Wrestling with First-time Adoption of IFRS IFRS 1 First-time Adoption of International Financial Reporting Standards*
Session Objective and Key Take aways Session Objective: The objective of this session is to explain the IFRS literature relating to First-time Adoption of IFRS The session shall focus on Key requirements of IFRS 1 More Common implementation issues Identification of Transitional adjustments between Indian GAAP and IFRS Inter-relationships with other standards Select illustrations. Key Take-aways: At the end of the session participants p are likely to understand the key IFRS requirements, discern the more common transitional adjustments and identify the more common disclosures that needs to be made in the IFRS financial statements. Slide 2
Objective To ensure that an entity s first IFRS financial statements, and its interim financial reports for part of the period covered by those financial statements, contain high quality information that: is transparent tfor users and comparable over all periods presented; Number of years provides a suitable starting point for accounting in accordance with International Financial Reporting Standards (IFRSs); and Important dates can be generated at a cost that does not exceed the benefits. Beneficial standard
First-time Adoption of IFRS - Application Application to the first IFRS financial statements ; and each interim financial report under IFRS in the first period The first IFRS financial statements are: The term first IFRS financial statements is defined in IFRS 1 as an entity s first annual financial statements in which an entity adopts IFRSs, by an explicit and unreserved statement of compliance with IFRSs Financial statements are not IFRS financial statements when there is no explicit statement of compliance with IFRSs they do not comply with all aspects of IFRSs IFRSs are used to fill gaps in local l guidance Slide 4
First-time Adoption of IFRS - Requirements Identify the first IFRS financial statements. IFRS 1 requires an entity in its opening IFRS balance sheet to: Recognise all assets and liabilities required by IFRSs and vice-versa Classify all assets, liabilities and equity as required by IFRSs; and Measure all items in accordance with IFRSs Select accounting policies i that t comply with IFRS, (latest t version of IFRS applicable on the reporting date) and apply those policies retrospectively Consider whether to apply any of the optional exemptions from retrospective application. Apply the mandatory exceptions from retrospective application. Make extensive disclosures to explain the transition to IFRS. Slide 5
Typical situation When IFRS 1 is applicable When an entity in past; Included a reconciliation of some items from a previous GAAP to IFRS. Complied with some, but not all, IFRSs, in addition to a previous GAAP. Complied with IFRS in all respects, in addition to a previous GAAP, but did not include an explicit and unreserved statement of compliance with IFRS. Was prepared in accordance with IFRS, but used them only for internal purposes (i.e., the IFRS financial statements were not distributed to the company s owners or external users). Was prepared as a group reporting package using IFRS principles. Did not prepare financial statements. In all above situations, IFRS 1 is applicable Slide 6
Applicability Previous GAAP - The basis of accounting Previous that a first-time adopter used GAAP immediately before adopting IFRSs What does first IFRS financial statements mean? in India? Explicit and unreserved statement of compliance Previous financial statements not under IFRS But what about.. IFRS financial statements for internal use? IFRS reporting packages for group purposes? Nothing like Subject to or Except for
Optional Exemptions Slide 8
Nces IFRS 1 - Optional Exemptions summary for a typical company Significant Some Minor Business Combination Borrowing Cost Employee Benefits PPE, Investment Properties, Intangibles Cumulative translation differences Transition date for Subsidiaries, Associates and JV s Compound Instruments Investments t in subsidiaries, associates and JCE s Share based payments Decommissioning liabilities Leases FV measurement of Financial instruments on initial iti recognition Service Concession Arrangements Designation of financial assets and liabilities Insurance contracts * Application of exemption may vary from Company to Company Slide 9
Optional Exemptions Exemption Business combinations Fair value as deemed cost Impact For all transactions qualifying as business combinations under IFRS 3R, a company can choose to: Not restate business combinations before the date of transition. Restate all business combinations before the date of transition. Restate a particular business combination, in which case all subsequent business combinations must also be restated and the IAS 36 impairment guidance must be applied. For property, plant and equipment, a company can choose to measure the value using: Cost in accordance with IFRS. Fair value at the date of transition as deemed cost. A revaluation carried out at a previous date (like a IPO) less accumulated depreciation till the date of transition as deemed cost, subject to certain conditions. This exemption can also be applied to intangible assets that meet the criteria for revaluation in IAS 38 and to investment properties p where the cost method in IAS 40 is applied. The exemption may not be used for any other assets or for liabilities. Slide 10
