Ind AS 105: Non-current Assets Held for...

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Ind AS 105: Non-current Assets Held for Sale


Contents

1. Navigating the standard2. Definitions3. Non-current asset & disposal group – Classification4. Initial measurement5. Non-current asset held for sale – Example6. Non-current asset or disposal group held for sale or distribution to

owners – Subsequent measurement7. Disclosures – key points

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Navigating the standard

Objective Sets out the accounting treatment of non current assets held for sale, disposal groups and discontinued operations

Scope The presentation and classification of all non-current assets and disposal groups that are held for sale except the measurement of several non current assets

Core principle • asset/disposal group held for sale to be measured at the lower of carrying amount and fair value less costs to sell

• assets that meet the criteria of held for sale to be presented separately in the statement of financial position

• the results of discontinued operations to be presented separately in the statement of comprehensive income

Key definitions

• non current asset• disposal group• discontinued operation


Exclusions • deferred tax assets• assets arising from employee benefits• financial assets within the scope of Ind AS 109 Financial Instruments. • non-current assets that are measured at fair value less costs to sell in accordance

with Ind AS 41 Agriculture. • contractual rights under insurance contracts as defined in Ind AS 104 Insurance

Contracts.

Navigating the standard (Contd.)

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Definitions

Non-current asset is an asset that does not meet the definition of a current asset.

Disposal group is a group of assets (and liabilities, if any) to be disposed of, by sale or otherwise, together as a group in a single transaction.

Discontinued operations is a component of an entity that: Either: • has been disposed of or • is classified as held for saleAnd: • represents a separate major line of business or geographical area of operations or• is part of a single co-ordinated plan to dispose of a separate major line of business or

geographical area of operations or• is a subsidiary acquired exclusively with a view to resale


Non-current asset & disposal groupClassification as held for sale / held for distribution

Non-current assets or disposal groups held for sale

Classification criteria: 1. available for immediate sale 2. in its present condition 3. subject only to terms that are usual and

customary for sales of such assets and4. its sale must be highly probable.

Non-current assets or disposal groups held for distribution to owners

Classification criteria: 1. available for immediate distribution 2. in their present condition 3. the distribution must be highly probable.

An entity should classify a non-current asset or a disposal group as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use.A non-current asset or disposal group is classified as held for distribution to owners when the entity iscommitted to distribute the asset/disposal group to the owners .

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Non-current asset & disposal groupClassification as held for sale / held for distribution

Non-current assets or disposal groups held for sale

• the appropriate level of management committed to a plan to sell

• active programme to locate a buyer and complete the plan

• actively marketed at a reasonable price compared to its fair value

• the sale is expected within one year from the date of classification (some exceptions)

• it is unlikely that the plan will be withdrawnor significantly changed

Non-current assets or disposal groups held for distribution to owners

• actions to complete the distribution must have been initiated

• the distribution is expected within one year from the date of classification

• it is unlikely that the distribution will be withdrawn or significantly changed

what is highly probable?


Initial measurement

Please refer hand outs for Initial Measurement IFRS 5 - table

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Non-current asset held for saleExample

• on 1 January 20X3, Entity A acquires an item of PP&E for INR 150,000. Entity A uses the cost model and the straight line depreciation method. It estimates the residual value to be nil and the useful life to be 5 years

• on 31 December 20X4, Entity A decides to sell the PP&E. Assume that the conditions for classification as held for sale are met

• set out below are details of the fair value less costs to sell and value in use.

Q - How should Entity A account for the PP&E on 31 D ecember 20X4?

Date Fair value less costs to sell Value in use

31 December 20X4 INR 60,000 INR 70,000


Non-current asset held for saleSolution - 31 December 20X4

The PP&E is classified as held for sale. Therefore, Entity A should: 1. Step 1: measure the asset in accordance with Ind AS 16

2. Step 2: test the asset for impairment in accordance with Ind AS 36

Cost INR 150,000

Accumulated depreciation (*) (INR 60,000)

INR 90,000

(*) INR 150,000*2/5

Carrying amount (INR 90,000) Recoverable amount (INR 70,000) (*)

(*) The higher of fair value less costs of disposal (INR 60,000) and value in use (INR 70,000)

The entity should recognise an impairment loss of INR 20,000 (INR 90,000-INR 70,000)

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3. apply Ind AS 105 and measure the asset at the lower of: – carrying amount– fair value less costs to sell

Carrying amount INR 70,000

Fair value less costs to sell INR 60,000

The lower INR 60,000

The entity should recognise an impairment loss of INR10,000 (INR 70,000-INR 60,000) and carry the asset at INR 60,000.

Non-current asset held for saleSolution - 31 December 20X4


Non-current asset or disposal group held for sale or distribution to owners:Subsequent measurement

Please refer hand outs for Subsequent Measurement Ind-AS 105 -

Table 2

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Non-current asset held for saleExample continued (subsequent measurement)

Recap: • 31 December 20X4 – decided to sell PPE

– carrying amount prior to Ind AS 105 classification was INR 70,000– FVLCTS at date of HFS classification was INR 60,000 – therefore, PPE written down to INR 60,000 as of 31 December 20X4

• Now it's 31 March 20X5 and management needs to prepare its financial statements. Updated figures are as follows for the PPE:

How should Entity A account for the PP&E at 31 Marc h 20X5?

Date 31 March 20X5

Carrying value INR 60,000

FVLCTS INR 61,000


Subsequent measurement

1. Step 1: do not depreciate/amortise the asset

2. Step 2: apply Ind AS 105• if FVLCTS > current carrying amount : recognise the subsequent gain; but not in excess of

cumulative impairment loss recognised in accordance with Ind AS 105 or Ind AS 36• if FVLCTS < current carrying amount : recognise the subsequent write-down of the asset to

FVLCTS

Carrying amount INR 60,000

Fair value less costs to sell INR 61,000

Cumulative impairment loss recognised in accordance with Ind AS 105 and Ind AS 36

INR 30,000

Since the asset is presently carried at INR 60,000, Entity A should recognise an impairment reversal of INR1,000

Non-current asset held for saleExample continued (subsequent measurement)

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DisclosuresSummary of key points

An entity should disclose the following information in the notes in the period in which a non-current asset (or disposal group ) has been either classified as held for sale or sold :

• a description of the non-current asset (or disposal group )• a description of the facts and circumstances of the sale , or leading to the expected disposal , the

expected manner and timing of that disposal• for any impairment losses or reversals recognised in accordance with Ind AS 105, the statement of

comprehensive income line item within which it is included (if not presented separately) • if there is a change in plan to sell , in the period of the decision to change the plan to sell the

non-current asset (or disposal group), a description of the facts and circumstances leading to the decision and the effect of the decision on the results of operations for the period and any prior periods presented

• if applicable, the entity should disclose the reportable segment in which the non-current asset (or disposal group) is presented in accordance with Ind AS 108.


Thank you!

