Lecture meet on IndASDay 1

Presented by

CA Kusai Goawala

For Pune Branch of WIRC

6th to 8th July 2015

CA KUSAI GOAWALA

• Globalization of Indian Economy

• Common Accounting Language

• IFRS widely accepted world over

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Why Convergence to IFRS ?

More than 100 countries, including the members of the EuropeanUnion and much of Asia, have already adopted and implementedIFRS. Israel is adopting IFRS this year, with Chile and South Koreaset for 2009, Brazil for 2010, and Canada for 2011.

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Journey of IFRS

• Board for IASC established in 1973• In force - IAS – 24 and IFRS 15 total 39

number till date• Interpretations issued by SAC (Standards

Advisory Committee)• In 2001, IASC replaced by IASB

• 14 member committee from all parts of world – 9 required to pass

• Modified IAS substantially• New Standards – New Series – IFRS• Interpretations issued – IFRIC

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• Framework• Substance over form

• Arrangement :

• Main Standard• BC = Basis for Conclusion• AG = Application Guidance• IG = Implementation Guidelines• IE = Illustrative Examples

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• Entire Europe converged to IFRS

• US already permits IFRS to Non US holdco having operations in US

• Road map of US to converge to IFRS over a period

• IFRS vs US GAAP

Principle based vs Rule based

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• 12 new Standards compared to Indian GAAP

• Several AS are replicated from IFRS

• All standards is made applicable at one time rather than phase wise

• In order to be IFRS compliant country it is not required to make SME comply.

• Two options – Primary and AlternativeCA KUSAI GOAWALA

Indian Convergence Road Map :

• IFRS modified to suit Indian conditions

• 39 IndAS notified

• Retrospective implications will impact 31.3.2015 accounts

• Once an entity applies IndAS, it shall continue forever even if criteria subsequently not met.

• Indian Holding Co – Foreign Subsidiary/JV/Associates

• Foreign Holdco – Indian Subsidiary/JV/Associates

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FINANCIAL YEAR 2015-16

• Not Mandatory (Voluntary)

ROAD MAPAPPLICABILITY OF Ind AS

FINANCIAL YEAR 2016-

17• Listed /Process of

Listing and Net Worth 500Cr or

more• Unlisted

Companies having NW 500 Cr or

more• Holding,

Subsidiary, JV and Associates of

above.Note : Listed on SME Stock

Exchange not covered

No

• I

FINANCIAL YEAR 2017-

18• All Listed /Process

of Listing Companies

• Unlisted Companies having

NW 250 Cr or more

• Holding ,Subsidiary, JV and

Associates of above.

Note : Listed on SME Stock Exchange not covered

The net worth for the purpose of the above will be taken as on 31.3.2014 or as per previous Balance Sheet if covered subsequently.CA KUSAI

GOAWALA

CA KUSAI GOAWALA

IndAS 19 – Overview

• Substantially similar to Indian AS15

• Types of Employee Benefits Short-term employee benefits Post-employment benefit plans

• Post-employment benefits: defined contribution plans

• Post-employment benefits: defined benefit plans

• Other long-term employee benefits

• Termination benefitsCA KUSAI GOAWALA

•Post-employment benefit plans – formal or

informal

•Two types of plans

defined contribution plan

defined benefit plan

 Accounting building blocks

• Present value of a defined benefit obligation

• Plan assets CA KUSAI GOAWALA

Actuarial gains/losses

• IFRS had two options recognize all actuarial gains/losses

do not recognize/amortize – corridor approach

• IndAS does not give two options

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• Extensive disclosures required

Description of plans and accounting policies

Reconciliation of changes in PV of PBO and fund assets

Reconciliation of B/S account to funded status

Components of total expense

Information about plan assets and actuarial assumptions, sensitivity analysis, historical data

Best estimate of expected contribution to plan in year after B/S date

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Sr. No.