Optional Exemptions Exemption Changes in existing decommissioning, restoration (AROs), and similar liabilities included in the cost of property, plant and equipment Employee benefits Cumulative translation differences Leases Impact When accounting for asset retirement obligations, first-time adopters may apply a shortcut method by: Measuring the liability at transition date in accordance with IAS 37. Estimating the amount of the liability that would have been included in the cost of the related asset when the liability first arose. Calculating the accumulated depreciation on that discounted amount, as of the date of transition to IFRS. Recognition of all cumulative actuarial gains and losses as an adjustment to opening retained earnings is allowed. Deferral of the recognition of future actuarial gains and losses using the corridor approach in IAS 19 may still be applied prospectively. The cumulative translation reserve may be reset to zero. A company may elect to assess whether an arrangement contains a lease at the date of transition, rather than at the inception of the arrangement. a e Slide 11
Optional Exemptions Exemption Assets and liabilities of subsidiaries, associates and joint ventures Investments in subsidiaries, jointly controlled entities and associates Impact A subsidiary that adopts IFRS later than its parent can elect to apply IFRS 1 or to use the carrying amounts of its assets and liabilities included in the consolidated financial statements, subject to eliminating any consolidation adjustments. If a parent adopts IFRS later than its subsidiary, the parent, in its consolidated d financial i statements, t t must measure the assets and liabilities of the subsidiary at the same carrying amounts as in the IFRS financial statements of the subsidiary, adjusting for normal consolidation entries. In their separate financial statements, first-time adopters can measure their investment in subsidiaries, jointly controlled entities and associates at either: Cost, determined in accordance with IAS 27R; Deemed cost, defined as fair value (determined in accordance with IAS 39) at the company s IFRS transition date, or Deemed cost, defined as previous GAAP carrying amount at the IFRS transition date. Slide 12
Optional Exemptions Exemption Impact Borrowing costs If the accounting treatment for capitalized interest required by IAS 23 is different than a company s previous accounting policy, the company should apply IAS 23 to borrowing costs related to qualifying assets capitalized on or after January 1, 2009, or the date of transition to IFRS, if later. Alternatively, ti l companies can designate any date before January 1, 2009 and apply the standard to borrowing costs relating to all qualifying assets capitalized on or after that date. Designation of Previously recognized Financial instruments Compound financial instruments Insurance contracts A company may choose to designate a financial instrument as a financial asset or financial liability at fair value through profit or loss or may designate a financial asset as available-for-sale at its transition date. A compound financial instrument does not need to be bifurcated if the liability component is not outstanding at the transition date. A company that issues insurance contracts and has a date of adoption before January 1, 2006, may choose not to restate comparatives for IFRS 4. The company applies its previous GAAP to insurance contracts for its comparatives. Slide 13
Optional Exemptions Exemption Share-based payment transactionsti Fair value measurement of financial assets and financial liabilities at initial recognition Impact A company may choose (but is not required) to apply IFRS 2 to any equity instruments that were granted before November 7, 2002, or that were granted after that date and vested before the date of transition, but only if the company has previously disclosed publicly the fair value of the instruments, determined at the measurement date. In addition, a company may choose (but is not required) to apply IFRS 2 to a liability relating to a cash-settled share-based payment that was settled prior to the date of transition to IFRS. First-time adopters can choose to measure their day one profits on Initial recognition of financial instruments either: Retrospectively to all transactions. Prospectively for all transactions entered into after October 25, 2002. Prospectively for all transactions entered into after January 1, 2004. Service concession Companies may elect to apply the transitional provisions of IFRIC 12, arrangements rather than full retrospective application. Slide 14
Optional Exemptions Exemption Transfer of assets from customers A first time adopter may apply the transitional provisions in IFRIC- 19,extinguishing financial liabilities with equity instruments. Extinguishing financial liabilities with equity instruments Impact A first time adopter may apply the transitional provisions of IFRIC- 18.He may designate any date before the date of transition to IFRS s and apply IFRIC-18 to all transfer of assets from customers received on or after that date. Slide 15
