statements. 57

59 Some important terms in Ind AS

60 Some important terms in Ind AS Effective Interest Rate (EIR) method: It is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument. The effective interest rate is determined on the basis of the carrying amount of the financial asset or liability at initial recognition. Under the effective interest method: a) the amortised cost of a financial asset (liability) is the present value of future cash receipts (payments) discounted at the effective interest rate, and b) the interest expense (income) in a period equals the carrying amount of the financial liability (asset) at the beginning of a period multiplied by the effective interest rate for the period. 59

61 Amortised cost: Some important terms in Ind AS The amortised cost of a financial asset or financial liability at each reporting date is the net of the following amounts: the amount at which the financial asset or financial liability is measured at initial Recognition; minus any repayments of the principal; plus or minus the cumulative amortisation using the effective interest method of any difference between the amount at initial recognition and the maturity amount; minus, in the case of a financial asset, any reduction for impairment 60

62 Example of effective interest rate calculation and amortised cost A bank gives loan to its customer as per the following terms: Loan amount: Rs.5,00,000 Processing charges: 2 % of loan amount. Maturity : 5 years Interest : year 1 6%, year 2 6%, year 3 7%, year 4 7%, year 5 8% Interest to be paid annually and principal at the maturity date. EIR is calculated at the rate that exactly discounts estimated future cash flows through the expected life of this instrument. 5,00,000 30,000/(1+EIR) 1 +30,000/(1+EIR) 2 +35,000/(1+EIR) 3 +35,000/(1+EIR) 4 +(40,000+5,00,000)/ (1+EIR) 5 XIRR function to be used in excel for EIR calculation 61

63 Accounting as per current I-GAAP The amortized cost of the loan at the end of each period will be accounted as follows: Year Opening Balance (Rs.) Principal + Interest (Rs.) Closing Balance (Rs.) 1 5,00,000 30,000 5,00, ,00,000 30,000 5,00, ,00,000 35,000 5,00, ,00,000 35,000 5,00, ,00,000 5,40,

64 Accounting as per Ind AS The amortized cost of the loan at the end of each period will be accounted as: Year Amortized Cost at the Start of the Year (A) EIR (B) (A)*7.22% Cash Flow (C) Amortized Cost at the end of the Year (D) = (A) +(B) (C) 1 4,90,000 35,386 30,000 4,95, ,95,386 35,775 30,000 5,01, ,01,160 36,192 35,000 5,02, ,02,352 36,278 35,000 5,03, ,03,630 36,370 5,40,

65 Some important terms in Ind AS Functional Currency: The primary economic environment in which an entity operates is normally the one in which it primarily generates and expends cash. An entity considers the following factors in determining its functional currency: (a) The currency: (i) that mainly influences sales prices for goods and services (this will often be the currency in which sales prices for its goods and services are denominated and settled); and (ii) of the country whose competitive forces and regulations mainly determine the sales prices of its goods and services. (b) the currency that mainly influences labour, material and other costs of providing goods or services (this will often be the currency in which such costs are denominated and settled). 64

66 Some important terms in Ind AS Functional Currency...: The following factors may also provide evidence of an entity s functional currency: (a) the currency in which funds from financing activities (i.e. issuing debt and equity instruments) are generated. (b) the currency in which receipts from operating activities are usually retained. 65

67 Subsidiary Control: Some important terms in Ind AS An investor, regardless of the nature of its involvement with an entity (the investee), shall determine whether it is a parent by assessing whether it controls the investee. An investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Thus, an investor controls an investee if and only if the investor has all the following: (a) power over the investee; (b) exposure, or rights, to variable returns from its involvement with the investee; and (c) the ability to use its power over the investee to affect the amount of the investor s returns. 66

68 Some important terms in Ind AS Fair Value: This Ind AS defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement is for a particular asset or liability. Therefore, when measuring fair value an entity shall take into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Such characteristics include, for example, the following: (a) the condition and location of the asset; and (b) restrictions, if any, on the sale or use of the asset 67

69 Some important terms in Ind AS Other Comprehensive Income (OCI): Other Comprehensive Income comprises items of income and expense that are not recognised in profit or loss as required or permitted by other Ind ASs. Items of OCI that will not be reclassified to Profit & Loss : Changes in revaluation surplus Re measurements of the defined benefit plans; Equity Instruments through OCI Fair value changes relating to own credit risk of financial liabilities designated at fair value through profit or loss Share of OCI in Associates and Joint Ventures, to the extent not to be classified into profit or loss 68

70 Some important terms in Ind AS Other Comprehensive Income (OCI): Items of OCI that will be reclassified to Profit & Loss: Exchange differences in translating the financial statements of a foreign operation Debt Instruments through OCI The effective portion of gains and loss on hedging instruments in a cash flow hedge Share of Other Comprehensive Income in Associates and Joint Ventures, to the extent to be classified into profit or loss 69

71 Some Implementation Issues

72 Some Implementation Issues Revenue Whether Gross vs. Net: Treatment for Excise Duty, Service Tax /VAT Defn of Revenue in Ind AS 18: Paragraph 8 of Ind AS 18, inter alia, provides that revenue includes only the gross inflows of economic benefits received and receivable by the entity onits own account. IFTG 4: Issue 1 and 2 Using AS 9 analogy, it concludes that Revenue is Gross of Excise Duty For Service Tax, concludes that since it is collected on behalf of third party Revenue should be net For VAT, GN on VAT requires Revenue to be shown as Net. NSE Circular dated 10 Sept 2016: Requires Revenue Gross of Excise 71

73 Some Implementation Issues Re-classification of Stores & Spares as PPE Issues Awareness of change? Improper availability of data Threshhold determination 72

74 Some Implementation Issues Net Worth criteria for applicability To be considered as per standalone FS of 31 st March 2014 Applies also to subsidiaries, associates and joint ventures Net Worth means Aggregate value of the paid-up share capital and all reserves created out of the profits and securities premium account, after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves created out of revaluation of assets, write-back of depreciation and amalgamation Issues Definition as per Companies Act, 2013 to be considered Company falling in phase I having subsidiaries as NBFCs? What if Net Worth falls subsequently? Applicability to associates registered under section 25 or section 8? Grant received and considered as capital reserve in FS is it part of net worth? 73

75 Some Implementation Issues Amalgamations and Mergers Issues Will scheme override law or AS? Provisions of M&A in Companies Act 2013 notified recently Minutes of SEBI Board meeting dt 14 Jan 2017 What about old schemes having continuing effect? What is Effective date for Ind AS 103 applicability? 74

76 Some Implementation Issues Deferred Tax Adjustments for assets carried at Fair Value For Goodwill Concept of Unused Tax Credit Tax paid under MAT Issues Timing vs. Temporary differences (AS 22 vs IndAS 12) Whether MAT credit available is part of Deferred tax Asset? Presentation of MAT in IndAS FS? Whether current or non-current? 75

77 Some Implementation Issues Security Deposits collected Issues Whether Current of Non-Current? ITFG Issue 2: 76

78 Some Implementation Issues Application of Effective Interest Rate method Issues Adjustment of loan processing and other charges? Adjustments done earlier under Securities Premium Account Re-schedulement of Loans Application of Expected Credit Loss Model Issues Improper availability of past data Complex model 77

79 78

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