Introduction to Ind-AS By Neeraj Sharma

Introduction to Ind-AS By Neeraj Sharma neerajsharma2002in@yahoo.com 1

Agenda Ind-AS An Overview Five Key Standards GAAP Differences Other GAAP Differences Questions & Answers 2

Ind-AS An Overview Set of accounting standards converged with IFRS Includes carve-outs which provide relaxations from specific IFRS requirements/remove policy options Applicable in phases IAS/IFRS Ind AS I GAAP 44 39 29 Fundamental differences with current Indian GAAP include Focus on substance over form Present Value and Fair Value Concepts (Relevance over Reliability) Estimates and judgments Extensive Disclosures Concept of Other Comprehensive Income and Total comprehensive income Unique concept of First Time Adoption 3

Ind-AS Roadmap Comparatives for the period ending 31 or thereafter 31 March 2016 or thereafter 31 March 2017 or thereafter 1 April 2015 1 April 2016 1 April 2017 Mandatorily applicable for following companies Applicable to companies Voluntary Adoption Companies whose net worth is Rs. 500 crore or more Holding, subsidiary, joint venture or associate companies of above companies Companies whose equity and/or debt securities are listed or are in the process of being listed on any stock exchange in India or outside India and having net worth of less than Rs. 500 crore. Unlisted companies having net worth of Rs. 250 crore or more Holding, subsidiary, joint venture or associate companies of above companies 4

Ind-AS Listed Companies Quarterly Reporting SEBI issued a circular on Nov 30, 2015 prescribing the formats for publishing financial under the newly issued SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 Companies adopting Ind AS for the first time will need to ensure that comparatives filed in such quarterly/annual financial results are also Ind AS compliant. Disclosures regarding reconciliation of equity, total comprehensive income and explanation relating to changes in its accounting policies and use of exemptions etc. is required in the quarterly results for the period covered by its first Ind-AS Financial Statements So, for June 2016 quarter, following will be required Financial Results - QE Jun 2015, QE Mar 2016 and QE Jun 2016 Financial Results - YE 2015-16 Segmental reporting for above periods Following reconciliations between IGAAP and Ind AS (equity, income statement, CF) Equity - as at 31 st Mar 2015, 30 th Jun 2015 and 31 st Mar 2016 Income Statement - QE Jun 2015, Income Statement - YE 2015-16 CF narrative explanation for YE 2015-16 5

Key 5 Standards with maximum impact Ind-AS 110 Consolidation Ind-AS 103 Business Combinations Ind-AS 109, Ind-AS 32 and Ind-AS 107 relating to Financial Instruments Ind-AS 115 Revenue from contracts with customers Ind-AS 12 - Taxes 6

GAAP Differences - Consolidation When? An entity that is a parent shall present consolidated financial statements. (certain exemptions provided). Required even when the company has no subsidiary and only associate(s) and/or Joint venture(s) Who? When the entity has control over the relevant activities of another entity Consider legal voting rights, BOD composition. However, also consider contractual arrangements, potential voting rights, de-facto control Two entities consolidating same investee is not possible How? Economic entity approach. CFS should be prepared using uniform accounting policies (except for associates) Joint ventures are accounted using accounted using Equity Method Non-controlling interest (minority interest) Can be negative 7

Example 1 : Proportionate Consolidation or Equity Method Facts: B Ltd. is a jointly controlled entity by A Ltd. and other investor. A Ltd. acquired its stake on 31.3.2014. The JV is a 50:50 JV. Other details are as below. (All figures are in Rs. Crores) 8 A Ltd. B Ltd. FY 2014 Fixed Assets 1000 400 Current Assets 200 80 Current Liabilities & Provisions 150 60 Loans 800 320 Invt. In B Ltd. 50 - Net Assets 250 100 FY 2015 Revenue 2000 800 Expenses 1400 560 PBT 600 240

Example 1 : Proportionate Consolidation or Equity Method Stand-alone and Consolidated Balance-sheet of the A Ltd. 9 FY 2014 Stand-alone Proportionate Consolidation Equity Method Fixed Assets 1000 1200 1000 Current Assets 200 240 200 Current Liabilities & Provisions 150 180 150 Loans 800 960 800 Invt. In B Ltd. 50-50 Net Assets 300 300 300 FY 2015 Revenue 2000 2400 2000 Expenses 1400 1680 1400 PBT 600 720 720

Example 1 : Proportionate Consolidation or Equity Method Lets see the impact Metrics PBT Net Assets Current Ratio PBT to Sales Proportionate Consolidation to Equity Accounting Same Same Change may be higher or lower Higher 10

