Presentation on Indian Accounting Standards By Bharat K Shetty Associate Director Walker, Chandiok & Co 1
Agenda Ind AS 1 Presentation of Financial Statements Ind AS 2 Inventories Ind AS 3 Statement of Cash Flows Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors 2
Ind AS 1 Presentation of Financial Statements Objective Comparability with entity's financial statements of previous periods Comparability with financial statements of other entities 3
Ind AS 1 Presentation of Financial Statements Scope To be used for preparation and presentation of general purpose financial statements Does not apply to the structure and content of condensed interim FS (Ind AS 34 Interim Financial Reporting to apply in such cases) Applies to all entities Uses terminology suitable for profit oriented entities including public sector enterprises. Not for profit entities may need to modify descriptions for specific line items 4
Ind AS 1 Presentation of Financial Statements Key Definitions General purpose financial statements Financial statements that are intended for users who are not in a position to require the entity to prepare reports tailored to meet their specific needs Indian Accounting Standards (Ind AS) Standards prescribed under the Companies Act, 1956 Material 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. Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances. 5
Ind AS 1 Presentation of Financial Statements Key Definitions Other Comprehensive Income Comprises items of income and expense (including reclassification adjustments) that are not recognised in profit or loss as required or permitted by other Ind ASs. Components of other comprehensive income include: 1) Changes in revaluation surplus 2) Actuarial gains and losses on defined benefit plans 3) Gains and losses arising on translation of financial statements of a foreign operation 4) Gains and losses arising on re-measuring available for sale financial assets 5) Effective portion of gains and losses on hedging instruments in a cash flow hedge 6
Ind AS 1 Presentation of Financial Statements Key Definitions Reclassification Adjustments Amounts reclassified to profit and loss in the current period from other comprehensive income Total comprehensive income Is the change in equity during a period resulting from transactions and other events, other than those changes resulting from transactions with owners in their capacity as owners. Total comprehensive income = Profit or loss + other comprehensive income 7
Ind AS 1 Presentation of Financial Statements Composition and General features An entity shall present the components of profit or loss and components of other comprehensive income as part of a single statement of profit and loss. Reports and statements presented outside FS are outside the scope of Ind ASs Application of Ind ASs, with additional disclosures when necessary, is presumed to result in true and fair view of FS Entities whose FS comply with Ind ASs shall make an explicit and unreserved statement of such compliance in the notes 8
Ind AS 1 Presentation of Financial Statements Composition and General features Inappropriate accounting policies cannot be rectified either by disclosure or by notes or explanatory material. In extremely rare circumstances, where management concludes that departure from Ind AS is required, the entity shall disclose: that management has concluded that the FS present a true and fair view of the entity's financial position, performance and cash flows that it has complied with all other applicable Ind ASs the title of the Ind AS from which the entity has departed, the nature of departure, including the treatment prescribed by Ind AS, the reason why that treatment would be misleading for each period presented, the financial effect of the departure on each item in the FS 9
Ind AS 1 Presentation of Financial Statements Composition and General features Going Concern An entity shall prepare FS on a going concern basis unless management intends to liquidate the entity or has no realistic alternative but to do so. Uncertainties involved in the going concern assumption to be disclosed Where FS are not prepared on a going concern basis, the fact, basis of preparation and reasons for lack of going concern assumption to be disclosed Accrual basis Entity shall prepare FS except for cash flow information, using accrual basis of accounting 10
Ind AS 1 Presentation of Financial Statements Composition and General features Materiality Entity shall present material class of similar items separately. Specific disclosures required by an Ind AS need not be provided if the information is not material except when required by law Offsetting Entity shall not offset assets and liabilities or income and expenses unless required or permitted by an Ind AS Frequency of reporting Atleast annually. When an entity changes its reporting date, it shall disclose the reasons for change and the fact that the amounts presented in the FS are not entirely comparable 11
Ind AS 1 Presentation of Financial Statements Composition and General features Reclassification When an entity reclassifies comparative amounts, the entity shall disclose the nature, amount and reason for the reclassification. Consistency An entity shall maintain consistency in presentation and classification from one period to another 12
Ind AS 1 Presentation of Financial Statements Balance Sheet key parameters Deferred tax assets (liabilities) shall not be classified as current assets (liabilities) Current/non current distinction Entity shall present current and non current assets and liabilities separately except when presentation based on liquidity (order of liquidity to be followed) is more reliable/relevant (for eg financial institutions since they do not supply goods or services within a clearly identifiable operating cycle) In either method, details of assets/liabilities expected to be recovered/settled after more than 12 months to be disclosed 13
Ind AS 1 Presentation of Financial Statements Current/Non current Definitions Entity shall classify an Asset as Current when: It expects to realise the asset or intends to sell or consume it, in its normal operating cycle; it holds the asset primarily for the purpose of trading; it expects to realise the asset within twelve months after the reporting period; or the asset is cash or a cash equivalent unless the asset is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period. All other assets shall be non current. Operating cycle, if not clear is assumed to be 12 months 14