Fair value as deemed cost Asset by asset selection PPE Investment t Intangible property assets Fair value at the date of transition Yes Yes* Yes** Previous GAAP revaluation *** Yes Yes* Yes** Event driven fair value revaluation at the date of the event Yes Yes Yes * If an entity elects to use the cost model ** If the asset meets the criteria in IAS 38 *** If the revaluation, at the date of revaluation, was broadly comparable to fair value or depreciated d cost adjusted d to reflect a general or specific price index
Indian GAAP IFRS IFRS Policy Cost Cost Cost IFRS 1 Exemption No Fair Value 1 Apr 06 500 400 06 07 07 (17) (8) 31 Mar 07 483 392 07 08 (17) (8) 31 Mar 08 467 384 08 09 (17) (8) 31 Mar 09 450 376 09 10 (17) (8) 31 Mar 10 433 368 10 11 (17) (8) 31 Mar 11 417 360 700 Gorss Block 500 400 700 Accumulated Dep (84) (40) Net Block 417 360 700 Reserves and Surplus (57) 284
Business combination exemption - Example Indian GAAP 1 Apr 10 31 Mar 11 Purchase Consideration 1,000 Net Assets Acquired* (400) Goodwill Policy to amortise (3 Years) 600 400 * Includes shares of INR 50 as at April 1, 10 and INR 75 as at March 31, 10(AS 13) IFRS 3 1 Apr 10 31 Mar 11 Purchase Consideration 1,000 Fair Value of Net Assets acquired (600) Fair value of Intangibles acquired (300) Goodwill Test for impairment 100 100 IFRS 1 Benefit 1 Apr 10 10 31 Mar 11 11 Purchase Consideration 1,000 Net Assets Acquired Deemed cost (400) Goodwill Test for impairment 600 400 * Share of INR 50 to be fair valued as on the Increase in date of transition; Say INR 75 reserves 25
Quick quiz - First Time adoption (1/3) Quick Quiz 1 Reporting date is the ending of the latest period for which a First Time Adopter presents full comparative information under IFRS. 2 Comparative information need not be presented in the first IFRS financial statements. 3 The business combinations exemption can be applied selectively to individual business combinations prior to the reporting date. 4 A First Time Adopter must recognise all cumulative actuarial gains and losses in equity in the opening IFRS balance sheet for defined benefit plans. 5 Fair value cannot be used as deemed cost for intangibles. Slide 19
Quick quiz - First Time adoption (2/3) Quick Quiz 6 A group which does not apply the CTA differences exemption must reconstruct all historical IFRS balance sheets and statements of comprehensive income of its consolidated foreign subsidiaries, joint ventures and associates. 7 In its separate financial statements, a First Time Adopter must reconstruct the cost of an investment in a subsidiary in accordance with IAS 27 R. 8 If a group adopts IFRS later than its subsidiaries, the group cannot apply the IFRS 1 exemption to the subsidiary balances in the group s first IFRS financial statements. 9 For First Time Adopters, Goodwill must be tested for impairment at the transition date as well as at reporting date. 10 A First Time Adopter must apply the guidance in IAS 27 R for changes in ownership that occurred after the date of transition Slide 20
Quick quiz - First Time adoption (3/3) Quick Quiz 11 Entity D is planning an IPO and is required to include financial statements covering the three years ended 31 December 2010, prepared in accordance with IFRS, in the offering circular. They will apply IFRS for the first time in the financial statements included in the offering document. In this case which is the transition date (being beginning of earliest period presented)? 12 Entity B prepares its first IFRS financial statements for the year ending 31 December 2010. There are significant differences between entity B's previous GAAP and IFRS. Entity B's management, therefore, plans to prepare its opening IFRS balance sheet at 1 January 2010, so it has a starting point for its accounting under IFRS. The first IFRS financial statements will include one year comparative information for the balance sheet, but there will be no comparative information for the income statement and cash flow statement. Are these financials i are in compliance with IFRS 1? 1st January, 2008 No Slide 21
Quick quiz - Business combination Quick Quiz 1 If goodwill was recognised in equity in previous GAAP, it should not be reclassified out of equity upon adopting IFRS. 2 If goodwill was amortised in previous GAAP, the amortisation would be reversed and goodwill restated and then tested for impairment. 3 IPR&D should be separately recognised from goodwill even if it was not for previous GAAP. 4 If an assembled workforce was recognised in prior GAAP, it should continue to be recognised upon adopting IFRS. Slide 22
Mandatory Exceptions Slide 23
Overview of IFRS 1 exceptions GAAP Differences Apply Standards in force at reporting date however five mandatory exceptions Significant Some Minor Estimates Hedge Accounting De-recognition of Financial Asset/ Liability Non controlling interest (applicable on or after 1st (apply for all transactions occurring after Jan 1, 2004) July 2009, can be early adopted) * Application of exception may vary from Company to Company Slide 24
