Ind AS 105: Non-current Assets Held for Sale

Transcription

1 Ind AS 105: Non-current Assets Held for Sale Contents 1. Navigating the standard 2. Definitions 3. Non-current asset & disposal group Classification 4. Initial measurement 5. Non-current asset held for sale Example 6. Non-current asset or disposal group held for sale or distribution to owners Subsequent measurement 7. Disclosures key points 1

2 Navigating the standard Objective Scope Sets out the accounting treatment of non current assets held for sale, disposal groups and discontinued operations The presentation and classification of all non-current assets and disposal groups that are held for sale except the measurement of several non current assets Core principle asset/disposal group held for sale to be measured at the lower of carrying amount and fair value less costs to sell assets that meet the criteria of held for sale to be presented separately in the statement of financial position the results of discontinued operations to be presented separately in the statement of comprehensive income Key definitions non current asset disposal group discontinued operation Navigating the standard (Contd.) Exclusions deferred tax assets assets arising from employee benefits financial assets within the scope of Ind AS 109 Financial Instruments. non-current assets that are measured at fair value less costs to sell in accordance with Ind AS 41 Agriculture. contractual rights under insurance contracts as defined in Ind AS 104 Insurance Contracts. 2

3 Definitions Non-current asset is an asset that does not meet the definition of a current asset. Disposal group is a group of assets (and liabilities, if any) to be disposed of, by sale or otherwise, together as a group in a single transaction. Discontinued operations is a component of an entity that: Either: has been disposed of or is classified as held for sale And: represents a separate major line of business or geographical area of operations or is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations or is a subsidiary acquired exclusively with a view to resale Non-current asset & disposal group Classification as held for sale / held for distribution An entity should classify a non-current asset or a disposal group as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. A non-current asset or disposal group is classified as held for distribution to owners when the entity is committed to distribute the asset/disposal group to the owners. Non-current assets or disposal groups held for sale Classification criteria: 1. available for immediate sale 2. in its present condition 3. subject only to terms that are usual and customary for sales of such assets and 4. its sale must be highly probable. Non-current assets or disposal groups held for distribution to owners Classification criteria: 1. available for immediate distribution 2. in their present condition 3. the distribution must be highly probable. 3

4 Non-current asset & disposal group Classification as held for sale / held for distribution what is highly probable? Non-current assets or disposal groups held for sale the appropriate level of management committed to a plan to sell active programme to locate a buyer and complete the plan actively marketed at a reasonable price compared to its fair value the sale is expected within one year from the date of classification (some exceptions) it is unlikely that the plan will be withdrawn or significantly changed Non-current assets or disposal groups held for distribution to owners actions to complete the distribution must have been initiated the distribution is expected within one year from the date of classification it is unlikely that the distribution will be withdrawn or significantly changed Initial measurement Please refer hand outs for Initial Measurement IFRS 5 - table 4

5 Non-current asset held for sale Example on 1 January 20X3, Entity A acquires an item of PP&E for INR 150,000. Entity A uses the cost model and the straight line depreciation method. It estimates the residual value to be nil and the useful life to be 5 years on 31 December 20X4, Entity A decides to sell the PP&E. Assume that the conditions for classification as held for sale are met set out below are details of the fair value less costs to sell and value in use. Date Fair value less costs to sell Value in use 31 December 20X4 INR 60,000 INR 70,000 Q - How should Entity A account for the PP&E on 31 December 20X4? Non-current asset held for sale Solution - 31 December 20X4 The PP&E is classified as held for sale. Therefore, Entity A should: 1. Step 1: measure the asset in accordance with Ind AS 16 Cost INR 150,000 Accumulated depreciation (*) (INR 60,000) (*) INR 150,000*2/5 2. Step 2: test the asset for impairment in accordance with Ind AS 36 INR 90,000 Carrying amount (INR 90,000) Recoverable amount (INR 70,000) (*) (*) The higher of fair value less costs of disposal (INR 60,000) and value in use (INR 70,000) The entity should recognise an impairment loss of INR 20,000 (INR 90,000-INR 70,000) 5

6 Non-current asset held for sale Solution - 31 December 20X4 3. apply Ind AS 105 and measure the asset at the lower of: carrying amount fair value less costs to sell Carrying amount INR 70,000 Fair value less costs to sell INR 60,000 The lower INR 60,000 The entity should recognise an impairment loss of INR10,000 (INR 70,000-INR 60,000) and carry the asset at INR 60,000. Non-current asset or disposal group held for sale or distribution to owners: Subsequent measurement Please refer hand outs for Subsequent Measurement Ind-AS Table 2 6