Ind AS 1 Presentation of Financial Statements Current/Non current Definitions Entity shall classify a liability as current when: It expects to settle the liability in its normal operating cycle; it holds the liability primarily for the purpose of trading; the liability is due to be settled within twelve months after the reporting period; or It does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period. Terms of a liability that could, at the option of the counterparty, result in its settlement by the issue of equity instruments do not affect its classification. All other liabilities shall be non current Agreement to refinance, or to reschedule payments on a long term basis completed after the reporting period and before the FS are approved do not affect classification. 15
Ind AS 1 Presentation of Financial Statements Statement of Profit and Loss An entity shall present all items of income and expense including components of other comprehensive income recognised in a period in a single statement of profit and loss However, each component of other comprehensive income (including tax effects) and total comprehensive income need to be disclosed separately The entity shall not present any item as extraordinary item in the Statement of Profit and Loss The entity shall classify expenses using nature of expense method 16
Ind AS 1 Presentation of Financial Statements Statement of Changes in equity Statement of changes in equity to be presented as part of Balance Sheet to include the following: Total comprehensive income for the period For each component of equity, the effects of retrospective application or restatement For each component of equity, a reconciliation between the carrying amount at the beginning and the end of the period, separately disclosing each change resulting from: profit or loss; each item of other comprehensive income; and transactions with owners in their capacity as owners 17
Ind AS 2 Inventories Objective Prescribe accounting treatment for inventories Determine cost and subsequent recognition as an expense including write downs, if any to net realisable value Cost formulas for assigning costs to inventories 18
Ind AS 2 Inventories Scope This Standard applies to all inventories except : work in progress arising under construction contracts, including directly related service contracts; financial instruments biological assets (i.e., living animals or plants) related to agricultural activity and agricultural produce at the point of harvest All the above are covered by separate Ind ASs 19
Ind AS 2 Inventories Key Definitions Inventories are assets: held for sale in the ordinary course of business; in the process of production for such sale; or in the form of materials or supplies to be consumed in the production process or in the rendering of services Net realisable value - entity specific value Estimated selling price in the ordinary course of business less (estimated costs of completion + estimated selling costs) Fair value Market value Is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm s length transaction 20
Ind AS 2 Inventories Measurement Cost of inventories comprise : Cost of purchase; Costs of conversion; and other costs incurred in bringing the inventories to their present location and condition Cost of purchase comprise : Purchase price Import duties and other taxes (except taxes recoverable from Govt) Transport, handling and other costs directly attributable to acquisition Adjustments for trade discount and rebates 21
Ind AS 2 Inventories Measurement Costs of conversion comprise : Costs directly related to production for eg direct labour; and Systematic allocation of fixed and variable production overheads Allocation of fixed production overheads to cost of conversion is based on normal capacity of the production facilities and not based on actual production. Unallocated overheads are recognised as an expense in the period in which they are incurred. In periods of abnormally high production, the amount of fixed overhead allocated to each unit of production is decreased so that inventories are not measured above cost. 22
Ind AS 2 Inventories Measurement Where several products are jointly produced, production cost is allocated on a rational and consistent basis for eg relative sales value, etc. Most by products, by their nature are immaterial and hence are measured at net realisable value and this value is deducted from the cost of the main product It may be sometimes appropriate to include non production overheads as cost of inventory for eg specific costs for designing specific products for certain customers Costs generally excluded from Inventory abnormal wasted material, labour or other production costs storage costs unless part of production process administrative overheads and selling costs 23
Ind AS 2 Inventories Measurement Ind AS 23, Borrowing Costs, identifies limited circumstances where borrowing costs are included in the cost of inventories. Interest cost arising on account of deferred settlement terms is recognised as interest expense over the period of financing 24
Ind AS 2 Inventories Measurement Cost formula Standard cost method may be used, if results approximate cost. Regular review and revision necessary in the light of current conditions Retail method is often used in the retail industry for measuring inventories of large numbers with similar margins for which it is impracticable to use other costing methods. The cost of the inventory is determined by reducing the sales value of the inventory by the appropriate gross margin percentage. Cost of specific inventories of specific projects are measured using specific identification method The cost of other inventories should be determined using FIFO method or weighted average cost method. Inventories of similar nature to have same cost formula. 25
Ind AS 2 Inventories Measurement Net realisable value Costs may not be recoverable in respect of damaged, obsolete and other inventory where selling prices have declined or where expected costs of completion/sale have increased. Such inventories need to be written down to net realisable value item by item or on a group basis for similar or related items. Estimates of net realisable value are made based on most reliable evidence available at the time of estimation. Materials and other supplies held for use in the production of inventories are not written down below cost if the consequent finished products are expected to be sold at or above cost. Net realisable value needs to be evaluated in each period 26