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Ind AS 8: Accounting Policies, Changes in Accounting Estimates and Errors


Contents

1. Key definitions2. Accounting policies - Hierarchy for selection3. Key factors for accounting policy application4. Changes in accounting policy and retrospective application5. Changes in accounting estimates6. Accounting policy Vs. Accounting estimate7. Errors – Overview8. Limitations to retrospective application

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Key definitions

• Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements

Accounting policies

• A 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 estimate

• 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 and available information.

Prior period errors

• Retrospective application is applying a new accounting policy to transactions, other events and conditions as if that policy had always been applied

Retrospective application


• 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

Retrospective restatement

• Prospective application is:• 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

Prospective application

• Applying a requirement is impracticable when the entity cannot apply it after making every reasonable effort to do so

Impracticable

• 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

Material omissions

Key definitions(Contd.)

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Accounting policiesHierarchy for selection

Standards and interpretations as per applicable Ind ASs.

Any relevant implementation guidance issued by the ICAI

Guidance which can derived from a similar issue / situation

Ind AS framework

Most recent pronouncements by other standard-setting bodies.

Other accounting literature and accepted industry practices


Consistency

Materiality

• Information is material if its omission or misstatement could affect decision making of the users of financial information.

• Ind AS 8 notes that policies need not be applied where the effect of applying them is immaterial

• Application of accounting policies consistently for similar transactions, other events and conditions unless permitted by Ind AS

• If an Ind AS requires/permits different policies , an entity shall apply its accounting policy consistently to each category.

Key factors for accounting policy application

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Changes in accounting policies:Change only if:• required by new standard or interpretation • provides reliable and more relevant information.

Retrospective applicationUnless:• impracticable• specific transitional provisions in new Standard or Interpretation.

Detailed disclosures required depending on whether required change or voluntary change

Changes in accounting policy and retrospective application


Accounting estimates

Judgments made by management e.g. bad debts, inventory obsolescence, warranty obligations, useful life of PPE

Changes based on new information or more experience that does not relate to prior periods

Changes in accounting Estimates

Prospective application

Disclose the nature & amount of the change that has had an effect on current or future periods.

Changes in accounting estimates

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Example:Accounting Policy Change: If entity changes method of valuing PPE, it is change in accounting Policy.

Accounting Estimate Change: If there is change in useful life or residual value of depreciable asset, it amounts to change in estimate.

When it is difficult to distinguish a change in an accounting policy from a change in an accounting estimate it is treated as a change in an accounting estimate.

Accounting policy Vs. Accounting estimate


Prior period errors

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 authorized 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 restatement

Restate comparative periods presented in which the error occurred and restate the opening balances for the earliest prior period presented.

Disclose nature and amount of any correction made or, if restatement is impracticable why this is the case.

ErrorsOverview

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• When it is impracticable to determine the period-specific effects of an error on comparative information for one or more prior periods presented, the entity shall restate the opening balances of assets, liabilities and equity for the earliest period for which retrospective restatement is practicable (which may be the current period).

• When it is impracticable to determine the cumulative effect , at the beginning of the current period, of an error on all prior periods, the entity shall restate the comparative information to correct the error prospectively from the earliest date practicable .

Limitations to retrospective application


Thank you!

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Ind AS 10: Events after the Reporting Period


Contents

1. Navigating the standard2. Adjusting events & Non-Adjusting events3. Dividends4. Adjusting events & Non-Adjusting events- Example5. Disclosures - summary

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Navigating the standard

ObjectiveTo prescribe when an entity should adjust its financial statements for events after thereporting period and the date of authorisation of financial statements and eventsafter that date.

Scope • accounting and disclosures of events after the reporting period

Key definitions

• adjusting events after the reporting period• non-adjusting events after the reporting period


Adjusting events & Non-Adjusting events

Adjusting events

Events after the reporting period that provide evidence of conditions that existed at the end

of the reporting period

Adjust the amounts recognised in the financial statements

Non-Adjusting events

Events after the reporting period that are Indicative of conditions that arose after the

end of the reporting period

Disclose but do not adjust the amounts recognised in the financial statements

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Adjusting events & Non-Adjusting eventsExamples

Adjusting events Non-adjusting events

• settlement of a court case• bankruptcy of a customer• sale of inventories• determination of profit-sharing or

bonus payments• discovery of fraud or error making the

financials incorrect

• Announcement of a plan to discontinue an operation

• destruction of major production plant by a fire

• abnormal changes in foreign exchange rates

• announcing a major restructuring


DividendsExample

• Entity A has a 31 December year-end. It declares dividends on the following dates:– interim dividends 20X2 declared on 1 August 20X2: INR 50,000– final dividends 20X2 declared on 1 February 20X3: INR 75,000– interim dividends 20X3 declared on 1 August 20X3: INR 55,000– final dividends 20X3 declared on 1 February 20X4: INR 80,000

• assume that Entity A is obliged to pay all dividends within a month of being declared.

What would appear in the statement of changes in eq uity of Entity A for the year 31 December 20X3?

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DividendsSolution

Dividends declared after the reporting date are notan adjusting event but are disclosed in the notes

Dividends declared during the period (75+55=130) are recognised – as a deduction from equity

disclose the amount of dividends and the dividends per share

Entity AStatement of changes in equity

(Extract) 31 December 20X3

Brought forward x

Dividends (130)

Total comprehensiveincome for period x

Carried forward x


Adjusting events & Non-Adjusting events Example- settlement of lawsuit after the reporting period

• during the year 20X2, Entity B commenced a lawsuit against Entity A for the breach of a pharmaceutical patent

• on 31 December 20X2: – Entity A did not recognise a provision, based on its lawyers advised that it is not liable– Entity B did not recognise an asset since it is uncertain about the outcome of the legal

proceedings • on 23 March 20X3, the court ruled that Entity A should compensate Entity B for INR 1,500,000 • the date of authorisation of the financial statements of both entities is 31 March 20X3.

How should Entity A and Entity B account for the la wsuit in the financial statements for the year 31 December 20X2?

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Adjusting events & Non-Adjusting events Solution- Entity A

Entity A should consider whether the court ruling is deemed to be the event that creates an obligation or as confirmatory evidence that an obligation existed at the reporting date as a result of a past event.

Ind AS 10 states: “…examples of adjusting events…: a) the settlement after the reporting period of a court case that confirms that the entity had a present obligation at the end of the reporting period…"

Entity A should recognise a provision of INR 1,500, 000 in the financial statements for the year ended 20X2.

Adjusting event


Adjusting events & Non-Adjusting events Solution- Entity B

Entity B should consider whether the court ruling is deemed to be the event that creates the right or as confirmatory evidence that a right existed at the reporting date as a result of a past event.

On 31 December 20X2, Entity B estimated the contingent asset at zero. That estimate is allowed to incorporate information obtained after 31 December 20X2 but before the financial statements are authorised for issue.

Entity B should recognise an asset of INR 1,500,000 in the financial statements for the year ended 20X2.