7 Non-current asset held for sale Example continued (subsequent measurement) Recap: 31 December 20X4 decided to sell PPE carrying amount prior to Ind AS 105 classification was INR 70,000 FVLCTS at date of HFS classification was INR 60,000 therefore, PPE written down to INR 60,000 as of 31 December 20X4 Now it's 31 March 20X5 and management needs to prepare its financial statements. Updated figures are as follows for the PPE: Date 31 March 20X5 Carrying value INR 60,000 FVLCTS INR 61,000 How should Entity A account for the PP&E at 31 March 20X5? Non-current asset held for sale Example continued (subsequent measurement) Subsequent measurement 1. Step 1: do not depreciate/amortise the asset 2. Step 2: apply Ind AS 105 if FVLCTS > current carrying amount: recognise the subsequent gain; but not in excess of cumulative impairment loss recognised in accordance with Ind AS 105 or Ind AS 36 if FVLCTS < current carrying amount: recognise the subsequent write-down of the asset to FVLCTS Carrying amount INR 60,000 Fair value less costs to sell INR 61,000 Cumulative impairment loss recognised in accordance with Ind AS 105 and Ind AS 36 INR 30,000 Since the asset is presently carried at INR 60,000, Entity A should recognise an impairment reversal of INR1,000 7

8 Disclosures Summary of key points An entity should disclose the following information in the notes in the period in which a non-current asset (or disposal group) has been either classified as held for sale or sold: a description of the non-current asset (or disposal group) a description of the facts and circumstances of the sale, or leading to the expected disposal, the expected manner and timing of that disposal for any impairment losses or reversals recognised in accordance with Ind AS 105, the statement of comprehensive income line item within which it is included (if not presented separately) if there is a change in plan to sell, in the period of the decision to change the plan to sell the non-current asset (or disposal group), a description of the facts and circumstances leading to the decision and the effect of the decision on the results of operations for the period and any prior periods presented if applicable, the entity should disclose the reportable segment in which the non-current asset (or disposal group) is presented in accordance with Ind AS 108. Thank you! 8

9 Ind AS 8: Accounting Policies, Changes in Accounting Estimates and Errors Contents 1. Key definitions 2. Accounting policies - Hierarchy for selection 3. Key factors for accounting policy application 4. Changes in accounting policy and retrospective application 5. Changes in accounting estimates 6. Accounting policy Vs. Accounting estimate 7. Errors Overview 8. Limitations to retrospective application 9

10 Key definitions Accounting policies Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements Changes in estimate A change in accounting estimate is an adjustment of the carrying amount of an asset or a liability, or the amount of the periodic consumption of an asset, that results from the assessment of the present status of, and expected future benefits and obligations associated with, assets and liabilities. Prior period errors Prior period errors are omissions from, and misstatements in, the entity s financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable and available information. Retrospective application Retrospective application is applying a new accounting policy to transactions, other events and conditions as if that policy had always been applied Key definitions(contd.) Retrospective restatement Prospective application Retrospective restatement is correcting the recognition, measurement and disclosure of amounts of elements of financial statements as if a prior period error had never occurred Prospective application is: applying the new accounting policy to transactions, other events and conditions occurring after the date as at which the policy is changed; and recognising the effect of the change in the accounting estimate in the current and future periods affected by the change Impracticable Applying a requirement is impracticable when the entity cannot apply it after making every reasonable effort to do so Material omissions Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions that users make on the basis of the financial statements 10

11 Accounting policies Hierarchy for selection Standards and interpretations as per applicable Ind ASs. Any relevant implementation guidance issued by the ICAI Guidance which can derived from a similar issue / situation Ind AS framework Most recent pronouncements by other standard-setting bodies. Other accounting literature and accepted industry practices Key factors for accounting policy application Materiality Information is material if its omission or misstatement could affect decision making of the users of financial information. Ind AS 8 notes that policies need not be applied where the effect of applying them is immaterial Consistency Application of accounting policies consistently for similar transactions, other events and conditions unless permitted by Ind AS If an Ind AS requires/permits different policies, an entity shall apply its accounting policy consistently to each category. 11

12 Changes in accounting policy and retrospective application Changes in accounting policies: Change only if: required by new standard or interpretation provides reliable and more relevant information. Retrospective application Unless: impracticable specific transitional provisions in new Standard or Interpretation. Detailed disclosures required depending on whether required change or voluntary change Changes in accounting estimates Accounting estimates Judgments made by management e.g. bad debts, inventory obsolescence, warranty obligations, useful life of PPE Changes in accounting Estimates Changes based on new information or more experience that does not relate to prior periods Prospective application Disclose the nature & amount of the change that has had an effect on current or future periods. 12

13 Accounting policy Vs. Accounting estimate Example: Accounting Policy Change: If entity changes method of valuing PPE, it is change in accounting Policy. Accounting Estimate Change: If there is change in useful life or residual value of depreciable asset, it amounts to change in estimate. When it is difficult to distinguish a change in an accounting policy from a change in an accounting estimate it is treated as a change in an accounting estimate. Errors Overview Prior period errors Prior period errors are omissions from, and misstatements in, the entity s financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that: was available when financial statements for those periods were authorized for issue; and could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements Retrospective restatement Restate comparative periods presented in which the error occurred and restate the opening balances for the earliest prior period presented. Disclose nature and amount of any correction made or, if restatement is impracticable why this is the case. 13

14 Limitations to retrospective application When it is impracticable to determine the period-specific effects of an error on comparative information for one or more prior periods presented, the entity shall restate the opening balances of assets, liabilities and equity for the earliest period for which retrospective restatement is practicable (which may be the current period). When it is impracticable to determine the cumulative effect, at the beginning of the current period, of an error on all prior periods, the entity shall restate the comparative information to correct the error prospectively from the earliest date practicable. Thank you! 14

