IndAS
Presented by
CA Kusai Goawala
For WICASA jointly with Pune Branch of WIRC
14h February 2016
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
•
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
Actuarial gains/losses
•
IFRS had two options
 recognize all actuarial gains/losses

•
do not recognize/amortize – corridor approach
IndAS does not give two options
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.
CA KUSAI GOAWALA
• 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
CA KUSAI GOAWALA
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
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
CA KUSAI GOAWALA
CA KUSAI GOAWALA
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
CA KUSAI GOAWALA
•
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
CA KUSAI GOAWALA
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:
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 – 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
IFRS 1 : First Time adoption of IFRS
•
•
•
•
•
•
Retrospective Applications
Restate previous comparable period
Opening IndAS Statement of Financial Position
Say first time adoption in 2017-18 :
Full IndAS compliance for year ended 31.3.2017 and 2016.
Only Statement of Financial Position (B/s) to be restated as
of 31.3.2015.
• Transitional provisions in each IndAS does not apply to first
time adoption
• It applies to changes in policies due to introduction of new
standard
CA KUSAI GOAWALA
Apply IndAS in
• Its First IndAS FS
• Interim Financial report- Part of period covered by its 1st
IndAS FS
Opening IndAS Balance Sheet
• Prepare IndAS BS 1st day
E.g. 1st FS is for 31.03.2017
Op.Bal. for 31.03.2015
• Apply latest version of IndAS.
• Can apply ‘not yet mandatory’ IndAS – Provided the same
allows early application.
CA KUSAI GOAWALA
•
•
•
•
•
IndAS First Balance Sheet
Shall include
– Three BS
– Two P&L
– Two CF
– Two statements of changes in equity
Recognise Assets & Liabilities which is required under IndAS
Derecognise Assets & Liabilities if IndAS does not permit
Reclassify Assets & liabilities as per IndAS
Measure Assets & Liabilities as per IndAS
Explanation of transition to IndAS
• Reconciliation of previous GAAP & IndAS – Equity
CA KUSAI GOAWALA
Exceptions
•
•
•
•
•
•
•
Para 14-17
Para 14 – Estimates . No change as given in previous GAAP
Para 15 – Information received after date of transition. Non
adjusting events. (Prospective not retrospective)
Para 16 – Previous GAAP estimates not required.
– No need to make retrospective
Para 17 – Comparative figures – The above apply
Appendix C and D
Previous GAAP carrying amounts can be considered as deemed cost
CA KUSAI GOAWALA
• Appendix C
1. Business Combinations
i) May not consider BC before date of transition.
ii) However, if apply to one than apply to all subsequent
BC.
iii) Carrying amount of Goodwill on transition date will
be continued subject to impairment test and
reclassification.
CA KUSAI GOAWALA
CA KUSAI GOAWALA
•Tax
Rate – Substantially Enacted
•No
discounting – Absolute Figures]
•Tax
Losses – Recognition of DTA- Virtual Certainty vs Probable
•Offset
rules
•Business
•ESOP
Combinations
related tax assets/liabilities
•Non
Current Asset/Liability
•CFS
– eliminated profit on intra group transaction –
temporary difference.
•Tax
Holiday ??– India specific – may get customized.
CA KUSAI GOAWALA
•Case
Study – Elimination of Intragroup Profits
H an entity taxed at 30% - S subsidiary at 34%
•S
Sells inventory – cost Rs.100000/- to H for Rs.120000/-
•Eliminate
•DTA
unrealised profit of Rs.20000
of 6000 = 30% of 20000/-.
CA KUSAI GOAWALA
Comparisons
Sr.
No.
Point for
Consideration
IndAS 12 (Income taxes)
AS 22 (Accounting for taxes on
income)
1
Deferred Income
Taxes
Temporary differences
Timing differences
2
Recognition of
DTA and DTL
Recognized for all Temporary
differences except which arise from
Initial recognition of goodwill or which
is not at a BC
Recognized for all Timing differences
3
Recognition of
DTA
Recognized to the extent it is probable
that future taxable profits will be
available.
