52 Ifrs and Indian Gaap
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Transcript of 52 Ifrs and Indian Gaap
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Overview of Significant Differences between International Financial
Reporting Standards (IFRS) and Indian GAAP
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TOPICS COVERED IN OUR SESSION
Differences with respect to:
Conceptual Accounting Framework
Content of Financial Statements
Accounting Differences
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ACCOUNTING FRAMEWORK
Historical cost
IFRS:
Historical cost, but intangible assets, property plant and equipment (PPE) andinvestment property may be revalued. Derivatives, biological assets and mostsecurities must be revalued.
Indian GAAP:
Historical cost, but fixed assets, other than intangibles, may be revalued.
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ACCOUNTING FRAMEWORK
First-time adoption of accounting frameworks
IFRS:
Full retrospective application of all IFRSs effective at the reporting date foran entitysfirst IFRSfinancial statements, with some optional exemptions andlimited mandatory exceptions.
Indian GAAP:
The accounting standard on Disclosure of Accounting Policies addresses theissue of adoption of accounting policies. Also, particular standards specify the
transitional treatment upon the first-time application of those standards
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FINANCIAL STATEMENTS
Contents of financial statements
IFRS:
Two years balance sheets, income statements, cash-flow statements,changes in equity, accounting policies and notes.
Indian GAAP:
Two yearsbalance sheets, profit and loss accounts, accounting policies andnotes. Listed entities are required to give their consolidated financialstatements and the related notes along with the standalone financial
statements. (Financial Statements should also include cash flow statementsin certain cases)
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FINANCIAL STATEMENTS- Balance Sheet
IFRS:Does not prescribe a particular format; an entity uses a liquidity presentationof assets and liabilities, instead of a current/non-current presentation, onlywhen a liquidity presentation provides more relevant and reliable information.Certain items must be presented on the face of the balance sheet
Indian GAAP:
The Indian Companies Act and other industry-specific laws like banking,insurance, etc. specify respective formats
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FINANCIAL STATEMENTS
Income Statements
IFRS
Does not prescribe a particular format. However, expenditure must be presented inone of two formats (function or nature). Certain items must be presented on the faceof the income statement.
Indian GAAP
The Indian Companies Act does not prescribe a particular format. The Company lawand accounting standards however, prescribes certain disclosure norms for incomeand expenditures. For certain industries, industry specific laws specify formats.
Reporting currency
IFRS:
Requires the measurement of profit using the functional currency. Entities may,however, present financial statements in a different currency.
Indian GAAP:
Schedule VI to the Companies Act, 1956 specifies Indian Rupees as the reportingcurrency.
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FINANCIAL STATEMENTS
Statement of changes in shareholdersequity
IFRS:
Statement showing capital transactions with owners, the movement inaccumulated profit and a reconciliation of all other components of equity. Thestatement must be presented as a primary statement.
Indian GAAP:
Changes in shareholdersequity are disclosed by way of a schedule.
Statement of recognised gains and losses / Other comprehensive income
IFRS:
Give a statement of recognised gains and losses either as a separate primarystatement or highlight it separately in the primary statement of changes inshareholdersequity
Indian GAAP:
Not prescribed
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Accounting Differences
Subject IFRS Indian GAAP
Special purposes entities(SPEs)
Consolidate where thesubstance of the relationshipindicates control.
No specific guidance.
Non-consolidation ofsubsidiaries
Dissimilar activities or temporarycontrol are not a justification fornon-consolidation.
Only if acquired and held forresale or there are severe long-term restrictions to transfer fundsto the parent.
Business combinations All business combinations areacquisitions.
No comprehensive accountingstandard on businesscombinations. All businesscombinations are acquisition;however, required use of poolingof interests method in certainamalgamations [when all thespecified conditions are met]. To
summarize: On consolidation, foran entity acquired and held as aninvestment: treated as acquisition.On amalgamation of an entity,either uniting of interests oracquisition. On businessacquisition (i.e. assets andliabilities only) treated as
acquisition.
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Accounting Differences
Subject IFRS Indian GAAP
Uniting of interestsmethod Prohibited. Required for certainamalgamations when all thespecified conditions are met, elseaccounted under the purchasemethod.
Acquired intangibleassets
Capitalise if recognition criteriaare met; intangible assets mustbe amortised over useful life.
Intangibles assigned anindefinite useful life must not beamortised but reviewed annuallyfor impairment. Revaluations arepermitted in rare circumstances.
Capitalise if recognition criteriaare met; intangible assets must beamortised over useful life with a
rebuttable presumption of notexceeding 10 years.
Revaluations not permitted.