Adjusting event

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Disclosures - summary

1. Date of authorisation for issue of financial statements and who gave that authorisation

2. Disclosure as regards power of the owners or others to amend the financial statements after issue

3. Update disclosures relating to conditions that existed at the end of the reporting period if any information is received after the reporting period

4. Disclosures regarding material non-adjusting eventsa) nature of the eventb) estimate of its financial effects or statement that such an

estimate cannot be made


Thank you!

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Ind AS 33: Earnings per share


Contents

1. Scope2. Definitions3. Basic EPS4. Diluted EPS5. Presentation in the statement of comprehensive income6. Disclosures

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Scope

This standard applies to Separate financial statements of an entity and Consolidated financial statements of a group:

i. whose ordinary shares or potential ordinary shares are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets) or

ii. that files, or is in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of issuing ordinary shares in a public market

Ind AS 33 requires EPS to be disclosed in both – separate and consolidated financials

Carve out - When a company presents both separate and consolidated financial statements, the EPS needs to be presented for consolidated financials only.


Definitions

Ordinary share - An ordinary share is an equity instrument that is subordinate to all other classes of equity instruments.

Potential ordinary share – A potential ordinary share is a financial instrument or other contract that may entitle its holder to ordinary shares. For example – financial liabilities or equity instruments, including preference shares, that are convertible to ordinary shares; options and warrants

Dilutive potential ordinary share – Potential ordinary shares shall be treated as dilutive when, and only when, their conversion to ordinary shares would decrease earnings per share or increase loss per share from continuing operations.

Treasury shares – Treasury shares are equity instruments reacquired and held by the issuing entity or by its subsidiaries.

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Basic EPSFormula

Profit/loss attributable to ordinary equity holders of the parent

Weighted average number of ordinary shares outstanding during the period

• declared dividends for non-cumulative preference shares

• dividends for cumulative preference shares (whether declared or not)

• Where any item of income/ expense is debited/credited to the security premium/other reserves shall also be deducted from profit or loss for calculating EPS.

• includes shares from the date consideration is receivable• consists of the number of ordinary shares outstanding at

the beginning of the period adjusted by:1. the number of ordinary shares bought back or

issued during the period multiplied by a time-weighting factor

2. issuance of shares that do not affect the Entity's resources (e.g. bonus issue, a share split, consolidation of shares)

Carve Out – Income/expense debited/credited to the security premium/other reserves shall not be deducted from profit or loss for calculating EPS


Basic EPSExample – treasury shares

• on 1 January 20X5, Entity B had 10,000 ordinary shares in issue of which it holds 1,500 as treasury shares

• on 1 June 20X5, Entity B issues 4,000 new shares for cash

• on 1 December 20X5, Entity B purchases an additional 1,500 of its own shares for cash to hold as treasury shares

• Entity B's profit after tax attributable to ordinary equity holders of the parent for the year 20X5 was INR 100,000.

Date Number of shares Weightage Total Earnings

1 Jan - 31 May 8,500 5/12 3,542

1 June - 30 November 12,500 6/12 6,250

1 December – 31 December 11,000 1/12 917

10,709 100,000

Basic EPS= INR 100,000/10,709 Shares= 9.34

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Diluted EPS

The numerator should be adjusted by the after tax effect of:

1. dividends or other effects related to dilutive potential ordinary shares which were deduc ted from the numerator in the Basic EPS calculation

2. P&L effects related to:

a) dilutive potential ordinary shares and

b) the conversion of the dilutive potential ordinary shares.

The denominator should be: • adjusted to the weighted average number of ordinary shares that would be issued on the

conversion of the dilutive potential ordinary share s • the adjustment date is the of:

1. the beginning of the period2. the date of the issue of the potential ordinary shares.


Diluted EPSOptions, warrants and equivalent instruments

1. calculate the proceeds from exercising the instrument2. calculate full price shares by dividing the proceeds in Step 1 to the average market price of the

ordinary shares during the period3. calculate the ''free shares '' i.e. the difference between:

• the number of shares that will be issued as a result of the exercise of the instrument• the full price shares in Step 2 above.

Options and warrants are financial instruments that give the holder the right to purchase ordinary shares.

Options and warrants are dilutive when the result of Step 3 above is positive (ie they are 'in the money' ).Otherwise, they are not included in the calculation of Diluted EPS.

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Diluted EPSOptions

• Entity A had the same 1,000,000 ordinary shares in issue on both 1 January 20X5 and 31December 20X5

• on 1 January 20X5, Entity A issues 200,000 INR 1 options• each option is exercisable to one ordinary share on 1 January 20X9 for a price of INR 8• Entity A's profit after tax for the year 20X5 was INR 2,000,000• the average price per share during the year 20X5 was INR 20 .

Shares Earnings

Basic 1,000,000 INR 2,000,000

Benefit 120,000 (Note)

Diluted 1,120,000 INR 2,000,000

Note - Proceeds from exercising the options: 200,000*INR 8= INR 1,600,000- Full price shares: INR 1,600,000/20= 80,000 shares- ''Free shares'': 200,000-80,000= 120,000 shares.

Basic EPS= INR 2,000,000/1,000,000 Shares =Diluted EPS = INR 2,000,000/1,120,000 Shares =

21.79


Diluted EPSContingently issuable shares

The conditions satisfied during the period

Include from the later of: • beginning of period• the agreement date

Assume the reporting date is end of contingency period

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Diluted EPSCombination of potential ordinary shares

• Entity A had the same 1,000,000 ordinary shares in issue on both 1 January 20X5 and 31 December 20X5

• on 1 January 20X5, Entity A issues 1,201 units of convertible bonds fo r INR 1,200,000. Each 5 bonds are convertible into 1 ordinary share

• on 1 January 20X5, Entity A issues 200,000 INR 1 options• each option is exercisable to one ordinary share on 1 January 20X9 for a price of INR 8• the average price per share during the year 20X5 wa s INR 20• Entity A's profit after tax for the year 20X5 was INR 5,000,000 and it includes:

o INR 100,000 interest expense on the convertible bon ds‒ INR 30,000 tax income effects .

What is the Basic and Diluted EPS for year ended 31 December 20X5?



Shares Earnings

Basic 1,000,000 INR 5,000,000

Options- Benefit 120,000 (*)

Conversion effect 240,000 (**) INR 70,000 (***)

(*)1. Proceeds from the exercise of the options: 200,000* INR 8= INR 1,600,0002. Full price shares: INR 1,600,000/20= 80,000 shares3. ''Free shares'': 200,000-80,000= 120,000 shares

(**) the denominator: 1,200,000 bonds/5= 240,000 shares(***) the numerator: INR 100,000-INR 30,000= INR 70,000

The dilution ratios are as follows: Options: INR 0/80,000 Shares= INR 0/shareConvertible bonds: INR 70,000/240,000 Shares= INR 0.3/share.