Recognized only when virtual certainty is
present support by convincing evidence.
4
Investments in
subsidiaries,
branches &
associates and
interest in JV
DTL for all taxable Temporary
differences are recognized. Except •Investor can control reversals.
• Temporary differences will not
reverse.
Not recognized.
5
Deferred Tax on
Unrealised intragroup profits
Recognized at Buyer’s rate
Not recognized .
6
Classification
Always classified as Non-Current
DTA after Investments and DTL after
Unsecured Loans (ASI 7)
CA KUSAI GOAWALA
CA KUSAI GOAWALA
•
Interest cost to be worked on effective interest method.
Does
not include imputed cost of owners equity
•
What is a Qualifying Asset
Takes substantial time (more than 12 months – rebuttable) for
completion.
•
How to compute borrowing cost for capitalisation
• First specific borrowing for QA
• If general purpose borrowing used, apply weighted
average rate.
•
Cannot capitalise – Biological Assets at FV, Repetitive
inventory items
CA KUSAI GOAWALA
CA KUSAI GOAWALA
IAS 24 : Related Party Disclosures
• Related Parties Definition :
• Category 1
• Holding – Subsidiaries
• Joint Ventures
• Associates
• Category 2
• Key Management Personnel of Entity or parent
• Close Relatives of KMP
• Entities which are controlled/jointly controlled/ having
significant
influence of KMP/Relatives
• Employees Retirement Benefit Plans
CA KUSAI GOAWALA
• KMP who has authority and responsibility for planning/directing
• Common director need not mean Related Party
• Common KMP – Yes
• KMP in one and director in another – ability to exercise significant
influence
• Relatives – Spouse/Domestic Partner, Children of both,
Dependants of
self/partner.
• Names to be given in cases where absolute control exists even if
no transactions. - Parent/Subsdiary only
CA KUSAI GOAWALA
•
All kinds of transactions to be reported :
•
•
•
•
•
•
•
•
•
Sales
Purchase
Services received/rendered
Loans received/given
Guarantees given/received
Dues from/to
KMP Compensation
Any other transactions Lease, Transfer of R & D, transfer
under
license agreements, Management contracts.
CA KUSAI GOAWALA
Case Study




Related party relationship are wider under
IndAS24 as against AS18
If Entity P has control over A and has significant
influence over B.
Under AS18 A and B are not related
However they are related party under IndAS24
Comparisons
Sr.
Point for
No. Consideration
IAS 24 (Related Party
Disclosures)
AS 18 (Related Party
Disclosures)
1
Related Parties Includes post employment
Post employment benefit
benefit plans of the
plans not included
reporting entity or its related
party
2
Definition of
relative
Uses the term “a close
member of that person’s
family” .
Uses the term “relatives of
an individual”
3
Compensation
to KMP
Disclosed as aggregate and
separately for (a) short term
employee benefits (b) post
employment benefits (c)
other long term benefits (d)
termination benefits and (e)
share based payments
Disclosed as aggregate of
all items of compensation
CA KUSAI GOAWALA
CA KUSAI GOAWALA
IndAS 108 – Operating Segments
• Identification of Operating Segment (OS)
• As per internal reporting norms to CEO
• Qualitative thresholds
To provide
• Quantitative thresholds
• 10% of revenue / profits / assets
• If OS does not cover 75% then add other segments also
CA KUSAI GOAWALA
Information to be disclosed
• Measurement
• Reconciliations
• Restatement
• Product & services
• Geographical Segments
• Major Customers >10%
CA KUSAI GOAWALA
Comparisons
Sr.