First-time Adoption of IFRS - Estimates Estimate YES NO required by Evidence of error? previous GAAP? Calculation consistent with IFRS? NO YES YES NO Make estimate reflecting conditions at relevant date Use previous Use previous estimate and adjust estimate to reflect IFRS Slide 25
Quick quiz - Estimates Quick Quiz 1 A Ltd makes provision for warranty @ 5% of total revenue based on historical trend for the year 2010-11. In 2011-12, the company came to know that products manufactured by it from a new factory in 2010-11 had a design defect and due to that the warranty costs will rise substantially for sales of the products manufactured in the new factory. Whether the company can revise its estimates of warranty cost while preparing its first IFRS financials? 2 B Ltd creates provision for Leave Encashment on the basis of basic salary + special allowance of all the employees. During the preparation of its first IFRS financial i statements, it discovered d that in the estimates done for the year 2010-11 the company had mistakenly considered only basic salary for estimating the amount of Leave Encashment provision. Whether B Ltd can revise its estimates for Leave Encashment for 2010-11? 3 In the financials for the year 2010-11, C Ltd had disclosed 5 lacs as contingent liability for one of the claims made against it by a customer as C Ltd ascertained that it was not very probable that it will be asked to make that payment. During 2011-12, the customer filed a case against C Ltd for 5 lacs and C Ltd ascertains that settlement will be done for 3 lacs. Can C Ltd make a provision for 3 lacs for the year 2011-12? Slide 26
Ind-AS 41 First time adoption of IFRS converged Indian Accounting Standards Slide 27
Reconciliations/ Disclosures Reconciliation statements Equity from previous GAAP to IFRS at the date of transition to IFRSs and the end of the latest period presented in the company s most recent annual financial statements under previous GAAP. Reconciliation to its total comprehensive income in accordance with IFRSs for the latest period in the entity's most recent annual financial statements under previous GAAP. There are detailed disclosure requirements under IFRS 1 when impairment losses, under IAS 36, are recognized in the opening IFRS balance sheet. The reconciliations should give sufficient details to enable users to understand the material adjustments to the balance sheet and income statement and to distinguish changes in accounting policies from the correction of errors identified during transition. A sample reconciliation footnote is included at the end of this guide. Slide 28
First-time Adoption of IFRS - Reconciliations Equity Reconciliation Reconciliation Statement Equity and Net income Reconciliation 01 Apr 2010 30 June 2010 31 March 2011 30 June 2011 31 March 2012 Transition Date Interim Comparative Year end Comparative Interim Date Reporting Date Interim financial Reports equity under previous GAAP at the end of that comparable interim period to its equity under IFRSs at that date; and its profit or loss under previous GAAP for that comparable interim period (current and year-todate) to its profit or loss under IFRSs for that period. further information to comply with IAS 34 Slide 29
Format - Reconciliation of Equity - Illustrative purpose only INR in million Notes Indian GAAP Adjustments IFRS Non - Current assets Property, plant and equipment (a) 15,000 250 15,250 Goodwill (b) 2,000 200 2,200 Other intangible assets, net of accumulated amortization (c) 500 1,125 1,625 Investments in associates (d) 500 (35) 465 Other assets including deferred taxes 4,000-4,000 Total Non - current assets 22,000 1,450 23,540 Current assets Cash and cash equivalents 5,000-5,000 Short-term securities 2,000-2,000 Accounts receivable less allowances 5,000-5,000 Inventories (e) 4,500 450 4,950 Other current assets, including deferred taxes 3,500-3,500 Total current assets 20,000000 450 20,450 Total assets 42,000 1,990 43,990 Slide 30
Format - Reconciliation of Equity - Illustrative purpose only INR in million Notes Indian GAAP Adjustments Non - current liabilities Long-term debt 13,000-13,000 Pension liabilities 500-500 Accrued postretirement benefits other than pensions 1,500-1,500 Other noncurrent liabilities, including deferred taxes (f) 2,150 1,250 3,400 Total Non - current liabilities 17,150 1,250 18,400 Current liabilities Trade accounts payable 1,600-1,600 Accrued expenses 6,400-6,400 Accrued taxes 2,000-2,000 Total current liabilities 10,000-10,000 Stockholders equity Share capital 500-500 Cumulative translation adjustment (g) 300 (300) - Retained earnings (h) 14,250 925 15,175 Non-controlling interests (i) - 15 15 Accumulated other comprehensive loss (j) (200) 100 (100) Total stockholders equity 14,850 740 15,590 Total liabilities and stockholders equity 42,000 1,990 43,990 IFRS Slide 31