Example 2 : Assessing Control Facts: A Ltd. Holds 51% equity share capital of S Ltd and B Ltd holds remaining 49%. Other facts are mentioned below - A Ltd and B Ltd have a shareholder agreement according to which the Board consists of 8 members, 4 of which are appointed by A Ltd. and 4 by B Ltd. Quorum At least 2 directors, 1 appointed by A Ltd. and 1 appointed by B Ltd. All the decision of the board are passed by a simple majority of votes provided that at least 1 A Ltd. and 1 B Ltd. nominee vote in favor of the decision. Question: Should A Ltd consolidate S Ltd in its Consolidated Financial Statements under Indian GAAP? What happens under Ind-AS? GAAP I-GAAP Ind-AS Will S Ltd be consolidated by A Ltd? Yes No Method Full Consolidation Equity, as it is a Jointly Controlled Entity 11

Example 3 : De-facto Control Facts: A Ltd. acquires 48 per cent of the voting rights of B Ltd. The remaining voting rights are held by thousands of shareholders, none individually holding more than 1 per cent of the voting rights. None of the shareholders has any arrangements to consult any of the others or make collective decisions. Many shareholders, each with <5% of votes. General representation at general meetings <30% for many years. Question: Does A Ltd exercises control over B Ltd? Answer: 12 Based on the facts, on the basis of the absolute size of its holding and the relative size of the other shareholdings, A Ltd can conclude that it has a sufficiently dominant voting interest to meet the power criterion. If A Ltd can demonstrate that it directs the relevant activities of the Company, it may have to consolidate B Ltd.

GAAP Differences - Taxes Area Indian GAAP Ind-AS Approach P&L Approach BS Approach Calculation of Tax Bases of each Balance-sheet item Recognition of DTA in situations of existence of tax losses Requires virtual certainty supported by convincing evidence Recognized to the extent it is probable that future taxable income will be available to offset losses Unrealized Intra-group profits Deferred taxes not recognized Recognized at the buyer s tax rate Revalued Assets Undistributed earnings of subsidiary, JV, associate, branches Disclosures Revaluation treated as permanent difference Deferred taxes not recognized No additional disclosures with respect to tax rate reco, unrecognized DTA and DTL Deferred taxes are recognized on revalued portion Deferred tax liability recognized Additional disclosures are required to be given 13

Example 1: Deferred Taxes For example, Company A buys an asset worth Rs.100 on 1st April, 2010. The useful life of the asset is five years and the tax laws allow it to be depreciated over four years. One year later, on 31st March, 2011, the Company revalues the asset to Rs.120. Indian GAAP Accounting Standard (AS) 22 Taxes on income does not permit creation of deferred tax on the excess depreciation charged on the revalued portion. It is not considered as a timing difference, but a permanent one. The underlying reason is that, under the income statement approach, a deferred tax liability is not created on the date of revaluation (since it does not have an effect on the income statement). In above case Deferred Tax liability will be recognized on timing difference of Rs. 5 (Rs. 80 - Rs. 75). Ind-AS Ind-AS 12 Income Taxes requires that measurement of the deferred tax liability or deferred tax asset shall reflect the tax consequences of recovering the carrying amount of the depreciable asset, regardless of the basis of measuring the carrying amount of that asset. In above case Deferred Tax liability will be recognized on temporary difference of Rs. 45 (Rs. 120 - Rs. 75). The tax impact, however, will be recorded in equity following the related movement of revaluation as Revaluation Reserve in Equity. 14

GAAP Differences - Revenue Area Indian GAAP Ind-AS Standards Two separate standards AS 7 and AS 9 One comprehensive standard Ind-AS 115* In case Ind-AS 115 is deferred, Ind-AS 11 and Ind-AS 18 will become applicable Model No fair value concept Revenue is measured at fair value of the consideration received/receivable. If significant financing component exists, discounting is done using imputed interest rate and adjusted to revenue. Model under Ind-AS 115 Simple revenue recognition model 5-step Control Model. Could have impact on timing and Measurement. Concepts like Variable Consideration, Multiple Element Arrangements, transfer of assets from customers are different 15