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Basic EPS= INR 5,000,000/1,000,000 Shares= INR 5/sh are

Diluted EPS

Include the most dilutive instrument (options only)= INR 5,000,000/(1,000,000Shares + 120,000Shares)= INR 4.46

Include the next most dilutive instrument= INR 5,240,000/(1,120,000Shares + 240,000Shares)= INR 3.85

Diluted EPS= INR 5,240,000/1,320,000 Shares= INR 3.8 5


Presentation in the statement of comprehensive income

Basic and Diluted EPS attributable for the parent from continuing operations and in total. Those presented even if the amounts are negative (loss for share)

EPS is presented for every period for which a statement of comprehensive income is presented

If Basic and Diluted EPS are equal-present Basic and Diluted EPS in one line in the statement of comprehensive income

If Diluted EPS is reported for at least one period, it should be reported for all periods presented, even if it equals Basic EPS

Presentation

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Disclosures- summary of key points

• the numerators of the Basic and Diluted EPS• a reconciliation of these numerators to profit or loss for each classes• the denominators of the Basic and Diluted EPS• a reconciliation of these denominators to each other by classes• the antidilutive instruments for the period not included at present but that could

potentially dilute in the future• details of ordinary share/potential ordinary share transactions :

1. that occur after the reporting period and2. that would have changed Basic or Diluted EPS significantly if they occurred before

the end of the reporting period.Examples : issue of shares, options, warrants, or convertible instrument.


Thank you!

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Ind AS 24 – Related Party Disclosures


Contents

1. Overview2. Definitions3. Special consideration4. Example5. Disclosures

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Overview

ObjectiveExistence of related parties may effect entity's financial position and profit or loss

Scope

• identifying related party relationships and transactions• identifying outstanding balances, including commitments, between entity

and its related parties• identifying the circumstances in which disclosure is required• determining the disclosures to be made

Applicability

Consolidated and separate financial statements of• Parent• Venturer • Investor Individual financial statement


Definition

A related party is a person or entity that is related to the reporting entity (RE), if:

• A person or a close member of that person’s family, if that person:− has control or joint control over the RE;− has significant influence over the RE; or− is a member of the key management personnel (KMP) of the RE or of a parent of

the RE

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Definition (Contd…)

• An entity is related to a RE , if:− both are members of same group − one is an associate or joint venture of the other− both are joint ventures of the same third party.− one is joint venture of a third entity and the other entity is an associate of the third

entity− the entity is a post-employment benefit plan (PEBP) of the RE.

− if RE is itself a PEBP, the sponsoring employers are related to the RE− the entity is controlled or jointly controlled by a person identified above− a person identified above has significant influence over the entity or is a member

of the KMP of the entity/ or of its parent


Definition (Contd…)

Related party transaction • transfer of resources, services or obligations between a reporting entity and a

related party , regardless of whether a price is charged

Close members of the family • person specified as relative under Companies Act,2013• that person's domestic partner• children of that person's domestic partner• dependents of that person's domestic partner.

Key management personnel • person having authority and responsibility for planning, directing and controlling

the activities of the entity, directly or indirectly , including any director (whether executive or otherwise) of that entity

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Special consideration


Special consideration

Associate includes subsidiaries of associate and joint venture includes subsidiaries of joint venture

Substance of the relationship and not merely the legal form to be considered for evaluating related party relationship.

The following are not considered as related parties :• two entities if they have a director/other member of KMP in common/ • a member of KMP of one entity has significant influence over the other entity• two venturers having joint control over a joint venture.• providers of finance/ trade unions/ public utilities/ departments and agencies of a

government that does not control, jointly control or significantly influence the reporting entity

• a customer, supplier, franchisor, distributor or general agent with whom an entity transacts a significant volume of business, simply by virtue of the resulting economic dependence

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Example 1

Subsidiary BSubsidiary A

Subsidiary C

Associate 2

Associate 3

Parent

Associate 1


Example (Contd…)

For financialstatement of

Related Party

Parent (separate)

Subsidiaries A, B, C and Associates 1, 2 and 3

Parent (consolidated)

Associates 1, 2 and 3

Subsidiary A Parent, Subsidiaries B and C and Associates 1, 2 and 3

Subsidiary B Parent, Subsidiaries A and C and Associates 1, 2 and 3

Subsidiary C Parent, Subsidiaries A and B and Associates 1, 2 and 3

Associates 1, 2 and 3

Subsidiaries A, B and C (Associates are not related to each other)

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Example 2

Person X

Entity A

Person Y

Entity B

Controlling interest

Domestic partner

Controlling interest


Example (Contd…)

For financial statement of Related Party

Entity A Entity B

Entity B Entity A

If X has significant influence over Entity A and Y has significant influence over Entity B, Entities A and B are not r elated to each other

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Disclosures


Disclosures

Parent–Subsidiary Relationships• Shall be disclosed whether or not there are transactions between them• Disclosures

− name of the parent− name of the ultimate controlling party− if neither of the above produce financial statements available for public use, the name of

the next most senior parent

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Disclosures (Contd…)

KMP Compensation• Disclosures (in total and for each of the following categories)

− short-term employee benefits (wages, salaries, bonuses, etc.)

− post-employment benefits (pensions, life insurance, etc.)

− other long-term benefits (sabbatical, disability, etc.)

− terminations− share-based payments

Related-Party Transactions• Disclosures

− amount

− amount of balances still outstanding

− provisions for doubtful debt and any related expense recognized during the period



• Who should make separate disclosures?− parent− entities with joint control/significant influence over the entity − subsidiaries− associates− joint ventures − key management personnel− other related parties

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Arm’s-length transactions/terms − May only disclose if this claim can be substantiated− Substantiation might be made by benchmarking against other similar transactions

Items of a similar nature may be disclosed in aggregate except when separate disclosure is necessary for an understanding of the effects of related party transactions

Under Ind AS 24 , disclosures which conflict with c onfidentiality requirements of statutes/ regulations are not requi red to be made.


Thank you!

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Ind AS 1 - Presentation of Financial Statements


Contents

1. Overview2. Components of financial

statements3. Balance sheet4. Other comprehensive income5. Comparative information6. Third balance sheet7. Cash flow

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Objective Prescribes basis for presentation of general purpose financial statements

Scope Preparation and presentation of general purpose financial statements in accordance with Ind AS

Core principle To ensure financial statements present fairly the financial position , financial performance and cash flows of an entity and provide comparability of information both within an entity's financial statements and those of other entities

Key definitions • normal operating cycle• current assets/ current liabilities• other comprehensive income• reclassification adjustments

Overview


Complete set of financial statements

• balance sheet• 'statement of profit and loss' presented in:

– a single statement (expenses classified by nature only – Carve out )

– a separate 'profit or loss statement' and 'other comprehensive income statement' – Carve out

• statement of changes in equity (SoCiE) - to be shown as a part of the balance sheet.

• statement of cash flow• notes• comparative information.

