A New Era of Financial Reporting The Agra Branch of CIRC of ICAI 30 th April 2016 FCA Aditya Singhal M.Com, DISA(ICAI), DipIFRS (ACCA) +91 8800334745 adityaagra@gmail.com
Current Global Reporting Requirements IFRS Stress Testing IFRS 9 FIN REP Schedule VI HKMA GSIB BoE 2
IFRS What is IFRS IFRS IAS IFRIC SIC Order of authoritativeness IFRS including any appendices Interpretations Appendices to IFRS that do not form part of the standards Implementation guidance issued by IASB 3
Why IFRS? Globalization Better transparency Cost effectiveness Scope of professional judgment Fair valuations Comparability 4
IFRS Vs Indian Accounting Standards Substance over form Fair value Current and Non-Current Classification Discounting (Time value of money) Standards prevail over law 5
IFRS across the world Canada 2009/11 United States (2019?) Europe 2005 China 2007 Japan (2016) India 2017/18 Brazil 2010 Chile 2009 South Africa 2005 Australia 2005 Current or anticipated requirement or option to use IFRS (or equivalent) 6
Revised Road-map Listed companies, to-be listed companies, companies with net worth> Rs 500 crore and their subsidiaries and joint ventures 31 st March 2017 with one year comparatives Listed companies, to-be listed companies, companies with net worth> Rs 250 crore and their subsidiaries and joint ventures 31 st March 2018 with one year comparatives Above limits not applicable to banks, insurance companies and NBFC s 7
Banks, Insurance companies, NBFC s> 500 crores Mandatory for accounting period ending on 31 st 2019 March Full Comparatives for 31 st March 2018 need to be provided in Ind AS As per Ind AS 101, an Ind AS Opening Balance Sheet would need to be prepared as on 1 st April 2017. (effectively year ending 31 st March 2017) RBI has mandated proforma Ind AS financial statements for the half-year ended 30 th September 2016 (clarity awaited on the contents of the proforma) 8
The IFRS Architecture Framework for preparation and presentation of Financial Statements IAS 1: Presentation of Financial Statements IFRS 1: First time Adoption of IFRS IAS 7 Statement of Cash flow IFRS 10: Cosl FS IAS 34: Interim financials reporting Other standards 10
Framework for preparation and presentation of Financial Statements 11
Framework for preparation and presentation of Financial Statements Underlying assumptions >Accrual Basis >Going Concern Quantitative Characteristics > Presentation - Understand ability - Comparability > Content - Relevance - Reliability Elements Recognition Measurement 12
IAS 1: Presentation of Financial Statements 13
Objective and Scope of IAS-1 Provide information about the financial position, financial performance, and cash flow of an entity that is useful a wide range of users Sets the overall requirement for the preparation and presentation of financial statements Provide guidance for the format and structure of financial statements Set out the minimum content requirement for financial statements 14
Financial Statements - Elements Assets - Liability - Equity - Income - Expenses -Resource -Controlled by an entity -As a result of past event -From which economic benefits are expected to flow to the entity -Present obligation -Arising from past events -The settlement of which is expected to result in an outflow from the entity of economic benefits -Residual interest in the entity s assets after deducting all of its liabilities -It is subdivided in the statement of financial position -Increase in economic benefit - During the accounting period - In the form of inflows, enhancement in assets or decrease in liability -Other than those relating to contribution from equity participants - Decrease in economic benefits - During the period - In the form of outflows, depletion of assets or incurrence of liability - Other than that which relates t o distributions to equity participants 15
General Feature of Financial Statement Presentation Fair Presentation Compliance with IFRS Going Concern Accrual Materiality & Aggregation Offsetting Comparative Information Consistency 16
Fair Presentation and Compliance with IFRS Requires faithful representation of effects of transactions, other events and conditions Required to make an explicit and unreserved statement of compliance with IFRS in the notes (Not applicable in case of Ind- AS) An entity shall not describe financial statements as complying with IFRSs unless they comply with all the requirements of IFRSs Absence of an IFRS management judgment : relevant and reliable IFRS hierarchy 17
Going Concern & Accrual Ability to continue operations for the foreseeable future Management required to make an assessment of the entity s ability to continue as a going concern should cover a period of 12 months from the end of the reporting period 18
Materiality and Aggregation Materiality Present separately each material class of similar items An entity shall present separately items of a dissimilar nature or function unless they are immaterial Offsetting An entity shall not offset assets and liabilities or income and expenses, unless required or permitted by an IFRS 19
Comparative Information & Consistency Disclose comparative information in respect of the previous period for all amounts reported in the current periods financial statements Shall include comparative information for narrative and descriptive information when it is relevant to an understanding of the current period s financial statements Retain the presentation and classification of items in financial statements from one period to another unless IFRS requires a change in presentation or another presentation or classification would be more appropriate 20