Point for
No. Consideratio
n
InAS 8 (Operating
Segments)
AS 17 (Segment
Reporting)
1
Identificatio Based on financial
n of
information on how to
segments
allocate resources and in
assessing performance
2 sets of segments i.e.
business and
geographical using risks
and rewards approach
2
Measureme
nt
Segment
Revenue/Expense/Result/
Asset/Liability not
defined
Segment
Revenue/Expense/Result/
Asset/Liability have been
defined
3
Disclosures
Revenue from a customer No such requirement
if exceeds 10% of total
segment revenue
CA KUSAI GOAWALA
CA KUSAI GOAWALA
IndAS 16 : Property Plant and Equipments
•
Definition of Asset – Only Tangible Items are
covered
•
Recognition of an item of PPE
Measurement of an item of PPE : Cost model or
Revaluation model
If Revaluation model – Assess at regular intervals
• Accounting for changes in decommissioning and restoration costs
• First Time application – Deem Cost
•
CA KUSAI GOAWALA
•
Revaluation of an item of PPE : Upward = Revaluation
Surplus a/c – OCI
•
and Downward = P&L a/c
•
Depreciation method : SLM or WDV
•
Change in method of Depreciation : Change in
accounting policy – Prospective effect Derecognition
•
Gain/loss on derecognition
 Component Accounting
To depreciate significant components separately if
Useful life differs
 Replacement of Components
•
The new part shall be capitalized if it fulfills the
recognition criteria and the replaced part shall be
derecognised
•
Replaced part to be derecognized
CA KUSAI GOAWALA
Comparisons
Sr.
No.
Point for
Consideration
IAS 16 (Property, Plant & Equipment)
AS 6 & 10 (Depreciation Accounting &
Accounting for Fixed Assets)
1
Measurement
Models
Cost or Revaluation model
Only Cost model allowed ; revaluation
permitted subject to conditions
2
Change in method
of depreciation
Change in Accounting Estimate,
prospectively
Change in Accounting Policy,
retrospectively
3
Deferred Receipt
on Disposal
Deferred Consideration – Effective
Interest
Not required
4
Replacement Costs
The new part shall be capitalized if it
fulfills the recognition criteria and the
replaced part shall be derecognized
The new part shall be capitalized if it
fulfills the recognition criteria ;
otherwise expensed out
5
Cost of major
inspection
Capitalised
Expensed out
6
Frequency of
Revaluation
If Revaluation model is adopted, at
the end of every reporting period
Not prescribed
7
Revaluation
Both Upward and Downward
Revaluation allowed subject to
carrying amount of asset not exceed
its fair value.
Only Upward
No concept of fair value while
revaluation
8
Frequency of
estimation of
Residual Value
To review at least at each reporting
period
Not prescribed
9
Scope
All fixed assets covered, except property
under as investment property (included in
IAS 40).
All fixed assets covered
10
Depreciation
Fixed Assets are REQUIRED to be
componentized and depreciated
separately.
Fixed Assets are NOT REQUIRED to be
componentized and depreciated
separately. Sch II effective from 1.4.2015
CA KUSAI GOAWALA
CA KUSAI GOAWALA
• In AS – top down or bottoms up test.
• Treatment of Impairment Loss :
• CA-RA = P&L
• If CA is revalued – first reduce Revaluation reserve to
that extent and balance to P&L
• If RA is negative = provide a liability
• Reversals of Impairment
• No reversals for impairment loss on goodwill – earlier version
allowed.
• Corporate Assets
• If possible to allocate to a unit – allocate
• If not possible go to CGU – allocate
• If not possible exclude Corporate Assets
CA KUSAI GOAWALA
• Impairment Loss in case of CGU with Goodwill
• First impact Goodwill then balance distribute to assets in
CGU on pro-rata
• The value cannot reduce below zero
• Reversals
• Tested on an annual basis or earlier when there is an
impairment indication.
• If external/internal sources favorable, check for
reversals.
• Reversals to be given effect only if there is a change in
estimates since last impairment loss.
• Change due to reduction in period of cash flow cannot
reverse impairment.
• Cannot exceed Carrying Amount if Impairment loss was
not recognized
• Impairment reversals (other than on Goodwill) to be
taken to P&L except in case of revaluation impact.
CA KUSAI GOAWALA
Sr. No.