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Balance sheet

• sets out the list of minimum contents

• requires separate classification of current and non-current assets and liabilities unless presentation based on liquidity provides reliable and more relevant information

• whichever method of presentation is used, the entity should discloseamounts expected to be recovered/settled within and after more than twelve months of the reporting date

• carve out - a minor breach of covenant that does not result in payment on demand based on the past experience of the entity does not require reclassification of liability to current


Other comprehensive income

To be segregated between: • Items that will not be reclassified to profit or loss:

• Gains on property revaluation• Remeasurements of defined benefit pension plans• Share of gain (loss) on property revaluation of associates• Income tax relating to items that will not be reclassified

• Items that may be reclassified subsequently to profit or loss:• Exchange differences on translating foreign operations• Available-for-sale financial assets• Cash flow hedge reserve• Income tax relating to items that may be reclassified

Income taxes may be disclosed item by item as well

41


Comparative information

Ind AS 1 states that except when Ind AS permit or require otherwise, an entity shall disclose comparative information in respect of the preceding period for all amounts reported in the current period’s financial statements.

In the case of providing additional comparative statements (beyond minimum requirements), the entity should also the related notes.


Third balance sheet

Ind AS 1 requires a third balance sheet (at the beginning of the preceding period ) if the entity:

– changes one or more of its accounting policies retrospectively

– makes a retrospective restatement to correct an error , or

– reclassifies items in its financial statements

and the change in accounting policy/restatement/reclassific ation has a material effect on the information in the balance sheet at the beginning of the preceding period.

42


Statement of cash flows

Cash flow information provides users of financial statements with a basis to assess:• the ability of the entity to generate cash and cash equivalents and • the needs of the entity to utilise those cash flows.


Thank you!

43


Ind AS 36 - Impairment of Assets


Contents

1. Scope and applicability2. Definitions3. Indicators of impairment4. Recognition of an impairment loss5. Identification of CGU6. Subsequent reversal of impairment loss7. Disclosures

44


Scope and applicability

Ind AS 36 is applicable to assets other than the fol lowing :

• inventories

• assets arising from construction contracts

• deferred tax assets

• assets arising from employee benefits

• financial assets that are within the scope of Ind AS 109

• investment property that is measured at fair value

• biological assets

• deferred acquisition costs, and intangible assets, arising from an insurer's contractual rights under insurance contracts

• non-current assets classified as held for sale


Definition

an impairment loss arises

The impairment loss is the amount by which the carrying amount of an asset or cash-generating unit exceeds the recoverable amount.

Cash generating unit (CGU) is "the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets."

IFThe CARRYINGAMOUNT of the

asset/cash generating unit

The RECOVERABLEAMOUNT of the

asset/ cash generating unit

45


Definition (Contd.)

Recoverable amount is higher of :

Fair value (FV) less costs of disposal Value in use ( VIU)

FV is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.Costs of disposal are the incremental costs directly attributable to the disposal of an asset or cash-generating unit, excluding finance costs and income tax expense

VIU is the present value of the future cash flows expected to be derived from an asset or cash - generating unit


Calculation of value in use

Value in useWhen estimating value in use , the following steps should be applied:

Step 1 : Estimate the cash flowsStep 2 : Determine the discount rateStep 3 : Discounting the estimated cash flows using the discount rate.

The value in use calculation needs to take into account the risk by adjusting either:• the discount rate (the traditional approach ) or • the cash flows.

The discount rate shall be a pre tax rate and the following factors shall be considered while determining the tax rate:

• WACC of the entity• Entity's incremental borrowing rate• Other market borrowing costs

46


Calculation of recoverable amount

• An asset has a fair value of INR 500,000. The cost of disposal is INR 30,000.

• The estimated cash flows from an asset is INR 110,000 for 5 years.

• The discounting factor is 10%

Recoverable amount = Higher of fair value less cost of disposal orValue in use

• Fair value less cost of disposal = INR 470,000 (INR 500,000- INR 30,000)

• The PV of the future cash flows= INR 416,986 (INR 110,000*3.7907)Value in use = INR 416,986

Recoverable amount = INR 470,000


Indicators of impairment

Significant decline in value

Significant changes with an adverse effect in

technological, market, economic or legal

environment

Carrying amount of net assets is more than the

market capitalisation of entity

Internal indicators

Obsolescence or physical damage

Significant adverse changes in which an

asset is used or expected to be used

Performance is or will be worse than expected

Dividends from investments in subsidiary, joint venture or

associate

Dividend exceeds the total comprehensive income of the investment in the period the

dividend is declared

Carrying amount of the investment in the separate

financial statements exceeds carrying amounts

of net assets in the consolidated financial statements (including associated goodwill)

External indicators

Indications of impairment include the following (at a minimum):

Increase in market / other rates of interest affecting

discount rate

47


Recognition of an impairment loss

An impairment loss is recognised• in profit or loss or • in other comprehensive incomeThat depends whether it is a revalued or non-revalued asset as follows:

Not revalued

Recognise immediately in profit or loss

Revalued

Other comprehensive income (only to extent of revaluation

surplus for that asset)


Identification of CGU

The recoverable amount

• value in use cannot be

•

The recoverable amount

cannot be determined if:

• value in use cannot be

estimated to be close

to its "fair value less

costs of disposal"

• the asset does not

generate cash flows

largely independently.

1. if there is any indication that an individual asset may be impaired, recoverable amount should be estimated for the individual asset

2. if the recoverable amount for an individual asset cannot be determined, the recoverable amount for the CGU to which the asset belongs to should be determined.

"An asset's cash-generating unit is the smallest group

of the cash inflows

"An asset's cash-generating unit is the smallest group

of assets that includes the asset and generates cash

inflows that are largely independent of the cash inflows

from other assets or groups of assets. Identification of

an asset's cash-generating unit involves judgement"

48


Identifying a CGUExample

Scenario

A mining entity owns a private railway to support its mining activities. The private railway could be sold only for scrap value and it does not generate cash inflows that are largely independent of the cash inflows from the other assets of the mine.

A raw material used for plant Y's production is an intermediate product from plant X of the same entity 60% of X's production is sold to Y and remaining 40% is sold in the market.

Solution

It is not possible to estimate the recoverable amount of the private railway because its value in use:• cannot be determined and• is probably different from the scrap value.Therefore, the CGU is the mine as a whole

Since X can sell its products in the active market and generate cash flows that are independent of cash inflows from Y, X is to be termed as a separate CGU.


Carrying amount of CGU

CGU carrying amount

Directly attributable

assets

Goodwill (grossed

up)

Share ofcorporate

assetsLiabilities

Net working capital

49


Allocation of assets to CGU

• Entity X has 2 CGU (A and B). The carrying value of A and B is INR 15000 and INR 30,000 respectively.

• The remaining operational lives 5 and 15 years of A and B respectively. (Weighting is 1:3)

• The corporate asset is INR 2,000.