Format - Reconciliation of Net Income - Illustrative purpose only INR in million Notes Indian GAAP Adjustments IFRS Sales 27,000 27,000 Cost of sales (k) 20,000000 439 20,439 Gross profit 7,000 (439) 6,561 Other operating income (100) (100) Selling and marketing costs 2,000 2,000 Administrative expenses 600 600 Other operating expenses 500 500 Operating profit/(loss) 4,000 (439) 3,561 Finance costs net (l) (700) (50) (750) Share of profit of associates 100 100 Profit before tax 3,400 (489) 2,911 Income tax expense (benefit) (m) 1,525 (196) 1,329 Profit from ordinary activities after tax 1,875 (293) 1,582 Profit for the period 1,875 (293) 1,582 Other comprehensive income Items recognised in other comprehensive income under IFRS, net of tax (50) (50) Total comprehensive income 1,875 (343) 1,532 Profit for the year attributable bl to Owners of the parent 1,860 1,517 Non controlling interest 15 15 Total Income for the year 1,875 1,532 Slide 32
- Recognition and Measurement - Key Dates 1 Apr 2010 1 Apr 2011 31 Mar 2012 Date of transition Recognise and measure all items using IFRS Opening IFRS balance sheet required to be presented. P 21 of Ind-AS 101 provides an option to provide comparatives Date of adoption First IFRS reporting date Select policies i Use standards in force at this date First IFRS financial statements Use the same accounting policies i for all periods presented in first IFRS financial statements (except where specific relief given)
IFRS 1 Disclosures In-AS 101 Previous GAAP At least one year of comparative information - Careful for exemptions that may apply for new standards Explanation of transition - SOFP / SOCI / CFS IAS 36 disclosures for impairment identified during transition Historical summaries under previous GAAP must be clearly labeled l In-AS 101 Deleted For reader to understand - Transition
IFRS 1 Dual Reporting Reconciliation of reported Indian GAAP Dual effort would have required IFRS numbers Equity reco Equity reco 1 Apr 2010 31 Mar 2012 1 Apr 2011 P&L reco Date of transition: Recognise and measure all items of Balance Sheet using Ind-AS Derecognise if don t meet Ind-AS Opening balance sheet Date of adoption Comparative Ind- AS balance sheet First Ind-AS reporting date Select policies Use standards in force at this date First Ind-AS financial statements
Ind-AS 101 Para 21 (a) without Comparatives Annual Reporting Dual Reporting Reconciliation of reported Indian GAAP Dual preparation Reconciliation assuming current Indian GAAP continued Significant GAAP differences Equity Reco Equity Reco reco April 1, 2010 April 1, 2011 P&L Reco March 31, 2012 Date of adoption / transition: Recognise and measure all items of Balance Sheet using Ind-AS Derecognise if don t meet Ind-AS Opening balance sheet First Ind-AS reporting date Select policies Use standards d in force at this date First Ind-AS financial statements
Ind-AS 101 Para 21 (b with Comparatives Annual Reporting Annual reporting with Comparatives Dual Reporting Reconciliation of reported Indian GAAP Dual preparation Reconciliation assuming Indian GAAP maintained Significant GAAP differences Equity Reco Equity Reco Equity Reco P&L Reco P&L Reco April 1, April 1, March 31, 2010 2011 2012 Date of transition: Recognise and measure all items of Balance Sheet using Ind-AS Derecognise if don t meet Ind-AS Opening balance sheet Date of adoption Comparative Ind- AS balance sheet First Ind-AS reporting date Select policies Use standards in force at this date First Ind-AS financial statements
IASB v/s ICAI IFRS 1 Ind-AS 101 Provides one transition date. Provides for adoption in phased manner. Provides transition date as the beginning of the earliest period. Provides various dates from which a standard could have been implemented. Provides the transition date as the beginning of financial year 1 April,11. (Phase 1 entities) All these dates have been changed to coincide with the transition date. Provides for recording of actuarial gains and losses for entity adopting corridor approach. Not specified Requires an entity to present comparative IFRS financial statements in its first IFRS financial statements i.e. 2 IFRS BS are required to be presented. Corridor approach is not offered. Provides to measure the non current asset held for sale and discontinued operations at lower of carrying value and fair value less cost to sell. Provides companies with the choice of providing comparative Ind-AS financials in first Ind-AS financial statements i.e. only 1 Ind-AS BS can be presented Ind-AS 101 reflects only the current set of provision and exemptions and does not present all the evolution, while IFRS 1 is used as the basis and updated to reflect subsequent amendments up to November 2009. Slide 38
Any questions? Thank You Arpit.mundra@in.pwc.com pwc com This presentation has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this presentation without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this presentation, and, to the extent permitted by law, Arpit Mundra or the Firm / Company for which he works, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this presentation or for any decision based on it. Without prior written permission of Arpit Mundra, the contents of this presentation may not be quoted in whole or in part or otherwise referred to in any documents. Moreover, the presensation has to be considered alongwith the session given by Arpit Mundra and not on as it is, standalone or any other basis.