Point for
Consideration
AS 28 (Impairment of
Assets)
IndAS 36 (Impairment of
Assets)
1
Goodwill
Tested for impairment by Allocated to the lowest level
allocating its carrying
at which goodwill is internally
amount to CGU.
monitored by management.
2
impairment test On indication
Tested on an annual basis or
for Goodwill
Also AS-26 requires
earlier when there is an
and Intangibles intangibles that are not
impairment indication.
available for use and that
are amortized over a
period exceeding 10
years to be assessed for
impairment every F.Y
and even if there is no
indication of impairment.
3
Reversal of
Favorable external events Reversal is prohibited (even in
impairment loss have occurred.
subsequent interim periods).
for goodwill
CA KUSAI GOAWALA
CA KUSAI GOAWALA
• Provision to be made for warranties, returns, money back offers, claims etc.
• High level of estimates required.
• Not necessary to know the identity of the payee.
• Provision to be made on the present value of the liability to be incurred.
• Contingent Liability to be given in notes. If chances of such liability is remote
– no need to disclose in notes.
• Joint and Several Liabilities – Contingent Liabilities – share of other joint
parties.
• Contingent Assets : Do not recognize unless realization virtually certain
Disclose in Notes
CA KUSAI GOAWALA
Key differences





Constructive Obligations vs Legal Obligations
Discounting of provision
Restructuring provision – constructive vs legal
obligation
Onerous contracts – IndAS – discounting and
impairment
Contingent Assets - Disclosure
• Measurement :
• Best estimate
• Provisions are before taxes
• Risks and uncertainties – not required to create excessive provision out of
abundant precaution.
• Future events :
• Amount to be provided – technological changes / legislation may not be
passed (eg environmental requirements)
• End use as per provision made : adjust such provision only.
• Future operating losses no need to provide.
• Onerous contracts : Unavoidable cost exceeds benefits – to provide.
• Reimbursements – recognize as a separate asset : virtual certain – to receive –
not to exceed the provision
CA KUSAI GOAWALA
Comparisons
Sr.
No.
Point for
Consideration
IAS 37 (Provisions, Contingent
Liabilities and Contingent
Assets)
AS 29 (Provisions, Contingent
Liabilities and Contingent
Assets)
1
Recognition
of Provisions
Constructive obligation
considered only if arising
from customary practice
In case of Legal or
Constructive obligation
2
Discounting of
Provisions
If more than 12 months, then
PV
Not permitted
3
Recognition
of Contingent
Assets
Disclosed in FS if an inflow of
economic benefits is
probable
Not disclosed in FS but
disclosed in BOD report
CA KUSAI GOAWALA
CA KUSAI GOAWALA
•What is indication of hyperinflation :
• When cumulating price index over three years nears 100%.
• People prefer dealing in stable currencies
• People invest in Non monetary assets/other stable currencies
• Sales/Purchase credits built in inflationary cost
• Interest/Wages linked to price index.
CA KUSAI GOAWALA
•
•
•
•
Non monetary assets/liabilities, income and expenditure are
indexed from the date of transaction to reporting date
(Measuring Unit Current)
Monetary items are already at MUC and hence not required
to be indexed.
Restate FS of current as well as previous year.
Recognize Gain or loss in P&L
CA KUSAI GOAWALA
• Money loses purchasing power and hence comparing the
transactions on absolute terms is not meaningful.
• How to index :
• Equity – Capital movements to be indexed
• Retained earnings will automatically get adjusted due to
changes in P&L
• Revaluation Reserve – Eliminate
• Monetary Assets/Liabilities – Assets/liabilities at carrying
amount
• Non Monetary Assets/Liabilities – Indexed by Measuring
Unit Current vs index on the date of transaction.
• Assets/Liabilities under a contract where it provides linked to
index – as per agreement.
CA KUSAI GOAWALA
•
•
In case of exact date of acquisition of FA not available – first
date of restatement.
In case of price index not available for a period – use
movements in stable currency as guiding factor.