IFRS IAS 19 IndAS 19 (The Effects of Changes in Foreign

Exchange Rates)

AS 11 (The Effects of Changes in Foreign

Exchange Rates)

1 Actuarial Valuation to be done at regular intervals

Actuarial Valuation to be done at regular intervals

Permitted to obtain Actuarial Valuation once in three years

2 Actuarial Gains/losses to be amortised as per Corridor Approach

Actuarial Gain/Losses to be written off immediately to OCI

Actuarial Gains/losses to be written off immediately to Profit and Loss

3 Discount rate – High quality Corporate Bonds

Discount Rate – Market yields in Government Bonds

Discount Rate – Market yields in Government Bonds

Comparisons

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IndAS 21 : The Effects of Changes in Foreign Exchange Rates

• Foreign Currency v/s • Functional Currency (FC) v/s • Presentation Currency (PC)

Definition :-Presentation currency is the currency in which the

financial statements are presentedFunctional currency is the currency of the primary

economic environment in which the entity operatesForeign currency is a currency other than the functional

currency of theentity.

• Determination of Functional Currency – Primary Economic Environment

• Exceptions –

• IAS 39 – Derivatives / hedge• IAS 7 – Cash Flow transactions for Foreign OperationsCA KUSAI

GOAWALA

• How to identify Functional Currency :

• Sales/Purchases - influenced by Country, Competitive forces, Determine Sales Prices

• Labour/Material

• Funds and Financing

• Currency in which funds from operations are retained

• Integral or Non Integral Operations

• Cash flows from Foreign Operations impacts entity’s cash flow

• Cash flows of FO are self sufficient – does not require entity to fund.

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• In case of change in functional currency, apply translation procedures applicable to the new functional currency prospectively from the date of the change.

• If FC is a currency of Hyperinflationary economy, first apply IAS 29 (restate Financial Statement) and cannot avoid by changing FC.

• If PC = FC :

• Initial Recognition

• All transactions to be translated as per spot rate on date of transaction.

• Average rate can be used provided it is does not fluctuate

significantlyCA KUSAI GOAWALA

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Subsequent Recognition :

• All monetary items to be translated at closing rate

• Non Monetary items are to be translated as per the date of acquisition. If revalued than the date of revaluation.

• Impairment of assets in FC may not be as per Foreign Currency or vise versa.

• Exchange Difference :

• For hedge transactions : to OCI

• For others :

• Net Foreign Operations (FO) – OCI : When FO sold out, reclassify to P&L

• Monetary Items – P&L

• Non Monetary Items – where the gains/losses related to assets are taken.

• Conservative Principle not followed.

• Changes in Functional Currency – Apply changes prospectively.

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• When PC is not the functional currency.

• If under hyperinflationary economy :

• First apply IndAS 29

• All assets/liabilities/income and expenditure to be translated as per closing rate

• Previous year figure comparatives not to be scaled as per index. To be translated without such indexation.

• Accounting treatment

• In FO – when eliminating intra group balances – P&L• Others – OCI

• In other cases :

• All assets and liabilities as per closing rate

• All income/expenditure as per transaction date

• Accounting treatment : Difference in OCICA KUSAI GOAWALA

Sr. No.

Point for Consideration

IAS 21 (The Effects of Changes in Foreign

Exchange Rates)

AS 11 (The Effects of Changes in Foreign

Exchange Rates)

1 Approach Based on functional currency approach

Based on the integral and non-integral foreign approach

2 Exchange Differences

Arising on net investment in a foreign operation : Separate FS – P&L a/c CFS – OCI

Arising on net investment in a foreign operation : Separate FS and CFS – Foreign Currency Translation Reserve (FCTR)

3 Functional/Reporting/Presentation Currency

Presentation Currency – currency in which FS are presentedFunctional Currency – currency of the primary economic environment in which the entity operates

Reporting Currency – currency in which FS are presentedNo such concept as Functional Currency

4 Translation of financial statement

At the closing rate at the date of financial statement

Depends on classification of operations as integral and non-integral.