Identification of Financial Statements Clearly identify the financial statements and distinguish them from other information in the same published document Prominently display following information Name of reporting entity and any change in that information from the end of the reporting period Whether the financial statements are of an individual entity or a group of entities Date of the end of the reporting period covered by the set of financial statements Presentation currency Level of rounding used in presenting amounts in the financial statements Domicile and legal form of the entity including country of incorporation and address of its registered office A description of the nature of the entity s operations and its principal activities 21
Components of Financial Statements Statement of Financial Position Statement of Comprehensive Income Statement of changes in Equity Statement of Cash Flows Notes, comprising a summary of significant accounting policies and other explanatory notes A SOFP as the beginning of the earliest comparative period under certain circumstances 22
Statement of Comprehensive Income The Standard does not specify the order of presentation or format to be used prescribes only certain minimum lines items, with a provision that additional line items may also be presented if so warranted by the nature or function of the item. For Example, under the head Property, Plant and Equipment an entity may present if so warranted by the assets that are measured using Revaluation Model. 23
Current Vs Non-Current Classification Criteria for Classification as Current Assets: An entity expects to realize the asset, or intends to sell or consume it, in its normal operating cycle, holds it primarily for trading purposes, expects to realize the asset within 12 months after the reporting period, the asset is a cash or cash equivalent Criteria for Classification as Current Liabilities it expects to settle the liability in the course its normal operating cycle holds the liability primarily for trading purposes or the liability is due to be settled within a year after the reporting period it does not have an unconditional right to defer settlement of the liability for at least a year after the reporting period 24
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Statement of Comprehensive Income An entity shall present all items of income and expenses recognized in a period: in a single statement of comprehensive income, or in two statements: a statement displaying components of profit or loss (separate income statement) and a second statement beginning with profit or loss and displaying components of other comprehensive income (statement of comprehensive income) 26
Component of SOCI Profit or Loss Account Total Comprehensive Income Other Comprehensive Income 27
Minimum Information in SOCI Revenue Finance costs Share of the profit or loss of associates and joint ventures accounted for using the equity method Tax expense Post-tax profit or loss of discontinued operations Profit or loss Each component of other comprehensive income classified by nature Total comprehensive income 28
SOCI-Others An entity shall present additional line items, heading and sub-totals in the statement of comprehensive income when such presentation is relevant to an understanding of the entity s financial performance No item of income or expense shall be presented as extraordinary items in the statement of comprehensive income 29
SOCI Layout cont.. 30
SOCI - Layout 31
Statement of Changes in Equity (SOCIE) Statement of Changes in Equity (SOCIE) requirements Total comprehensive income for the period, showing separately the total amounts attributable to owners of the parent and to noncontrolling interests For each component of equity, the effects of retrospective application or retrospective restatement recognized in accordance with IAS 8- Accounting Policies, Changes in Accounting Estimates and Errors For each component of equity, a reconciliation between the carrying amount at the beginning and end of the period, separately disclosing changes resulting from: Profit or Loss, Each item of other comprehensive income, and Transactions with owners in their capacity as owners showing separately contributions by and distribution to owners 32
SOCIE- Layout 33
Cash Flow- IAS 7 An entity shall prepare a statement of cash flows in accordance with IAS -7 Special Attention Foreign Currency transactions Tax on Income Non-Cash transactions Transactions resulting in changes in ownership interest Dividends 34
Cash flow- IAS 7 Disclosure requirement: Management commentary on special areas Reconciliation of opening and closing cash items Optional disclosure: Restricted cash Cash belongs to Joint ventures Cash flow relating to each reporting segments reported Minimum cash required to maintain the operating capacity 35
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Notes Present information about the basis of the preparation of the financial statements and the specific accounting policies Disclose information required by IFRS that is not presented elsewhere in the financial statements Provide information that is not presented elsewhere in the financial statements, but is relevant to an understanding of any of them 37
Notes- Sequence Statement of compliance with IFRS Summary of significant accounting policies Supporting information for items presented in the statements of financial position Other disclosures including contingent liabilities, nonfinancial disclosures 38
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IFRS 1: First time Adoption of IFRS 40
First time Adoption - 5 step process 1. Identification of date of transition 2. Selection of accounting policies that comply with IFRSs 3. Preparation of an opening IFRS balance sheet 4. Preparation of the first IFRS financial statements 5. Reconciliations and disclosures 41