CA KUSAI GOAWALA
CA KUSAI GOAWALA
• Development involves
• Application of research
• Alternative already selected
• Making prototype
• Ends on commencement of commercial production/use
• If research and development phase cannot be
distinguished – Consider as Research phase.
• Expenditure once written off cannot be subsequently
capitalized.
• When recognition criteria is met at a later stage –
capitalize from that date.
• Intangibles acquired under Business Combination
• Recognize even if internally generated by acquiree
• Assess recognize criteria
• To recognize separately from Goodwill
• Initial recognition always at cost
CA KUSAI GOAWALA
Cost includes
• cost of acquisition
• direct cost incurred for making it capable for operating
as intended
• deferred price consideration – imputed interest to be
segregated
• Borrowing cost as per IAS 23
• Cannot include : Marketing, administration, abnormal
wastages etc
• Grant : Assets allotted without considering – Airport
landing rights, license to operate radio stations etc. – Take
Fair Value on both sides – Asset and Government Grant
CA KUSAI GOAWALA
• Cost model – Cost less amortization less impairment
• Revaluation to be done regularly.
• Active market : taxi licences, fishing licences,
production quotas
• No active market – brands, patents or trademark –
since assets are unique
• If active market cease – it indicates - check for
impairment.
• Effect of revaluation :
•When revalued asset is disposed off, revaluation surplus
transferred to
retained earnings directly without routing through P&L.
• Test for impairment
CA KUSAI GOAWALA
• Intangibles
• Having finite lives
• Having Infinite lives (no foreseeable limit to generate cash
inflows)
• For assets having finite lives – Apply IndAS 36
• For assets having infinite lives – Check annually and on indication
of impairment.
• Indefinite does not mean infinite. Estimate on prudent basis.
• Amortization :
-- For Finite lives :
• On straight line over the period of useful life.
• No amortization for intangibles having infinite lives
• Goodwill/brand once impaired – cannot reverse.
CA KUSAI GOAWALA
• Intangibles purchased on deferred payment terms – imputed
interest to be segregated
•Expenditure on advertisement and publicity expenses – Fee
paid to an actor in a promotional film is charged to PL when he
shoots the film. The charge is not delayed till release of the film.
•In case of toll roads, revenue model of amortisation not
permitted.
CA KUSAI GOAWALA
Comparisons
Sr.
Point for
No. Consideratio
n
IndAS 38 (Intangible
Assets)
AS 26 (Intangible Assets)
1
Measurement Either at Cost or Revalued
Amt
Only at Cost
2
Useful life
Either finite or infinite
Cannot be infinite
(rebuttable presumption
max 10 years)
3
Goodwill
Not amortised but subject to Arising on amalgamation in
annual impairment test
the nature of purchase :
amortized over 5 years
Arising on acquisition : not
amortised but tested for
impairment
CA KUSAI GOAWALA
CA KUSAI GOAWALA
Investment Property
• Properties that are held :
• for renting/already rented
• for capital appreciation
• vacant – future use not decided
• Not held for administrative purposes or for sale in ordinary
course of business
•Investment properties during construction period is to be dealt
with as PPE.
•Property let out to Group Companies – Standalone vs CFS
CA KUSAI GOAWALA
•Services rendered in relation to property – dominant or
ancillary – PPE or
IP Hotel or Rented Property
• Part PPE / IP : Segregate relevant portions. Possible to sell
independently.
• If not possible – If OOP very negligible compared to total,
then treat as IP.
• Conditions for recognition :
• If Future Economic benefits will flow to entity
• Cost can be measured reliably
CA KUSAI GOAWALA
•
•
Measurement after recognition
Only one method available:
• Cost model (Fair Value model option in IFRS)
•
CA KUSAI GOAWALA
Disposals and Retirements :
• When sold or permanently withdrawn from use : no future
benefit available
• When replacement of one part – apply method used in PPE.
•On sale – Consideration – Carrying amount = P&L
• If consideration deferred – compute imputed interest revenue.
CA KUSAI GOAWALA
Investment Property
Basis Of Comparison
IndAS 40 Investment
Property
AS 13 Accounting for
Investments
Definition of
investment property
Land or building held
to earn rentals or for
capital appreciations or
both.