15 Ind AS 10: Events after the Reporting Period Contents 1. Navigating the standard 2. Adjusting events & Non-Adjusting events 3. Dividends 4. Adjusting events & Non-Adjusting events- Example 5. Disclosures - summary 15

16 Navigating the standard Objective To prescribe when an entity should adjust its financial statements for events after the reporting period and the date of authorisation of financial statements and events after that date. Scope accounting and disclosures of events after the reporting period Key definitions adjusting events after the reporting period non-adjusting events after the reporting period Adjusting events & Non-Adjusting events Adjusting events Events after the reporting period that provide evidence of conditions that existed at the end of the reporting period Non-Adjusting events Events after the reporting period that are Indicative of conditions that arose after the end of the reporting period Adjust the amounts recognised in the financial statements Disclose but do not adjust the amounts recognised in the financial statements 16

17 Adjusting events & Non-Adjusting events Examples Adjusting events settlement of a court case bankruptcy of a customer sale of inventories determination of profit-sharing or bonus payments discovery of fraud or error making the financials incorrect Non-adjusting events Announcement of a plan to discontinue an operation destruction of major production plant by a fire abnormal changes in foreign exchange rates announcing a major restructuring Dividends Example Entity A has a 31 December year-end. It declares dividends on the following dates: interim dividends 20X2 declared on 1 August 20X2: INR 50,000 final dividends 20X2 declared on 1 February 20X3: INR 75,000 interim dividends 20X3 declared on 1 August 20X3: INR 55,000 final dividends 20X3 declared on 1 February 20X4: INR 80,000 assume that Entity A is obliged to pay all dividends within a month of being declared. What would appear in the statement of changes in equity of Entity A for the year 31 December 20X3? 17

18 Dividends Solution Entity A Statement of changes in equity (Extract) 31 December 20X3 Brought forward Dividends (130) Total comprehensive income for period Carried forward x x x Dividends declared after the reporting date are not an adjusting event but are disclosed in the notes Dividends declared during the period (75+55=130) are recognised as a deduction from equity disclose the amount of dividends and the dividends per share Adjusting events & Non-Adjusting events Example- settlement of lawsuit after the reporting period during the year 20X2, Entity B commenced a lawsuit against Entity A for the breach of a pharmaceutical patent on 31 December 20X2: Entity A did not recognise a provision, based on its lawyers advised that it is not liable Entity B did not recognise an asset since it is uncertain about the outcome of the legal proceedings on 23 March 20X3, the court ruled that Entity A should compensate Entity B for INR 1,500,000 the date of authorisation of the financial statements of both entities is 31 March 20X3. How should Entity A and Entity B account for the lawsuit in the financial statements for the year 31 December 20X2? 18

19 Adjusting events & Non-Adjusting events Solution- Entity A Entity A should consider whether the court ruling is deemed to be the event that creates an obligation or as confirmatory evidence that an obligation existed at the reporting date as a result of a past event. Ind AS 10 states: examples of adjusting events : a) the settlement after the reporting period of a court case that confirms that the entity had a present obligation at the end of the reporting period " Adjusting event Entity A should recognise a provision of INR 1,500,000 in the financial statements for the year ended 20X2. Adjusting events & Non-Adjusting events Solution- Entity B Entity B should consider whether the court ruling is deemed to be the event that creates the right or as confirmatory evidence that a right existed at the reporting date as a result of a past event. On 31 December 20X2, Entity B estimated the contingent asset at zero. That estimate is allowed to incorporate information obtained after 31 December 20X2 but before the financial statements are authorised for issue. Adjusting event Entity B should recognise an asset of INR 1,500,000 in the financial statements for the year ended 20X2. 19

20 Disclosures - summary 1. Date of authorisation for issue of financial statements and who gave that authorisation 2. Disclosure as regards power of the owners or others to amend the financial statements after issue 3. Update disclosures relating to conditions that existed at the end of the reporting period if any information is received after the reporting period 4. Disclosures regarding material non-adjusting events a) nature of the event b) estimate of its financial effects or statement that such an estimate cannot be made Thank you! 20

21 Ind AS 33: Earnings per share Contents 1. Scope 2. Definitions 3. Basic EPS 4. Diluted EPS 5. Presentation in the statement of comprehensive income 6. Disclosures 21

22 Scope This standard applies to Separate financial statements of an entity and Consolidated financial statements of a group: i. whose ordinary shares or potential ordinary shares are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets) or ii. that files, or is in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of issuing ordinary shares in a public market Ind AS 33 requires EPS to be disclosed in both separate and consolidated financials Carve out - When a company presents both separate and consolidated financial statements, the EPS needs to be presented for consolidated financials only. Definitions Ordinary share - An ordinary share is an equity instrument that is subordinate to all other classes of equity instruments. Potential ordinary share A potential ordinary share is a financial instrument or other contract that may entitle its holder to ordinary shares. For example financial liabilities or equity instruments, including preference shares, that are convertible to ordinary shares; options and warrants Dilutive potential ordinary share Potential ordinary shares shall be treated as dilutive when, and only when, their conversion to ordinary shares would decrease earnings per share or increase loss per share from continuing operations. Treasury shares Treasury shares are equity instruments reacquired and held by the issuing entity or by its subsidiaries. 22

