Lecture meet on IndAS
Day 1
Presented by
CA Kusai Goawala
For Pune Branch of WIRC
6th to 8th July 2015
CA KUSAI GOAWALA
Why Convergence to IFRS ?
• Globalization of Indian Economy
• Common Accounting Language
• IFRS widely accepted world over
CA KUSAI GOAWALA
More than 100 countries, including the members of the European
Union and much of Asia, have already adopted and implemented
IFRS. Israel is adopting IFRS this year, with Chile and South Korea
set for 2009, Brazil for 2010, and Canada for 2011.
CA KUSAI GOAWALA
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
CA KUSAI GOAWALA
• Framework
• Substance over form
•Arrangement :
• Main Standard
• BC = Basis for Conclusion
• AG = Application Guidance
• IG = Implementation Guidelines
• IE = Illustrative Examples
CA KUSAI GOAWALA
•
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
CA KUSAI GOAWALA
• 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 Alternative
CA 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
CA KUSAI GOAWALA
ROAD MAP
APPLICABILITY OF Ind AS
FINANCIAL
YEAR 201516
•
Not Mandatory
(Voluntary)
FINANCIAL
YEAR 2016-17
FINANCIAL
YEAR 2017-18
• 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.
• 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
Note : Listed on SME Stock Exchange
not covered
No will be taken as on 31.3.2014 or as per
The net worth for the purpose of the above
previous Balance Sheet if covered subsequently.
CA KUSAI GOAWALA
• I
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 benefits
CA 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
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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
CA KUSAI GOAWALA
Comparisons
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 Permitted to obtain Actuarial
at regular intervals
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
CA KUSAI GOAWALA
CA KUSAI GOAWALA
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
presented
Functional currency is the currency of the primary economic environment
in which the entity operates
Foreign currency is a currency other than the functional currency of the
entity.
•
Determination of Functional Currency – Primary Economic
•
Exceptions –
Environment
• IAS 39 – Derivatives / hedge
• IAS 7 – Cash Flow transactions for Foreign Operations
CA 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
significantly
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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.
CA KUSAI GOAWALA
•
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.
CA KUSAI GOAWALA
•
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 OCI
CA KUSAI GOAWALA
Comparisons
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 nonintegral 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/Rep
Presentation Currency –
orting/Presentati currency in which FS are
presented
on Currency
Functional Currency –
currency of the primary
economic environment in
which the entity operates
Reporting Currency – currency in
which FS are presented
No such concept as Functional
Currency
4
Translation of
financial
statement
Depends on classification of
operations as integral and nonintegral.
At the closing rate at the date
of financial statement
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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.
CA KUSAI GOAWALA
Comparisons
Sr.
No.
1
Point for
Consideration
Proposed
Dividends
IAS 10 (Events after the
reporting period)
Non-adjusting event
AS 4 (Contingencies and
Events occurring after BS
Date)
Adjusting event
CA KUSAI GOAWALA
CA KUSAI GOAWALA
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
•
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 ??
•
decisions
• Audit Report – books of accounts and profit and
loss account matching ??
CA KUSAI GOAWALA
►
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
CA KUSAI GOAWALA
Under Indian GAAP
YE 2010
Sales
Under IFRS
YE 2009
YE 2010
YE 2009
1000
800
1000
800
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
140
200
40
Interest Income
Prior Period Adjustments
Net Profit
-100
100
CA KUSAI GOAWALA
Under Indian GAAP
YE 2010
Sales
Under IFRS
YE 2009
YE 2010
YE 2009
1000
800
1000
800
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
140
200
40
Interest Income
Prior Period Adjustments
Net Profit
-100
100
CA KUSAI GOAWALA
Comparisons
Sr.
Point for
No. Consideration
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)
Prospectively/Retrospecti
vely application - AS is
silent ; hence option to
entity
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
2
Errors
Retrospectively Restated Separately disclosed
CA KUSAI GOAWALA
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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.
CA KUSAI GOAWALA
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).
CA KUSAI GOAWALA
Scope Exclusion:
Example:
Mr. X
(100 %)
Mr. Y
(100 %)
A Ltd.
B Ltd.
(50%).
(50%).
C Ltd.
Whether BC ?
CA KUSAI GOAWALA
Scope Exclusion:
Example:
Mr. X
(100 %)
Mr. Y
(100 %)
Acting in concert by agreement
A Ltd.
B Ltd.
(75%).
(25%).
C Ltd.
Whether BC ?
CA KUSAI GOAWALA
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
CA KUSAI GOAWALA
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)
CA KUSAI GOAWALA
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
CA KUSAI GOAWALA
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).
CA KUSAI GOAWALA
Key Requirements – (Intangible Assets identification) :
Definition
of an asset
Definition of
an intangible
asset
YES
Does the entity
have control
NO
Is future economic
benefits expected
NO
Is the asset
separable
NO
YES
YES
Can cost be
measured reliably
Recognition
– Criteria
YES
Is future economic
benefits probable
NO
YES
Goddwill
Expenses
Goddwill
Expenses
Goddwill
N/ A
Goddwill
N/ A
Intangible
asset
Intangible
asset
CA KUSAI GOAWALA
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
CA KUSAI GOAWALA
Key Requirements – Step Acquisition :
• Increases in ownership interest
Apply :
• IndAS 28
• IndAS 109/39
• IndAS 107
Initial
Investment
Business Combination-FIRS 3: :
• Fair Value existing holding
• Fair Value acquired net assets
• Calculate Goodwill
Control
Obtained
Equity Transaction :
• No Adjustment to
Goodwill
• No P&L Gain/ Loss
Buy further
Minorities
Obtaining control is a significant economic event that
triggers remeasurement
CA KUSAI GOAWALA
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
CA KUSAI GOAWALA
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
CA KUSAI GOAWALA
Comparisons
IndAS–103 – BC
Sr.
No.
Point for
Consideration
AS 14 –Accounting for
Amalgamation
1.
Recording of
Assets, Liabilities
& Reserves
Only Purchase Method ;
Acquirer to be identified
Common Control mergers
allowed under Pooling of
Interest Method
Under Purchase method : fair value
or at book values
Under 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 years
No 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
CA KUSAI GOAWALA
CA Kusai Goawala
kusai@gkdj.in
9823140520