Comparisons

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IndAS 10 : Events after the Reporting Period

• Adjusting and Non adjusting Events

• Condition existed prior to the end of the Accounting Period

• Condition arose after the reporting period

• Going Concern is an adjusting event

• Authorisation for Issue – Date

• Non Adjusting Event – disclose in notes

• Dividend declared in AGM – non adjusting event under IndAS.

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Sr. No.

Point for Considerati

on

IAS 10 (Events after the reporting period)

AS 4 (Contingencies and Events occurring after

BS Date)

1 Proposed Dividends

Non-adjusting event Adjusting event

Comparisons

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IndAS 8 : Accounting Policies, Changes in Accounting Estimates and Errors

• Changes in Policies• Changes in Estimates• Errors• Accounting Policies : Relevant Reliable Consistent

– Framework

• Changes in Accounting Estimates vs Policies • Conservative approach is not fair• Accounting Estimate – Current year change• Accounting Policies – Prospective subject to

exceptions (like voluntary application)• No prior year adjustment in P&L

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• Everything Ordinary – Nothing extra-ordinary

• Restate to earliest period reported

• Materiality – subjective not objective : Influences decisions

• Changes in Depreciation Method – Change of

Estimate – Prospective• Problem Areas

• What happens if a prior expenses is restated to earlier years and dividend declared now exceeds the amount of profit available ??

• Audit Report – books of accounts and profit and

loss account matching ??

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► Prior Period Adjustments

► In accounts for YE 2010, following income/expenses relating to YE 2009 were observed :

Interest Income 100

Advertisement Expenses -200

Net Prior Period (Expenses) -100

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Under Indian GAAP Under IFRS

YE 2010 YE 2009 YE 2010 YE 2009

Sales 1000 800 1000 800

Interest Income 200 100 200 200

1200 900 1200 1000

Cost and other expenses 700 600 700 600

Advertisement Expenses 200 100 200 300

900 700 900 900

Net Profit before Tax 300 200 300 100

Tax 100 60 100 60

Net Profit after tax 200 140 200 40

Prior Period Adjustments -100

Net Profit 100 140 200 40CA KUSAI GOAWALA

Under Indian GAAP Under IFRS

YE 2010 YE 2009 YE 2010 YE 2009

Sales 1000 800 1000 800

Interest Income 200 100 200 200

1200 900 1200 1000

Cost and other expenses 700 600 700 600

Advertisement Expenses 200 100 200 300

900 700 900 900

Net Profit before Tax 300 200 300 100

Tax 100 60 100 60

Net Profit after tax 200 140 200 40

Prior Period Adjustments -100

Net Profit 100 140 200 40

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Sr. No.

Point for Considerati

on

IAS 8 (Accounting Policies, Changes in

Accounting Estimates and

Errors)

AS 5 (Net Profit or Loss for the Period, Prior Period Items

and Changes in Accounting Policies)

1 Changes in Accounting Policies

Retrospective application by adjusting opening reserves for the earliest period presented and the other comparative amounts for each period presented

Prospectively/Retrospectively application - AS is silent ; hence option to entity

2 Errors Retrospectively Restated

Separately disclosed

Comparisons

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Introduction – Core Principle :

IFRS 3 bringing the commercial substance merger / acquisition / reverse merger in the books of the acquirer.

This is a deviation from traditional accounting practice of recognition of assets / liabilities acquired at historic cost.

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Key Definition – What is Business Combination ?

Business Combinations:

The bringing together of separate entities or businesses into one reporting entity. Nearly all business combinations entail in an acquirer obtaining control of one or more acquirees.

Example :

1. One or more corporations become subsidiaries.

2. One company transfers its net assets to another.

3. Each company transfers its net assets to a newly formed company.

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Scope Exclusion:

1. Formation of Joint Ventures (dealt with under IndAS 31).

2. BCs under common control, and that control is not transitory (A separate project in pipeline in lines with US GAAP).

3. The acquisition of an asset or a group of assets that does not constitute a business (since not a business).

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Scope Exclusion:

Example:

Mr. X(100 %)

A Ltd.

Mr. Y(100 %)

B Ltd.

C Ltd.

Whether BC ?

(50%). (50%).