The allocation of INR 2000 of corporate asset shall be on the basis of weighted average amount of carrying value of CGU (the lives are different)

CGU A CGU B Total

Weighting 1 3 4

Weighted avg. amount

15,000(15000*1)

90,000(30,000*3)

105,000

CGU Calculation Allocation

A =2,000*(15,000/105,000) INR 286

B =2,000(90,000/105,000) INR 1,714


CGU with allocated goodwill – impairment test

An Entity is required to carry out an impairment test for a CGU with allocated goodwill:

1. if there are any indications of impairment 2. annually, irrespective of any indicators

Most recent detailed calculation of recoverable amount in a previous period can be used in the impairment test for the current period if:• the CGU's assets & liabilities have not changed significantly • most recent calculation resulted in an amount that exceeded the carrying amount

by a substantial margin and• based on analysis of changes since most recent calculation, the likelihood of an

impairment is remote.

50


Allocation of Goodwill to CGU

Methods for Allocation of Goodwill

• Using factors contributing to goodwill such as synergy gains

• Using relative fair values of net assets at the acquisition date

• Using discounted cash flow forecasts at the time of the acquisition

• Pro-rata on the basis of a price-earnings formula, using cash flows or income streams projected at the acquisition date

• Pro-rata on net asset value at the acquisition date (probably excluding interest-bearing debt and other financing liabilities)


Subsidiary-part of a larger CGU's

• Subsidiary A and subsidiary B are a part of a larger CGU • Goodwill of A is INR 18 m and B is INR 27 m.• The carrying amount of the identifiable net assets of combined CGU (A+B) is INR 50 m.

The recoverable amount of CGU is INR 80m.

• Full goodwill method is followed. Impairment losses are first allocated to goodwill in 18:27 ratio.

• Goodwill of A and B will be reduced by impairment loss of INR 6m and INR 9m.

Particulars INR in million

Identifiable net assets 50

Goodwill (18m + 27m) 45

Total value of CGU 95

Less recoverable amount 80

Impairment loss 15

51


Impairment reversal of CGU

A previously recognised impairment loss is reversed , if and only if , there has been a change in the estimates used to determine the recoverable amount since the last impairment loss was recognised.

As per Ind AS 36:"An impairment loss recognised for goodwill

shall not be reversed in a subsequent period."

Reversal of an impairment loss:• should be allocated to the assets of the unit pro rata with the carrying amounts • the increase is treated as a reversal of losses on individual assets• the carrying amount of an asset should not be increased above the lower of:

o the recoverable amount ando the carrying amount (net of deprecation/amortisation) had no impairment loss been

previously recognised.


Impairment reversal of CGU (Contd.)

• a previously recognised impairment loss is reversed , if and only if , there has been a change in the estimates used to determine the recoverable amount since the last impairment loss was recognised

• increased carrying amount of an asset due to reversal should not exceed the carrying amount (net of amortisation/depreciation) had no impairment loss been previously recognised

• non-revalued asset: the reversal is recognised in profit or loss

• revalued asset : the reversal is treated as a revaluation and recognised inother comprehensive income , unless the impairment loss was recognised in profit or loss , then the revaluation is:- first recognised in profit or loss and - only after then as a revaluation surplus in OCI.

52


Group question - Impairment reversal of CGU

• Impairment loss recognised on CGU on 31 December 2013 was INR 20 million.

• Out of INR 20 million, INR 10 million allocated to Goodwill and INR 10 million to asset. Net carrying amount of PPE after impairment =INR 80 million

• The depreciation for 2013 = INR 80m/10= INR 8m• The carrying value of PPE as on 01 January 2014 is INR 72 m• The remaining useful life of the PPE as on 01 January 2014 is 9 years. • at 31 December 2014, Entity A estimates that there has been

indications of a potential decrease in the impairment loss • Entity A estimates the recoverable amount of the CGU at 31

December 2014 at INR 90m.


Group question - Impairment reversal of CGU

Item Net carrying amount as at

31 Dec 2013 (Incl. impairment)

Net carrying amount as at31 Dec 2013

(Excl. impairment)

Carrying amount

Opening balance 90 90 -

Impairment (10) - (10)

Depreciation (8) (9) 1

Total 72 81 (9)

• when the impairment reverses, goodwill can never be reinstated. The PP&Eis restored by INR 9 m .

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Disclosures- summary of key points

For each material impairment loss recognised or reversed disclose the following:• events and circumstances that led to the recognition or reversal• impairment loss recognised /reversed and the line item in which included• whether the recoverable amount of the impaired asset or CGU is its fair value less

costs of disposal or its value in use• discount rate used in the current estimate and previous estimate (if any) of value in

use.• In case of segment reporting , the Impairment loss recognised/reversed for each

reportable segment

If the CGU's recoverable amount is based on value in use : • key assumption on which cash flow projections are based .• the period over which management has projected cash flows based on financial

budgets/forecasts approved by management and, when a period greater than five years is used for a CGU, an explanation of why that longer period is justified


Thank you!

54


Ind AS 109: Financial Instruments


Contents

1. Overview2. Classification3. Application4. Financial liabilities5. Embedded derivatives6. Impairment7. Hedge Accounting

55


Rewrites accounting rules:– new approach to financial asset classification

• Amortised Cost• Fair Value

– impairment model • expected loss rather than incurred loss

– hedge accounting substantially revised

Macro hedging is not included and is a separate pro ject

Ind AS 109 Financial InstrumentsOverview


Classification – debt instrument

Is the objective of the entity’s business model to hold the financial assets to collect contractual cash flows?

Do contractual cash flows represent solely payments of principal and interest?

Does the company apply the fair value option to eliminate an accounting mismatch?

Amortised cost FVOCI

Yes

No No

Yes Yes

No

Yes Yes

NoNo

Is the financial asset held to achieve an objective by both collecting contractual cash flows and selling financial

assets?

FVPL

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Classification – Business model assessment

• An entity's business model is:– how financial assets are managed for generating cash flows– determined by key management personnel– not dependent on management's intentions

An entity may have more than one business model


Classification – Debt and equity instrument

Debt instrumentBusiness Model Measurement

Hold to collect Amortised cost

Hold to collect and sale FVPL / FVOCI

Others FVPL

Equity instrument

Equity Instrument Measurement Criteria

Hold for trading FVPL Held for trading

Other equity FVOCI* • not held for trading • not contingent consideration of an acquirer in a

business combination

*• Irrevocable option on an instrument by instrument basis• gains and losses recognised in OCI are not recycled to P&L• equity classified as FVOCI is not subject to impairment• dividend is recognized in profit and loss

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Application to investments in debt securities

Debt investments

Contractual cash flows solely payments of principal and interest

Business model (BM) test(at entity level)

Fair value option elected?

Amortised cost FVOCI (with recycling)

FVTPL

Fail

Pass

1 Hold to collect contractual cash flows

2 BM to collect contractual cash flows and sell asset

No No

Yes

Derivative investments Equity investments

Held for trading?

FVOCI option elected?

FVOCI (no recycling)

Fail Fail

Yes

No

No

Yes

Neither 1 or 2


Application to derivatives

Debt investments Derivative investments Equity investments


Held for trading?

Fair value option elected?