23 Basic EPS Formula Profit/loss attributable to ordinary equity holders of the parent Weighted average number of ordinary shares outstanding during the period declared dividends for non-cumulative preference shares dividends for cumulative preference shares (whether declared or not) Where any item of income/ expense is debited/credited to the security premium/other reserves shall also be deducted from profit or loss for calculating EPS. includes shares from the date consideration is receivable consists of the number of ordinary shares outstanding at the beginning of the period adjusted by: 1. the number of ordinary shares bought back or issued during the period multiplied by a time-weighting factor 2. issuance of shares that do not affect the Entity's resources (e.g. bonus issue, a share split, consolidation of shares) Carve Out Income/expense debited/credited to the security premium/other reserves shall not be deducted from profit or loss for calculating EPS Basic EPS Example treasury shares on 1 January 20X5, Entity B had 10,000 ordinary shares in issue of which it holds 1,500 as treasury shares on 1 June 20X5, Entity B issues 4,000 new shares for cash on 1 December 20X5, Entity B purchases an additional 1,500 of its own shares for cash to hold as treasury shares Entity B's profit after tax attributable to ordinary equity holders of the parent for the year 20X5 was INR 100,000. Date Number of shares Weightage Total Earnings 1 Jan - 31 May 8,500 5/12 3,542 1 June - 30 November 12,500 6/12 6,250 1 December 31 December 11,000 1/ Basic EPS= INR 100,000/10,709 Shares= , ,000 23

24 Diluted EPS The numerator should be adjusted by the after tax effect of: 1. dividends or other effects related to dilutive potential ordinary shares which were deducted from the numerator in the Basic EPS calculation 2. P&L effects related to: a) dilutive potential ordinary shares and b) the conversion of the dilutive potential ordinary shares. The denominator should be: adjusted to the weighted average number of ordinary shares that would be issued on the conversion of the dilutive potential ordinary shares the adjustment date is the of: 1. the beginning of the period 2. the date of the issue of the potential ordinary shares. Diluted EPS Options, warrants and equivalent instruments Options and warrants are financial instruments that give the holder the right to purchase ordinary shares. 1. calculate the proceeds from exercising the instrument 2. calculate full price shares by dividing the proceeds in Step 1 to the average market price of the ordinary shares during the period 3. calculate the ''free shares'' i.e. the difference between: the number of shares that will be issued as a result of the exercise of the instrument the full price shares in Step 2 above. Options and warrants are dilutive when the result of Step 3 above is positive (ie they are 'in the money'). Otherwise, they are not included in the calculation of Diluted EPS. 24

25 Diluted EPS Options Entity A had the same 1,000,000 ordinary shares in issue on both 1 January 20X5 and 31 December 20X5 on 1 January 20X5, Entity A issues 200,000 INR 1 options each option is exercisable to one ordinary share on 1 January 20X9 for a price of INR 8 Entity A's profit after tax for the year 20X5 was INR 2,000,000 the average price per share during the year 20X5 was INR 20. Shares Earnings Basic 1,000,000 INR 2,000,000 Benefit 120,000 (Note) Diluted 1,120,000 INR 2,000,000 Note - Proceeds from exercising the options: 200,000*INR 8= INR 1,600,000 - Full price shares: INR 1,600,000/20= 80,000 shares - ''Free shares'': 200,000-80,000= 120,000 shares. Basic EPS= INR 2,000,000/1,000,000 Shares = Diluted EPS = INR 2,000,000/1,120,000 Shares = Diluted EPS Contingently issuable shares The conditions satisfied during the period Include from the later of: beginning of period the agreement date Assume the reporting date is end of contingency period 25

26 Diluted EPS Combination of potential ordinary shares Entity A had the same 1,000,000 ordinary shares in issue on both 1 January 20X5 and 31 December 20X5 on 1 January 20X5, Entity A issues 1,201 units of convertible bonds for INR 1,200,000. Each 5 bonds are convertible into 1 ordinary share on 1 January 20X5, Entity A issues 200,000 INR 1 options each option is exercisable to one ordinary share on 1 January 20X9 for a price of INR 8 the average price per share during the year 20X5 was INR 20 Entity A's profit after tax for the year 20X5 was INR 5,000,000 and it includes: o INR 100,000 interest expense on the convertible bonds INR 30,000 tax income effects. What is the Basic and Diluted EPS for year ended 31 December 20X5? Diluted EPS Combination of potential ordinary shares Shares Earnings Basic 1,000,000 INR 5,000,000 Options- Benefit 120,000 (*) Conversion effect 240,000 (**) INR 70,000 (***) (*) 1. Proceeds from the exercise of the options: 200,000* INR 8= INR 1,600, Full price shares: INR 1,600,000/20= 80,000 shares 3. ''Free shares'': 200,000-80,000= 120,000 shares (**) the denominator: 1,200,000 bonds/5= 240,000 shares (***) the numerator: INR 100,000-INR 30,000= INR 70,000 The dilution ratios are as follows: Options: INR 0/80,000 Shares= INR 0/share Convertible bonds: INR 70,000/240,000 Shares= INR 0.3/share. 26