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Scope Exclusion:

Example:

Mr. X(100 %)

A Ltd.

Mr. Y(100 %)

B Ltd.

C Ltd.

Whether BC ?

(75%). (25%).

Acting in concert by agreement

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Key Requirements – Identifying Acquirer :

Identification of acquirer –

The acquirer is the combining entity that obtains control of the

other combining entities or businesses. This might be indicated

by the entity having some or all of the following

> ½ the voting rights(incl. potential rights)

Power to appoint /remove majority of board

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Key Requirements – Identifying Acquirer :

Identification of acquirer –

• Power to cast majority of votes at board meetings

• Ability to determine the selection of the management team

IndAS 103 contains significant guidance on identifying the acquirer

(e.g. relative fair values)

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Key Requirements – Summary :

Method? Must be accounted for using the purchase method

Assets and liabilities acquired?

Recognition of intangible assets and contingent liabilities at fair value at

acquisition date

Goodwill? Not amortised but tested for impairment at least annually

Negative goodwill? Recognised in OCI

Restructuring costs? Only recognised to the extent a liability of the acquiree exist at acquisition date

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Key Requirements – (Intangible Assets identification) :

Intangible assets must be recognised as assets if they meet one

of two criteria :

The contractual-legal criterion or

The separable criterion (same as IndAS-38) Intangible Assets).

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Key Requirements – (Intangible Assets identification) :

Definitionof an asset

Does the entity have control

YES

NOGoddwill Expenses

Is future economicbenefits expected

NOGoddwill Expenses

Definition of an intangible

asset

Is the assetseparable

YES

NOGoddwill N/ A

Can cost be measured reliably

Goddwill N/ A

YES

Recognition – Criteria

NO

YESIs future economicbenefits probable

Intangible asset

YESIntangible

asset

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Key Requirements – Intangible Assets identification :

Eg. of intangible asset recognised by companies under IndAS 103:

- Favorable Operating leases

- Vessel purchase options

- Freight related contracts

- “Order backlog”

- Vessel new building and purch. Cont. (not yet delivered or paid)

- Customer lists/customer relationships

- Vessel pool concepts

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Key Requirements – Step Acquisition :

• Increases in ownership interest

Apply :• IndAS 28• IndAS 109/39• IndAS 107

Business Combination-FIRS 3: :• Fair Value existing holding• Fair Value acquired net assets• Calculate Goodwill

Equity Transaction :• No Adjustment to Goodwill• No P&L Gain/ Loss

Initial Investment

Control Obtained

Buy furtherMinorities

Obtaining control is a significant economic event that triggers remeasurement

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Key Requirements – First Time Adopter :

• A first time adopter may elect not to apply IndAS 103 retrospectively to past business combinations.

• If a first time adopter restates any business combination to comply with IndAS 103

• It shall restate all later business combinations

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IndAS 103 : Business Combinations

a)Even Intangibles not recognized earlier can be now recognized – for instance internally

generated brands.

b) Exceptions to recognition and measurement principles – Deferred Tax – Potential tax effects of temporary differences/Employee Benefits – as per relevant IndAS

c) Bargain purchases - Negative Goodwill – OCI - reassess all identified assets and liabilities

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Sr. No.

Point for Consideration

IndAS–103 – BC AS 14 –Accounting for Amalgamation

1. Recording of Assets, Liabilities & Reserves

Only Purchase Method ;Acquirer to be identifiedCommon Control mergers allowed under Pooling of Interest Method

Under Purchase method : fair value or at book valuesUnder Pooling of Interest Method : Carrying amounts

2. Goodwill Amortisation in subsequent period

Not to amortise but to test for impairment on year to year basis

Under Purchase method – amortise not exceeding 5 yearsNo specific provision for Goodwill on acquisition of subsidiary.

3. Contingent consideration

Consideration may include contingent consideration. Changes to contingent consideration resulting from events after the end of the reporting period recognised in profit & loss.

No specific guidance

Comparisons

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CA Kusai Goawalakusai@gkdj.in9823140520