Ind AS 2 Inventories Relevant disclosures Accounting policies for measuring inventories including cost formula used Total carrying amount of inventories and carrying amount in classifications appropriate to the entity (FG, WIP, Materials, Stores and spares, loose tools, etc.) Carrying amount of inventories carried at fair value less costs to sell Inventories recognised as expense, write down of inventories, if any and reversal of any such write downs Circumstances or events that led to the reversal of write downs Carrying amount of inventories pledged as security for liabilities 27
Ind AS 7 Statement of Cash Flows Objective, Scope and Key benefits Objective To provide users of FS, information on the entity's ability to generate cash and cash equivalents and their utilisation, categorised as operating, investing and financing activities. Scope An entity shall prepare a statement of cash flows in accordance with the requirements of this standard and present it as part of the FS for each reporting period. Key Benefits It enhances the comparability of the reporting of operating performance by different entities because it eliminates the effects of using different accounting treatments for the same transactions and events. 28
Ind AS 7 Statement of Cash Flows Key definitions Cash Comprises cash on hand and demand deposits Cash equivalents Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Operating activities Principal revenue-producing activities of the entity and other activities that are not investing or financing activities Investing activities Acquisition and disposal of long -term assets and other investments not included in cash equivalents 29
Ind AS 7 Statement of Cash Flows Key definitions Financing activities Activities that result in changes in the size and composition of the contributed equity and borrowings of the entity Where bank overdrafts which are repayable on demand form an integral part of an entity's cash management, they are included as a component of cash and cash equivalents. 30
Ind AS 7 Statement of Cash Flows Presentation The statement of cash flows shall report cash flows during the period classified by operating, investing and financing activities Statement of cash flows enables users to forecast future cash flows Classification depends to a great extent on the nature of business of the entity for eg borrowings in the case of non financial entities would be classified as financing activities whereas in the case of a financial entity, it would be classified as operating activities. 31
Ind AS 7 Statement of Cash Flows Reporting cash flows Operating cash flows can be reported using either: Direct method Major classes of gross cash receipts and gross cash payments are disclosed or Indirect method Profit or loss is adjusted for the effects of transactions of a non-cash nature, any deferrals or accruals of past or future operating cash receipts or payments, and items of income or expense associated with investing or financing cash flows. Entities are encouraged to report cash flows from operating activities using the direct method since it is more useful in estimating future cash flows An entity shall report separately major classes of gross cash receipts and gross cash payments arising from investing and financing activities 32
Ind AS 7 Statement of Cash Flows Reporting cash flows The following cash flows may be reported on a net basis: cash receipts and payments on behalf of customers when the cash flows reflect the activities of the customer rather than those of the entity; and cash receipts and payments for items in which the turnover is quick, the amounts are large, and the maturities are short. Foreign currency cash flows Cash flows arising from foreign currency transactions shall be recorded in an entity s functional currency at the exchange rate on the date of the cash flow. Cash flows of a foreign subsidiary shall be translated at the exchange rates on the dates of the cash flows. Exchange rate that approximates the actual rate is also permitted (for eg weighted average exchange rate). However, year end rate not permitted 33
Ind AS 7 Statement of Cash Flows Reporting cash flows Interest and dividends Cash flows from interest and dividends received and paid shall each be disclosed separately. Such cash flows in the case of a financial institution (except dividend paid) should be classified as cash flows from operating activities. In the case of other entities, interest paid should be classified as cash flows from financing activities while interest and dividends received should be classified as cash flows from investing activities. Dividends paid should be classified as cash flows from financing activities. Total amount of interest paid to be disclosed (including interest capitalised) 34
Ind AS 7 Statement of Cash Flows Reporting cash flows Taxes on income Cash flows arising from taxes on income shall be separately disclosed and shall be classified as cash flows from operating activities unless they can be specifically identified with financing and investing activities When tax cash flows are allocated over more than one class of activity, the total amount of taxes paid is disclosed 35
Ind AS 7 Statement of Cash Flows Reporting cash flows Investment in subsidiaries, etc. The aggregate cash flows arising from obtaining or losing control of subsidiaries or other businesses shall be presented separately and classified as investing activities An entity shall disclose, in aggregate, in respect of both obtaining and losing control of subsidiaries or other businesses during the period each of the following: the total consideration paid or received; the portion of the consideration consisting of cash and cash equivalents; the amount of cash and cash equivalents in the subsidiaries or other businesses over which control is obtained or lost; and the amount of the assets and liabilities other than cash or cash equivalents in the subsidiaries or other businesses over which control is obtained or lost, summarised by each major category. 36