Identification of date of transition If entity presents comparative statements Transition Date - 1st April 2010 Adoption Date - 1st April 2011 Reporting Date - 31st March 2012 If entity does not present comparative statements Transition/Adoption Date 1st April 2011 Reporting Date- 31st March 2012 42
Selection of accounting policies that comply with IFRSs a) Need to apply IFRS effective at the Reporting Date. b) May apply a new IFRS that is not yet mandatory, if it permits early application. c) Determine which exceptions to use d) Take into account the exceptions to retrospective application 43
Preparation of an opening IFRS Balance Sheet Does not recognize items as assets or liabilities if IFRS does not permit such recognition Recognize all assets and liabilities whose recognition is required by IFRS Reclassify assets, liabilities and items of equity as per the requirements of IFRS Measure all assets and liabilities in accordance with IFRS 44
Preparation of an opening IFRS Balance Sheet Assets/ Liability as per IFRS? No YES Recognised under Indian GAAP? YES Recognised under Indian GAAP No Include as per IFRS prescription YES YES Whether Measurement in line with IFRS? No Change required No Adjust carrying amount as per IFRS Exclude and do not recognise Re-classify, if required by IFRS 45
Preparation of an opening IFRS Balance Sheet ABC Corp presented its financial statements under the national GAAP of Strangeland (country) until 2004. It adopted IFRS from 2005 and is required to prepare an opening IFRS balance sheet as at January 1, 2004. In preparing the IFRS opening balance sheet Exuberance Corp. noted Under its previous GAAP, ABC Corp. had deferred advertising costs of $1,000,000 and had classified proposed dividends of $500,000 as a current liability. It had not made a provision for warranty of $200,000 in the financial statements presented under previous GAAP since the concept of constructive obligation was not recognised under its previous GAAP. In arriving at the amount to be capitalized as part of costs necessary to bring an asset to its working condition, Exuberance Corp. had not included professional fees of $300,000 paid to architects at the time when the building it currently occupies as its head office was being constructed. 46
Preparation of the first IFRS financial statements - Mandatory Exceptions Assets held for sale and discontinued operations (IFRS 5) Non- Controlling interests (IFRS 3) Estimates (IAS 8 & 10) Hedge accounting & Embedded derivatives (IAS 39 & IFRS 9) Derecognition of financial assets and financial liabilities (IAS 39 & IFRS 9) 47
Preparation of the first IFRS financial statements - Optional Exemptions Fixed Assets Business Combination Financial Instruments Others Use of fair value as deemed cost Decommissioning liabilities included in the cost of property, plant and equipment. Leases Service concession arrangements Borrowing costs Business combinations Assets and liabilities of subsidiaries, associates and joint ventures Investments in subsidiaries, jointly controlled entities and associates in separate financial statements Cumulative translation differences Compound financial instruments Designation of previously recognized financials instruments Fair value measurement of financial assets or financials liability at initial recognition Employees benefits Share- based payment transactions Insurance contracts 48
Reconciliations and Disclosures Equity from previous GAAP to IFRS at the transition date and the end of the last period presented in the entity s most recent financial statements under previous GAAP Net profit from previous GAAP to IFRS for the last period in the entity's most recent financial statements under previous GAAP. Other disclosures in the first IFRS financial statements 49
Challenges involved in First Time Adoptions 1. Fair value override permitted under IFRS 2. Retrospective application 3. Barred extraordinary items 4. Impact of change in accounting policy 5. The use of revaluation for fixed assets, intangibles and investment property. cont 50
Challenges involved in First Time Adoptions 6. Consolidation of financials Special purpose entities 7. Goodwill/negative goodwill treatment 8. Revenue recognition of long term construction contract 9. Impairment of non-current assets 10. Classification of financial instrument 51
Reporting: Opportunity and Career 52
Role of CAs in Industry Change Agents Preparing internal processes to meet the information compilation to meet the requirements of the IFRSs Developing Human Resources for Adaptation First time adoption The Board has to approve first time adoption choices (IFRS1) Detailed communication plan is necessary to educate stakeholders and actively manage perceptions. Communication of key policy choices, interpretations and accounting decisions to explain the financial results. Need for additional resources to replace those allocated to the IFRS convergence programme. Budgets, forecasts, management accounts and KPIs need to be on IFRS basis 53
Role of CAs in Practice Handholding Consultation Advise on internal processes on adoptation Training HRs on IFRSs processes Guidance 54
Questions? 55
Key Learning Points 1. First time adoption is more of a business decision than accounting 2. Doing it right at the first time is very critical 3. Judiciously applying the optional exemptions will help reduce the GAAP difference 4. Practice with options will guide to refine decisions 5. Significant disclosure and reconciliation requirements 56
Thanks! FCA Aditya Singhal M.Com, DISA(ICAI),Dip IFRS (ACCA) +91 8800334745 adityaagra@gmail.com 57