27 Diluted EPS Combination of potential ordinary shares Basic EPS= INR 5,000,000/1,000,000 Shares= INR 5/share Diluted EPS Include the most dilutive instrument (options only) = INR 5,000,000/(1,000,000Shares + 120,000Shares)= INR 4.46 Include the next most dilutive instrument = INR 5,240,000/(1,120,000Shares + 240,000Shares)= INR 3.85 Diluted EPS= INR 5,240,000/1,320,000 Shares= INR 3.85 Presentation in the statement of comprehensive income Basic and Diluted EPS attributable for the parent from continuing operations and in total. Those presented even if the amounts are negative (loss for share) EPS is presented for every period for which a statement of comprehensive income is presented Presentation If Basic and Diluted EPS are equalpresent Basic and Diluted EPS in one line in the statement of comprehensive income If Diluted EPS is reported for at least one period, it should be reported for all periods presented, even if it equals Basic EPS 27

28 Disclosures- summary of key points the numerators of the Basic and Diluted EPS a reconciliation of these numerators to profit or loss for each classes the denominators of the Basic and Diluted EPS a reconciliation of these denominators to each other by classes the antidilutive instruments for the period not included at present but that could potentially dilute in the future details of ordinary share/potential ordinary share transactions: 1. that occur after the reporting period and 2. that would have changed Basic or Diluted EPS significantly if they occurred before the end of the reporting period. Examples: issue of shares, options, warrants, or convertible instrument. Thank you! 28

29 Ind AS 24 Related Party Disclosures Contents 1. Overview 2. Definitions 3. Special consideration 4. Example 5. Disclosures 29

30 Overview Objective Existence of related parties may effect entity's financial position and profit or loss Scope identifying related party relationships and transactions identifying outstanding balances, including commitments, between entity and its related parties identifying the circumstances in which disclosure is required determining the disclosures to be made Applicability Consolidated and separate financial statements of Parent Venturer Investor Individual financial statement Definition A related party is a person or entity that is related to the reporting entity (RE), if: A person or a close member of that person s family, if that person: has control or joint control over the RE; has significant influence over the RE; or is a member of the key management personnel (KMP) of the RE or of a parent of the RE 30

31 Definition (Contd ) An entity is related to a RE, if: both are members of same group one is an associate or joint venture of the other both are joint ventures of the same third party. one is joint venture of a third entity and the other entity is an associate of the third entity the entity is a post-employment benefit plan (PEBP) of the RE. if RE is itself a PEBP, the sponsoring employers are related to the RE the entity is controlled or jointly controlled by a person identified above a person identified above has significant influence over the entity or is a member of the KMP of the entity/ or of its parent Definition (Contd ) Related party transaction transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is charged Close members of the family person specified as relative under Companies Act,2013 that person's domestic partner children of that person's domestic partner dependents of that person's domestic partner. Key management personnel person having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity 31

32 Special consideration Special consideration Associate includes subsidiaries of associate and joint venture includes subsidiaries of joint venture Substance of the relationship and not merely the legal form to be considered for evaluating related party relationship. The following are not considered as related parties: two entities if they have a director/other member of KMP in common/ a member of KMP of one entity has significant influence over the other entity two venturers having joint control over a joint venture. providers of finance/ trade unions/ public utilities/ departments and agencies of a government that does not control, jointly control or significantly influence the reporting entity a customer, supplier, franchisor, distributor or general agent with whom an entity transacts a significant volume of business, simply by virtue of the resulting economic dependence 32

33 Example 1 Parent Associate 1 Subsidiary A Subsidiary B Associate 2 Subsidiary C Associate 3 Example (Contd ) For financial statement of Parent (separate) Parent (consolidated) Related Party Subsidiaries A, B, C and Associates 1, 2 and 3 Associates 1, 2 and 3 Subsidiary A Parent, Subsidiaries B and C and Associates 1, 2 and 3 Subsidiary B Parent, Subsidiaries A and C and Associates 1, 2 and 3 Subsidiary C Parent, Subsidiaries A and B and Associates 1, 2 and 3 Associates 1, 2 and 3 Subsidiaries A, B and C (Associates are not related to each other) 33

34 Example 2 Person X Domestic partner Person Y Controlling interest Controlling interest Entity A Entity B Example (Contd ) For financial statement of Entity A Entity B Related Party Entity B Entity A If X has significant influence over Entity A and Y has significant influence over Entity B, Entities A and B are not related to each other 34

35 Disclosures Disclosures Parent Subsidiary Relationships Shall be disclosed whether or not there are transactions between them Disclosures name of the parent name of the ultimate controlling party if neither of the above produce financial statements available for public use, the name of the next most senior parent 35