Ind AS 7 Statement of Cash Flows Reporting cash flows Others Non cash transactions Investing and financing transactions that do not require the use of cash or cash equivalents shall be excluded from a statement of cash flows. Such transactions shall be disclosed elsewhere in the financial statements in a way that provides all the relevant information about these investing and financing activities Components of cash and cash equivalents Components shall be disclosed including a reconciliation of the amounts in the statement of cash flows with the equivalent items reported in the Balance Sheet An entity shall also disclose, together with a commentary by management, the amount of significant cash and cash equivalents that are not available for use by the entity 37
Ind AS 8 Accounting policies, changes in accounting estimates and errors Objective and Scope Prescribe the criteria for selecting and changing accounting policies Accounting treatment and disclosure of changes in accounting policies Changes in accounting estimates and corrections of prior period errors. Intended to enhance the relevance and reliability of an entity s financial statements, and the comparability of those financial statements over time and with the financial statements of other entities. 38
Ind AS 8 Accounting policies, changes in accounting estimates and errors Key definitions Accounting policies Specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements. 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. Changes in accounting estimates result from new information or new developments and, accordingly, are not corrections of errors. 39
Ind AS 8 Accounting policies, changes in accounting estimates and errors Key definitions 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 approved 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 application Is applying a new accounting policy to transactions, other events and conditions as if that policy had always been applied. 40
Ind AS 8 Accounting policies, changes in accounting estimates and errors Key definitions 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 Of a change in accounting policy and of recognising the effect of a change in an accounting estimate, respectively, are: 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 41
Ind AS 8 Accounting policies, changes in accounting estimates and errors Accounting policies When an Ind AS specifically applies to a transaction or condition, the accounting policy or policies applied to that item shall be determined by applying the Ind AS (material items only) In the absence of an Ind AS that specifically applies to a transaction or condition, management shall use its judgement in developing and applying an accounting policy that results in information that is relevant to the economic decision-making needs of users and reliable While making the judgement indicated above, the following sources shall be considered in descending order: the requirements in Ind ASs dealing with similar and related issues; and the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Framework. Recent pronouncements from International Accounting bodies, other accounting literature and accepted industry practices 42
Ind AS 8 Accounting policies, changes in accounting estimates and errors Accounting policies An entity shall select and apply its accounting policies consistently for similar transactions unless an Ind AS specifically requires or permits categorisation of items for which different policies may be appropriate. Change in an accounting policy is permitted only if the change: is required by an Ind AS; or results in the financial statements providing reliable and more relevant information An entity shall account for a change in accounting policy resulting from the initial application of an Ind AS in accordance with the specific transitional provisions, if any, in that Ind AS 43
Ind AS 8 Accounting policies, changes in accounting estimates and errors Accounting policies When there are no specific transitional provisions applying to that change, or an entity changes an accounting policy voluntarily, it shall apply the change retrospectively When a change in accounting policy is applied retrospectively the entity shall adjust the opening balance of each affected component of equity for the earliest prior period presented and the other comparative amounts disclosed for each prior period presented as if the new accounting policy had always been applied 44
Ind AS 8 Accounting policies, changes in accounting estimates and errors Accounting policies When an entity has not applied a new Ind AS that has been issued but is not yet effective, the entity shall disclose: this fact; and known or reasonably estimable information relevant to assessing the possible impact that application of the new Ind AS will have on the entity s financial statements in the period of initial application 45
Ind AS 8 Accounting policies, changes in accounting estimates and errors Changes in accounting estimates Revision in estimates do not relate to prior periods and is not correction of an error A change in the measurement basis applied is a change in an accounting policy, and is not a change in an accounting estimate. When it is difficult to distinguish, the change is treated as a change in an accounting estimate The effect of change in an accounting estimate (except relating to assets and liabilities or equity), shall be recognised prospectively by including it in profit or loss in: the period of the change, if the change affects that period only; or the period of the change and future periods, if the change affects both. 46
Ind AS 8 Accounting policies, changes in accounting estimates and errors Prior period errors An entity shall correct material prior period errors (unless impracticable to do so) retrospectively in the first set of financial statements approved for issue after their discovery by: restating the comparative amounts for the prior period(s) presented in which the error occurred; or if the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities and equity for the earliest prior period presented. An entity shall disclose : the nature of the prior period error; for each prior period presented, to the extent practicable, the amount of the correction for each financial statement line item and basic and diluted earnings per share the amount of the correction at the beginning of the earliest prior period presented 47
Q&A session 48
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