FVOCI option elected?

Amortised costFVOCI (with recycling)


FVTPL

Fail Fail FailPass

1

Hold to collect contractual cash flows

2

BM to collect contractual cash flows and sell asset

NoNo

Yes

Yes

No

No

Yes

Neither 1 or 2

Business model (BM) test (at entity level)

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Application to equity investments

Debt investments Derivative investments Equity investments


Business model (BM) test (at entity level)

Held for trading?

Fair value option elected?FVOCI option

elected?

Amortised cost FVOCI (with recycling)


FVTPL

Fail Fail FailPass

1

Hold to collect contractual cash flows 2

BM to collect contractual cash flows and sell asset

No NoYes

Yes

No

No

Yes

Neither 1 or 2


Financial Liabilities - Classification and measurement

Majority of Ind AS 39's requirements retained:• most liabilities either

– at amortised cost, or – bifurcated into a host instrument measured at amortised cost, and an embedded

derivative, measured at fair value• Liabilities held for trading (includes all derivatives) are measured at fair value.

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Financial Liabilities - Classification and measurement

Own credit risk• Under Ind AS 39's an entity would recognise a gain in P&L when its own credit risk

deteriorated• Under Ind AS 109, change in FV due to changes in the entity's own credit should be

ignored – Carve out• one exception where the effects would create or enlarge an accounting mismatch

(recognise all in P&L )The accounting mismatch is:• To be determined on initial recognition of liability• not re-assessed subsequently• Not only due to measurement method used by entity to assess own credit risk.


Embedded derivatives

Embedded derivatives• eliminates Ind AS 39's requirement to separate embedded derivatives within hybrid

contracts where host contract is an asset• such contracts will be likely to fail Ind AS 109's cash flow characteristics test• must still consider the need to separate embedded derivatives where host contract is

a financial liability or an asset outside the scope of Ind AS 109.

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Impairment – Definitions

Lifetime expected credit losses (ECL)– expected credit losses that result from all possible default events over the

expected life of a financial instrument.12-month expected credit losses

– The portion of lifetime ECL that result from default events on a financial instrument that are possible within the 12 months after the reporting date.

Default • Though not defined, however, should be assessed based on criteria which are

consistent with internal credit risk management and considering qualitative factors• 90 days past due rebuttable presumption


Impairment – ECL Assessment

Dual measurement approach depending on whether 1. there has been a significant deterioration in the credit quality 2. credit risk > low.

financial instruments that have not deteriorated significantly in credit quality since

initial recognition or that have low credit risk

12 month expected credit losses

financial instruments that have deteriorated significantly in credit quality since initial

recognition and whose credit risk is not low

lifetime expected credit losses

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Impairment – the three-stage process

`

Stage 1 Performing

Stage 1 Performing

• Stage 1: 12-month expected credit losses• Effective interest on gross carrying amount

Stage 2 Under

Performing

Stage 2 Under

Performing

• Stage 2: lifetime ECL• Effective interest on gross carrying amount

Stage 3 Non

Performing

Stage 3 Non

Performing

• Stage 3: assets where there is objective evidence of impairment

• Effective interest on amortised carrying amount net of provision

Assets with significant increase in credit risk since initial recognition

Change in credit quality from

initial recognition

Credit

risk = low

Credit risk > low


Impairment – ECL change

12 month expected credit

losses

Lifetime expected credit

losses

If the credit risk reverses

if the credit risk increased significantly from initial

recognition

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Hedge Accounting: Key differences Ind AS 109 v/s Ind AS 39

Requirement Ind AS 39 Ind AS 109

Risk component as eligible hedged item Financial Items All Items

80%-125% test � X

Prospective effectiveness testing � �

Retrospective effectiveness testing � X

Quantitative effectiveness test � Depends

Qualitative effectiveness test X Depends

All ineffectiveness must be recognised � �

Accounting for ‘costs of hedging’ X �

Rebalancing of hedge ratio X �

Dedesignation (risk management objective unchanged) � X

Discontinuation (risk management objective changed or other qualifying criteria not

met)� �


Hedge Accounting

Hedge Accounting

Presentation and Disclosures

Discontinuation

Hedged Items

Hedging Instruments

Cost of hedging

Effective assessment

Rebalancing

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Hedge Accounting: Risk management strategy and objective

Risk management strategy

• Established at a high level (e.g., entity)

• Identifies risks (in general) and how entity responds to them

• Typically in place for longer period

• May include flexibility

• Often a formal policy document

• Part of hedge documentation

Risk management objective

Applies at level of particular hedging relationship

How a particular hedging instrument is used to hedge a particular exposure designated as the hedged item

Part of hedge documentation


Hedge Accounting: Hedged itemss

Hedged item

Entire item

Components of an item

Nominal components

Selected contractual cash flows Risk components

Groups of items

Proportion

Layer

Aggregated

exposures

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Hedge Accounting: Hedging Instruments

Hedging instrument

Partial designation

Exclude costs of hedgingProportion of the nominal

amountFX risk component*

Entire item

*only for non-derivatives


Hedge Accounting: Costs of hedging

Costs of hedging

• Time value of options

• Forward element of forward contracts

• Foreign currency basis spread

Transaction-related hedged items

� Costs of hedging are recognised in profit or loss when the transaction occurs or they become part of a basis adjustment

� In the interim, the fair value changes are accumulated in OCI

Time period-related hedged items

� Costs of hedging are recognised in profit or loss over time (amortisation).

� In the interim, the fair value changes are accumulated in OCI

Accounting for costs of hedging

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Hedge Accounting: Effectiveness Assessment

Economic relationship• Between hedged item and hedging instrument• Systematic change (opposite direction) in response to same or economically related underlying

Credit risk does not dominate• Credit risk does not frustrate economic relationship• Credit risk can arise from hedging instrument and hedged item

Hedge ratio• Consistent with actual ratio used by entity• Different ratio only if accounting outcome would be inconsistent with purpose of hedge accounting


Thank you!

66


Ind-AS 115: Revenue from Contracts from customers


Contents

1. Key features of Ind-AS 1152. Step 1: Identify the contract(s) with a customer3. Step 2: Identify the performance obligations4. Step 3: Determine the transaction price5. Step 4: Allocate the transaction price to the performance obligations6. Step 5: Recognise revenue when or as an entity satisfies

performance obligations7. Disclosure requirements8. Summary

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Overview


Status of the new standard

• ICAI issued exposure draft of Ind-AS 115 in October 2014

• It is yet to be notified by the MCA

• Ind-AS 115 is based on IFRS 15, which is effective from 1 January 2017 with early application permitted.

• An effective date and transition approach for Ind-AS 115 is yet to be decided, though currently it seems likely that transition to Ind-AS 115 would only be made effective after 2017.

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Scope of the new standard

• Ind-AS 115, when effective, would replace all revenue recognition guidance in Ind-AS (like Ind-AS 18 and Ind-AS 11, and the appendix to such standards, which are based on IFRIC 13 and IFRIC 18), and would be applied to contracts with customers to provide goods or services.