36 Disclosures (Contd ) KMP Compensation Disclosures (in total and for each of the following categories) short-term employee benefits (wages, salaries, bonuses, etc.) post-employment benefits (pensions, life insurance, etc.) other long-term benefits (sabbatical, disability, etc.) terminations share-based payments Related-Party Transactions Disclosures amount amount of balances still outstanding provisions for doubtful debt and any related expense recognized during the period Disclosures (Contd ) Who should make separate disclosures? parent entities with joint control/significant influence over the entity subsidiaries associates joint ventures key management personnel other related parties 36

37 Disclosures (Contd ) Arm s-length transactions/terms May only disclose if this claim can be substantiated Substantiation might be made by benchmarking against other similar transactions Items of a similar nature may be disclosed in aggregate except when separate disclosure is necessary for an understanding of the effects of related party transactions Under Ind AS 24, disclosures which conflict with confidentiality requirements of statutes/ regulations are not required to be made. Thank you! 37

38 Ind AS 1 - Presentation of Financial Statements Contents 1. Overview 2. Components of financial statements 3. Balance sheet 4. Other comprehensive income 5. Comparative information 6. Third balance sheet 7. Cash flow 38

39 Overview Objective Prescribes basis for presentation of general purpose financial statements Scope Core principle Preparation and presentation of general purpose financial statements in accordance with Ind AS To ensure financial statements present fairly the financial position, financial performance and cash flows of an entity and provide comparability of information both within an entity's financial statements and those of other entities Key definitions normal operating cycle current assets/ current liabilities other comprehensive income reclassification adjustments Complete set of financial statements balance sheet 'statement of profit and loss' presented in: a single statement (expenses classified by nature only Carve out) a separate 'profit or loss statement' and 'other comprehensive income statement' Carve out statement of changes in equity (SoCiE) - to be shown as a part of the balance sheet. statement of cash flow notes comparative information. 39

40 Balance sheet sets out the list of minimum contents requires separate classification of current and non-current assets and liabilities unless presentation based on liquidity provides reliable and more relevant information whichever method of presentation is used, the entity should disclose amounts expected to be recovered/settled within and after more than twelve months of the reporting date carve out - a minor breach of covenant that does not result in payment on demand based on the past experience of the entity does not require reclassification of liability to current Other comprehensive income To be segregated between: Items that will not be reclassified to profit or loss: Gains on property revaluation Remeasurements of defined benefit pension plans Share of gain (loss) on property revaluation of associates Income tax relating to items that will not be reclassified Items that may be reclassified subsequently to profit or loss: Exchange differences on translating foreign operations Available-for-sale financial assets Cash flow hedge reserve Income tax relating to items that may be reclassified Income taxes may be disclosed item by item as well 40

41 Comparative information Ind AS 1 states that except when Ind AS permit or require otherwise, an entity shall disclose comparative information in respect of the preceding period for all amounts reported in the current period s financial statements. In the case of providing additional comparative statements (beyond minimum requirements), the entity should also the related notes. Third balance sheet Ind AS 1 requires a third balance sheet (at the beginning of the preceding period) if the entity: changes one or more of its accounting policies retrospectively makes a retrospective restatement to correct an error, or reclassifies items in its financial statements and the change in accounting policy/restatement/reclassification has a material effect on the information in the balance sheet at the beginning of the preceding period. 41

42 Statement of cash flows Cash flow information provides users of financial statements with a basis to assess: the ability of the entity to generate cash and cash equivalents and the needs of the entity to utilise those cash flows. Thank you! 42

43 Ind AS 36 - Impairment of Assets Contents 1. Scope and applicability 2. Definitions 3. Indicators of impairment 4. Recognition of an impairment loss 5. Identification of CGU 6. Subsequent reversal of impairment loss 7. Disclosures 43

44 Scope and applicability Ind AS 36 is applicable to assets other than the following: inventories assets arising from construction contracts deferred tax assets assets arising from employee benefits financial assets that are within the scope of Ind AS 109 investment property that is measured at fair value biological assets deferred acquisition costs, and intangible assets, arising from an insurer's contractual rights under insurance contracts non-current assets classified as held for sale Definition The CARRYING AMOUNT of the asset/ cash generating unit IF The RECOVERABLE AMOUNT of the asset/ cash generating unit an impairment loss arises The impairment loss is the amount by which the carrying amount of an asset or cashgenerating unit exceeds the recoverable amount. Cash generating unit (CGU) is "the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets." 44

45 Definition (Contd.) Recoverable amount is higher of : Fair value (FV) less costs of disposal FV is 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. Costs of disposal are the incremental costs directly attributable to the disposal of an asset or cash-generating unit, excluding finance costs and income tax expense Value in use (VIU) VIU is the present value of the future cash flows expected to be derived from an asset or cash - generating unit Calculation of value in use Value in use When estimating value in use, the following steps should be applied: Step 1: Estimate the cash flows Step 2: Determine the discount rate Step 3: Discounting the estimated cash flows using the discount rate. The value in use calculation needs to take into account the risk by adjusting either: the discount rate (the traditional approach) or the cash flows. The discount rate shall be a pre tax rate and the following factors shall be considered while determining the tax rate: WACC of the entity Entity's incremental borrowing rate Other market borrowing costs 45