Property, plant andequipment
Use historical cost or revaluedamounts. Regular valuations ofentire classes of assets are
required when revaluation optionis chosen.
Use historical cost. Revaluationsare permitted, however, norequirement on frequency of
revaluation. On revaluation, anentire class of assets is revalued,or selection of assets is made ona systematic basis.
Depreciation Allocated on a systematic basisto each accounting period overthe useful life of the asset.
Similar to IFRS, except where theuseful life is shorter than thatenvisaged under the CompaniesAct or the relevant statute, the
depreciation is computed byapplying a higher rate.
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Accounting Differences
Subject IFRS Indian GAAP
Deferred income taxes Use full provision method (someexceptions) driven by balancesheet temporary differences.Recognise deferred tax assets ifrecovery is probable.
Recognise tax effect of timingdifference as deferred tax asset orliability. Recognise deferred taxassets (a) for entities with taxlosses carry forward, if realisationis virtually certain, whereas (b) forentities with no tax losses carryforward, if realisation isreasonably certain. A number of
other specific differences.
Fringe benefits tax Included as part of relatedexpense (fringe benefit) whichgives rise to incurrence of thetax.
Disclosed as a separate item afterprofit before tax on the face of theincome statement.
Convertible debt Account for convertible debt onsplit basis, allocating proceeds
between equity and debt
Convertible debt is recognised asa liability based on legal form
without any split.
Functional currency Currency of primary economicenvironment in which entityoperates.
Does not define functionalcurrency.
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Accounting Differences
Subject IFRS Indian GAAP
Compensated absences Provision on actual cost to thecompany basis
Provision based on actuarialvaluation
Preliminary expenses Charged to income statement. Deferred and written off over theperiod of 5 years.
loans Origination Cost Origination cost is amortized Charged to Profit and lossaccount
Financial liabilities -classification
Mandatory redeemablepreference shares are classifiedas liabilities.
All preference shares areclassified as shareholdersfunds.
Employee benefits -Pension costs definedbenefit plans
Must use the projected unitcredit method to determinebenefit obligation
Provision in the accounts isnormally made on the basis ofactuarial valuation no specificmethod is prescribed
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Accounting Differences Contd.
Subject IFRS Indian GAAP
Changes in
accountingpolicies
Restate comparatives and prior-
year opening retained earnings.
Include effect in the income statement
of the period in which the change ismade except as specified in certainstandards where the change resultingfrom adoption of the standard has to beadjusted against opening retainedearnings.
Correction offundamentalerrors
Restatement of comparatives ismandatory.
Include effect in the current yearincome statement with appropriate
disclosure
Deferred Taxes Use full provision method (someexceptions), driven by balancesheet temporary differences.Recognise deferred tax assets ifrecovery is probable.
Deferred tax assets and liabilitiesshould be recognised for all timingdifferences subject to consideration ofprudence in respect of deferred taxassets.
Lease Accounting Has been in place for a muchlonger time.
Applicable since 2001
Asset RetirementObligation (ARO)
Obligations that are legallyenforceable and unavoidable, andare associated with the retirementof tangible long-lived assets, berecorded as liabilities when thoseobligations are incurred andrecorded at fair value.
No such guidance available.
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Accounting Differences - Investments
Investments:
IFRS:
Depends on the classification of investment if held to maturity or loan orreceivable, then carry at amortised cost, otherwise at fair value. Unrealisedgains/losses on fair value through profit or loss classification (including tradingsecurities) recognised in the income statement and on available-for-saleinvestments recognised in equity.**
Indian GAAP:Carry long-term investments at cost (with provision for other than temporarydiminution in value). Current investments carried at lower of cost or fair valuedetermined on individual basis or by category of investment but not on overall(or global) basis. Specific guidance exists for banking industry.
**There is an option in IFRS to classify any financial asset at fair value through
profit or loss. Changes in fair values in respect of such securities are recognizedin the income statement. It must be noted that it is an irrevocable option toclassify a financial asset at fair value through profit or loss.
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16Derivatives and other financial instruments - Measurement of
derivative instruments and hedging activities
IFRS:Measure derivatives and hedge instrument at fair value. Recognise thechanges in fair value in the income statement, except for effective cash flowhedges, where the changes are deferred in equity until effect of theunderlying transaction is recognised in the income statement.
Gains / losses on hedge instrument used to hedge forecast transaction,included in the cost of asset/liability (basis adjustment).
Indian GAAP:
No comprehensive guidelines currently. Accounting treatment for forwardcontracts and equity index and equity stock futures and option is prescribed.Guidance prescribed for banking companies.