• It would not be applied to elements within the scope of other Ind-ASs such as lease contracts, guarantees other than product warranties, financing elements in a contract etc.

• A contract may contain both the elements which is part of Ind-AS 115 and element which are covered in other standards (like arrangement with a customer to lease a machine, and also provide revenue generating services)

• Although the scope of Ind-AS 115 is described differently, for practical purposes we expect it will be very similar to the scope of Ind-AS 18 and Ind-AS 11 taken together.


Key features

• new control-based model

• five step process includes new guidance on:

- identifying separate performance obligations

- variable consideration and a revenue constraint

- allocating revenue in multiple element arrangements

- recognizing revenue over time versus a point in time

- Specific items like warranties, licenses, capitalization of costs incurred on obtaining contracts, sales with right of return, principal agent analysis, repurchase agreements.

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Five step process

Step 1 identify the contract(s) with a customer

Step 2 identify the performance obligations

Step 3 determine the transaction price

Step 4 allocate the transaction price to the performance obligations

Step 5 recognise revenue when or as an entity satisfies performance obligations


Step 1: Identify the contract(s) with a customer

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Step 1: Identify the contract(s) with a customerCriteria to evaluate whether model is to be applied

Model not applied unless it meets the following criteria:

Revenue is recognised only when either:(1) the entity's performance is

complete, substantially all of the consideration has been collected and is non-refundable

(2) the contract has been terminated and the consideration received is non-refundable

n

n

n

n

contract has commercial substance

y

parties have approved the contract

y

the entity can identify each party's rights and the payment terms

y

it is probable the entity will collect the consideration

y

Apply the Ind-AS 115 model


STEP 2: Identify the performance obligations

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Step 2: Identify the performance obligationsDistinct performance obligation

In general, a performance obligation is a DISTINCT good or service (need not be explicitly stated in the contract, can be implied; focus on customer expectations):

customer can benefit from goods/

services alone or…

separately identifiable from other contract promises

DISTINCT New

• no significant integration services provided for the goods/services• they do not significantly modify/ customise other promised items• no highly dependent on, or interrelated with , other promised goods or services in the

contract


Step 2: Identify the performance obligationsContract options/ material rights

Options to acquire free or discounted services may be a performance obligation

must be a 'material right ' the customer would not receive without entering the contract

Examples include: points, customer renewal options, incremental discounts on other goods/ services

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Step 2: Identify the performance obligationsWhat this means for you?

Increased focus on the earnings process from the customer's perspective

Significant impact for certain industries like software and could services to identify what represents a 'material' right with respect to customer options.

While underlying principles are not radically different, be alert to the possibility that either MORE or DIFFERENT performance obligations may be identified under the new standard


STEP 3: Determine the transaction price

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STEP 3: Determine the transaction priceDetermine the transaction price

Transaction price includes:

• fixed consideration• estimates of variable consideration (including expected price concessions)• fair value of any non-cash consideration• impact of the time value of money• consideration payable to a customer

The transaction price is "…the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer"


STEP 3: Determine the transaction priceNew guidance on variable consideration

The revenue constraint:

Variable consideration is included in the transaction price only to the extent that it is highly probable that a significant reversal of cumulative revenue will notoccur when the uncertainty is resolved

Variable consideration can arise from discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, penalties, general rights of return, and similar items

Include in the transaction price using your best estimate , based on either the most likely amount , or expected amount

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STEP 3: Determine the transaction priceWhat this means for you?

Performance incentives: Previously included when probable and could be measured reliably. Now included to extent 'highly probable' that significant reversal will not occur. Likely similar result in most cases, but subtle differences require care!Return/refund rights: Similar results expected in most cases, with exception that related asset for right to returned goods must be presented as a 'contract asset' separate from inventory and assessed for impairment under Ind-AS 39

System changes: System changes may be required for ensuring that appropriate estimates are made.


STEP 4: Allocate the transaction price

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STEP 4: Allocate the transaction priceAllocate the transaction price

Objective

Mechanics

• allocate transaction price to each performance obligation identified in the contract on a relative stand-alone selling price basis

Stand-alone selling

price

• defined as the price at which an entity would sell a promised good or service separately to a customer

• best evidence is the observable selling price charged by the entity to similar customers and in similar circumstances

• if not available, estimated using all available information, maximising use of observable inputs

• allocate the transaction price to each performance obligation in an amount that depicts the amount of consideration to which the en tity expects to be entitled in exchange for transferring the promised goods or services to the customer


STEP 4: Allocate the transaction priceWhat this means for you?

If more (or different) performance obligations are identified and selling prices are not observable, estimation could involve significant effort .

Must allocate the transaction price based on stand-alone selling prices for promised goods/services. If not available: estimate

Reduced availability of the residual method as an estimation method (may only be used under specific conditions).

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STEP 5: Timing of revenue recognition


STEP 5: Timing of revenue recognitionRecognise revenue

Y

Y

N

Does customer control the asset as it is created or enhanced?

N

Does customer receive and consume the benefits as the entity performs?

N

Does asset have an alternative use to the entity?

Y

Control is transferred at a point in time

Control is transferred over time

Does the entity have the enforceable right to receive payment for work to date and expect to fulfil contract as promised?

Y

N

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STEP 5: Timing of revenue recognitionWhat this means for you?

Sales agreements should be carefully analysed to determine whether revenue now required to be recognised over time (e.g. if manufactured unit are customer-specific and cannot be transferred to another customer and Company is entitled to payment for work performed to date)

Focus of analysis is now on the transfer of control (risks and rewards now an indicator)

There is also new guidance on "bill and hold" and customer acceptance matters, but major changes not expected to be common (but don't ignore)


Enhanced disclosure requirements

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Enhanced disclosure requirements

Disclosure area Summary of requirements

Information about contract balances

• including opening and closing balances of contract assets, contract liabilities, and receivables (if not separately presented)

• revenue recognised in period that was included in contact liabilities and from performance obligations (wholly or partly) satisfied in prior periods

• explanation of relationship between timing of satisfying performance obligations and payment

Information about performance obligations

• when the entity typically satisfies performance obligations• significant payment terms• obligations for returns, refunds and similar obligations • types of warranties and related obligations• aggregate amount of transaction price allocated to remaining performance obligations at end of

period

Additional Ind-AS requirements

• Separate presentation of excise duty included in the revenue• Disclosure of reconciliation of revenue recognised in the statement of profit or loss with contract

price


Key messages

• revenue may be either accelerated or deferred compared to existing standards. New systems, policies and procedures would need to be put in place

• new concepts of 'distinct' and 'material rights' means that more (or different) performance obligations may be identified (as opposed to the existing multiple element guidance in Ind-AS 18)

• variable consideration – watch revenue constraint!

• telecom, IT, financial services, real estate and retail industries might get more impacted

• more disclosures!

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Thank you!


Thank you!

Ind AS 105: Non-current Assets Held for...

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