Example 3: Multiple element arrangements - Revenue On March 1, 2014, Company enters into a contract with a customer to provide, deliver and install manufacturing equipment for a single invoice of Rs. 15,00,000, due on delivery. Company delivers the equipment in March 14 and installs it during April 14. Title to the equipment passes to the customer at delivery. The customer has an option to purchase machinery with or without installation services. The market value of equipment and installation services is Rs. 14,00,000 and Rs.2,00,000 respectively. How much revenue is recognised for the year ended March 31, 2014 as per IFRS and Indian GAAP? Indian GAAP There is no specific guidance under Indian GAAP with respect to accounting for multiple element arrangements. In the above scenario company may record the entire revenue of Rs.15,00,000 for the year ended March 31, 2014 and make a provision for installation cost or alternatively, the company may recognize the entire revenue in the year in which the installation is made i.e. the year ending March 31, 2015. 16 Ind-AS In the above example company is providing discount of Rs.1,00,000 to the customer on purchase of equipment along with services. Hence the said discount will be allocated to equipment and services proportionately i.e. Rs. 87,500 and Rs. 12,500 respectively. As the company has satisfies its obligation with respect to delivery of machine before March 2014, it will recognized the revenue of Rs.13,12,500 for the financial year ended on March 31, 2014 and Rs.1,87,500 will be recognized in the April 2014 i.e. in the next financial year after providing installation service to the customer.

GAAP Differences Business Combinations Area Indian GAAP Ind-AS Methods Goodwill Goodwill - Subsequent Measurement Contingent Consideration Pooling of Interest In case of merger between two entities Book Values are used Purchase Method BV or FV Choice is available Excess of consideration paid over assets and liabilities acquired is accounted as Goodwill. Amortized over a period not exceeding 5 years Recognized only if payment is probable and a reliable estimate can be made Business combinations between entities under common control are accounted using pooling of interest method All other business combinations using the acquisition method ONLY FV USED Excess of consideration paid over fair value of identifiable assets and liabilities is recorded as Goodwill This may result in more intangibles like customer lists etc. Not amortized, but tested for impairment annually Recognized at acquisition date FV. 17

Example 5: Business Combination under Ind-AS 103 TATA MOTORS LIMITED Acquisition of JLR in June 2008 Rs. In Crores March 2009 March 2008 Goodwill on consolidation - IGAAP 3,719 566 Goodwill IFRS 535 403 18 Source : Tata Motors Annual Report March 2009

GAAP Differences Fixed Assets Area Indian GAAP Ind-AS Componentisati on Investment Property Overhaul Asset Retirement Obligation Change in method of depn No componentization required. Where cost of a part of the asset is significant to total cost of the asset and useful life of that part is different from the useful life of the remaining asset, useful life of that significant part shall be determined separately. No such concept. Major overhaul expenditure is charged to P&L. Provision of Asset retirement obligation and environmental obligation is not required. Treated as change in accounting policy and retrospectively accounted Significant components of PPE are required to be depreciate separately, if they have significantly different useful life. Land & building held with an intention to earn rental or for capital appreciation or surplus land & building with no intended use will be classified as Investment property. Major overhaul expenditure to be capitalized. Provision is recognized for Asset retirement obligations and environmental obligation. Treated as change in accounting estimate and accounted prospectively 19

GAAP Differences Others Area Indian GAAP Ind-AS First time adoption standard Industry-specific standards Dividends No such standard in I-GAAP. No such standards in I-GAAP. Dividends proposed after BS date but before approval in AGM are recorded in the FS of the FY for which they have been proposed Ind-AS 101 specifies how an entity should convert its previous GAAP opening balance-sheet to Ind-AS Balance-sheet. The standard provides certain exemptions (for cost effectiveness) and exceptions (to avoid abuse). Ind-AS includes various industry related standards such as Agriculture, Investment Property, Exploration and evaluation of mineral resources, Investment Entities, Service concession arrangements etc. Recorded in the year in which declared 20

GAAP Differences Others Area Indian GAAP Ind-AS Leases No concept of embedded leases. Arrangements not in the legal form of lease but fulfilment of which is dependent on specific asset and which convey right to use the asset are accounted as leases. (Classic example of substance over form) Leasehold Land Classified as Tangible Fixed Assets Leasehold land need to be assessed whether finance or operating based on the guidance given in Ind-AS 17. Leasehold land classified as operating leases are disclosed as Prepayments under Loans and Advances. Actuarial Gains/Losses Govt Grants Functional Currency 21 Recorded in P&L Grants in the nature of Promoter s Contribution are classified as Capital Reserves under Equity Foreign operations are classified as Integral or Non-Integral, depending on which the conversion gains/losses are recognized in P&L or in Reserves Recorded in OCI and never recycled back to P&L. No such classification. Concept of functional currency. All conversion gains/losses are recognized and accumulated in Currency Translation Reserve.

GAAP Differences Others Area Indian GAAP Ind-AS Long-term Provisions No discounting is considered Such provisions are discounted, if the effect of discounting is material. 22

QUESTIONS? 23

Thank You 24