46 Calculation of recoverable amount An asset has a fair value of INR 500,000. The cost of disposal is INR 30,000. The estimated cash flows from an asset is INR 110,000 for 5 years. The discounting factor is 10% Recoverable amount = Higher of fair value less cost of disposal or Value in use Fair value less cost of disposal = INR 470,000 (INR 500,000- INR 30,000) The PV of the future cash flows= INR 416,986 (INR 110,000*3.7907) Value in use = INR 416,986 Recoverable amount = INR 470,000 Indicators of impairment Indications of impairment include the following (at a minimum): External indicators Significant decline in value Significant changes with an adverse effect in technological, market, economic or legal environment Increase in market / other rates of interest affecting discount rate Carrying amount of net assets is more than the market capitalisation of entity Internal indicators Obsolescence or physical damage Significant adverse changes in which an asset is used or expected to be used Performance is or will be worse than expected Dividends from investments in subsidiary, joint venture or associate Dividend exceeds the total comprehensive income of the investment in the period the dividend is declared Carrying amount of the investment in the separate financial statements exceeds carrying amounts of net assets in the consolidated financial statements (including associated goodwill) 46

47 Recognition of an impairment loss An impairment loss is recognised in profit or loss or in other comprehensive income That depends whether it is a revalued or non-revalued asset as follows: Not revalued Revalued Recognise immediately in profit or loss Other comprehensive income (only to extent of revaluation surplus for that asset) Identification of CGU 1. if there is any indication that an individual asset may be impaired, recoverable amount should be estimated for the individual asset 2. if the recoverable amount for an individual asset cannot be determined, the recoverable amount for the CGU to which the asset belongs to should be determined. "An asset's cash-generating unit is the smallest group of assets that includes the asset and generates cash inflows that are largely independentof the cash inflows from other assets or groups of assets. Identification of an asset's cash-generating unit involves judgement" The recoverable amount cannot be determined if: value in use cannot be estimated to be close to its "fair value less costs of disposal" the asset does not generate cash flows largely independently. 47

48 Identifying a CGU Example Scenario A mining entity owns a private railway to support its mining activities. The private railway could be sold only for scrap value and it does not generate cash inflows that are largely independent of the cash inflows from the other assets of the mine. A raw material used for plant Y's production is an intermediate product from plant X of the same entity 60% of X's production is sold to Y and remaining 40% is sold in the market. Solution It is not possible to estimate the recoverable amount of the private railway because its value in use: cannot be determined and is probably different from the scrap value. Therefore, the CGU is the mine as a whole Since X can sell its products in the active market and generate cash flows that are independent of cash inflows from Y, X is to be termed as a separate CGU. Carrying amount of CGU CGU carrying amount Directly attributable assets Goodwill (grossed up) Share of corporate assets Liabilities Net working capital 48

49 Allocation of assets to CGU Entity X has 2 CGU (A and B). The carrying value of A and B is INR and INR 30,000 respectively. The remaining operational lives 5 and 15 years of A and B respectively. (Weighting is 1:3) The corporate asset is INR 2,000. The allocation of INR 2000 of corporate asset shall be on the basis of weighted average amount of carrying value of CGU (the lives are different) CGU A CGU B Total Weighting Weighted avg. amount 15,000 (15000*1) 90,000 (30,000*3) 105,000 CGU Calculation Allocation A =2,000*(15,000/105,000) INR 286 B =2,000(90,000/105,000) INR 1,714 CGU with allocated goodwill impairment test An Entity is required to carry out an impairment test for a CGU with allocated goodwill: 1. if there are any indications of impairment 2. annually, irrespective of any indicators Most recent detailed calculation of recoverable amount in a previous period can be used in the impairment test for the current period if: the CGU's assets & liabilities have not changed significantly most recent calculation resulted in an amount that exceeded the carrying amount by a substantial margin and based on analysis of changes since most recent calculation, the likelihood of an impairment is remote. 49

50 Allocation of Goodwill to CGU Methods for Allocation of Goodwill Using factors contributing to goodwill such as synergy gains Using relative fair values of net assets at the acquisition date Using discounted cash flow forecasts at the time of the acquisition Pro-rata on the basis of a price-earnings formula, using cash flows or income streams projected at the acquisition date Pro-rata on net asset value at the acquisition date (probably excluding interest-bearing debt and other financing liabilities) Subsidiary-part of a larger CGU's Subsidiary A and subsidiary B are a part of a larger CGU Goodwill of A is INR 18 m and B is INR 27 m. The carrying amount of the identifiable net assets of combined CGU (A+B) is INR 50 m. The recoverable amount of CGU is INR 80m. Particulars Identifiable net assets 50 Goodwill (18m + 27m) 45 Total value of CGU 95 Less recoverable amount 80 Impairment loss 15 INR in million Full goodwill method is followed. Impairment losses are first allocated to goodwill in 18:27 ratio. Goodwill of A and B will be reduced by impairment loss of INR 6m and INR 9m. 50

51 Impairment reversal of CGU A previously recognised impairment loss is reversed, if and only if, there has been a change in the estimates used to determine the recoverable amount since the last impairment loss was recognised. As per Ind AS 36: "An impairment loss recognised for goodwill shall not be reversed in a subsequent period." Reversal of an impairment loss: should be allocated to the assets of the unit pro rata with the carrying amounts the increase is treated as a reversal of losses on individual assets the carrying amount of an asset should not be increased above the lower of: o o the recoverable amount and the carrying amount (net of deprecation/amortisation) had no impairment loss been previously recognised. Impairment reversal of CGU (Contd.) a previously recognised impairment loss is reversed, if and only if, there has been a change in the estimates used to determine the recoverable amount since the last impairment loss was recognised increased carrying amount of an asset due to reversal should not exceed the carrying amount (net of amortisation/depreciation) had no impairment loss been previously recognised non-revalued asset: the reversal is recognised in profit or loss revalued asset: the reversal is treated as a revaluation and recognised in other comprehensive income, unless the impairment loss was recognised in profit or loss, then the revaluation is: - first recognised in profit or loss and - only after then as a revaluation surplus in OCI. 51

52 Group question - Impairment reversal of CGU Impairment loss recognised on CGU on 31 December 2013 was INR 20 million. Out of INR 20 million, INR 10 million allocated to Goodwill and INR 10 million to asset. Net carrying amount of PPE after impairment =INR 80 million The depreciation for 2013 = INR 80m/10= INR 8m The carrying value of PPE as on 01 January 2014 is INR 72 m The remaining useful life of the PPE as on 01 January 2014 is 9 years. at 31 December 2014, Entity A estimates that there has been indications of a potential decrease in the impairment loss Entity A estimates the recoverable amount of the CGU at 31 December 2014 at INR 90m. Group question - Impairment reversal of CGU Item Net carrying amount as at 31 Dec 2013 (Incl. impairment) Net carrying amount as at 31 Dec 2013 (Excl. impairment) Carrying amount Opening balance Impairment (10) - (10) Depreciation (8) (9) 1 Total (9) when the impairment reverses, goodwill can never be reinstated. The PP&E is restored by INR 9 m. 52

53 Disclosures- summary of key points For each material impairment loss recognised or reversed disclose the following: events and circumstances that led to the recognition or reversal impairment loss recognised /reversed and the line item in which included whether the recoverable amount of the impaired asset or CGU is its fair value less costs of disposal or its value in use discount rate used in the current estimate and previous estimate (if any) of value in use. In case of segment reporting, the Impairment loss recognised/reversed for each reportable segment If the CGU's recoverable amount is based on value in use: key assumption on which cash flow projections are based. the period over which management has projected cash flows based on financial budgets/forecasts approved by management and, when a period greater than five years is used for a CGU, an explanation of why that longer period is justified Thank you! 53

54 Ind AS 109: Financial Instruments Contents 1. Overview 2. Classification 3. Application 4. Financial liabilities 5. Embedded derivatives 6. Impairment 7. Hedge Accounting 54

55 Ind AS 109 Financial Instruments Overview Rewrites accounting rules: new approach to financial asset classification Amortised Cost Fair Value impairment model expected loss rather than incurred loss hedge accounting substantially revised Macro hedging is not included and is a separate project Classification debt instrument Is the objective of the entity s business model to hold the financial assets to collect contractual cash flows? Yes Do contractual cash flows represent solely payments of principal and interest? Yes No Is the financial asset held to achieve an objective by both collecting contractual cash flows and selling financial assets? Yes Yes Does the company apply the fair value option to eliminate an accounting mismatch? No No Yes FVPL No Amortised cost No FVOCI 55

56 Classification Business model assessment An entity's business model is: how financial assets are managed for generating cash flows determined by key management personnel not dependent on management's intentions An entity may have more than one business model Classification Debt and equity instrument Debt instrument Business Model Hold to collect Hold to collect and sale Others Equity instrument Measurement Amortised cost FVPL / FVOCI FVPL Equity Instrument Measurement Criteria Hold for trading FVPL Held for trading Other equity FVOCI* not held for trading not contingent consideration of an acquirer in a business combination * Irrevocable option on an instrument by instrument basis gains and losses recognised in OCI are not recycled to P&L equity classified as FVOCI is not subject to impairment dividend is recognized in profit and loss 56

57 Application to investments in debt securities Debt investments Derivative investments Equity investments Business model (BM) test(at entity level) Contractual cash flows solely payments of principal and interest Pass Fail Fail Fail Held for trading? 1 Hold to collect contractual cash flows Fair value option elected? 2 BM to collect contractual cash flows and sell asset Yes Neither 1 or 2 Yes No No FVOCI option elected? No No Yes Amortised cost FVOCI (with recycling) FVTPL FVOCI (no recycling) Application to derivatives Debt investments Derivative investments Equity investments Contractual cash flows solely payments of principal and interest Pass Business model (BM) test (at entity level) Fail Fail Fail Held for trading? 1 Hold to collect contractual cash flows 2 BM to collect contractual cash flows and sell asset Neither 1 or 2 Yes No No FVOCI option elected? Fair value option elected? No Amortised cost No FVOCI (with recycling) Yes FVTPL Yes FVOCI (no recycling) 57