Does not apply to
owner occupied
property or property
held for sale or that is
leased to another entity
under financial lease.
An investment in land
or buildings that are
not intended to be
occupied substantially
for use by, or in the
operations of the
investing enterprise.
Measurement of
investment property
Permits only cost
model.
Classified as long term
investments and
measured at cost less
impairment.
CA KUSAI GOAWALA
CA KUSAI GOAWALA
•Biological assets – livestock, crops, plantations.
•Bearer Plants – living plant – expected to bear produce
for more than one period.
•Except – plant grown as lumber
• Agricultural Produce – harvested produce
• Process – Agricultural transformation/Deterioration/
Procreation.
• Recognised only if :
• Control over assets.
• Cash flow can be estimated – economic benefits.
• Cost or FV can be reliably determined.
CA KUSAI GOAWALA
• Initial Recognition at Fair Value as per present location
and condition minus point of sale costs.
• Changes in value – P&L.
• If FV cannot be ascertained – cost minus depreciation
minus impairment as per PPE.
• If harvested – the crop is to be considered as
Inventories.
• Once taken at FV cannot change back to Cost method.
• Gain or loss from initial recognition – take to P&L
• If land and standing crops are combined - deduct land
value to determine value for crops.
• In case of Government Grant – When FV used – take it
to P&L when becomes receivable.
• If contingent on fulfilling conditions – recognize only
when conditions met.
CA KUSAI GOAWALA
• Fair Value to be determined for Biological assets as
well as Agricultural Produce.
• Do not consider forward sale price to determine FV as
the same is not indicative of the current FV
• Group similar assets according to significant attributes
etc
• Gains or losses on initial recognition to P&L
• Subsequent measurement changes – recognise to PL
CA KUSAI GOAWALA
Biological Assets
Agricultural
Produce
Products as a result
of processing
harvesting
Sheep
Wool
Yarn Carpet
Dairy Cattle
Milk
Cheese
Cotton Plants
Cotton
Thread clothing
Sugarcane
Harvested cane
Sugar
Tea Bushes
Picked leaves
Tea
Fruit Trees
Picked Fruit
Processed fruit
CA KUSAI GOAWALA
CA KUSAI GOAWALA
Comparisons
Sr.
Point for
No. Consideration
1
Deferred
Settlement
Terms
IAS 2 (Inventories)
AS 2 (Valuation of
Inventories)
Purchase price under
Cost is the purchase price
normal credit terms (–)
amt paid for deferred
settlement = interest
expense (imputed interest)
CA KUSAI GOAWALA
CA KUSAI GOAWALA
Forgivable loans considered as grant
Government loans at below market interest to be
accounted as per IFRS 109 (initial carrying amount –
amount as determined under IFRS 109)
Grants relating to assets to be accounted as
deferred Income
Non monetary grant at fair value – vs nominal value
Refund of Grant – prohibition to be classified as
Extraordinary Item
CA KUSAI GOAWALA
Comparisons
Sr.
No.
Point for
Consideration
IAS 20 (Accounting for
Government Grants and
Disclosure of Government
Assistance)
AS 12 (Accounting for
Government Grants)
1
Recognition
Only Income approach
Capital or Income approach
2
Trf to
Shareholder’s
Funds
Nil
In the nature of Promoter’s
contribution
3
Repayment Cumulative
additional
depreciation
Immediately recognized as
an expense ; prohibited to
classify as an extra-ordinary
item
Recognized over the
remaining useful life of the
asset ; classified as an extraordinary item
CA KUSAI GOAWALA
CA KUSAI GOAWALA
IndAS 27 - Consolidated and Separate
Financial Statements
•
•
•
•
CFS is the primary FS.
Single Economic Entity.
Separate Financial Statement only if statute requires
For an entity having no subsidiary/JV/Associate – SFS is the FS
•
Control for the purpose of determining subsidiary status:
a. Power over the investee
b. Exposure or rights to variable returns due to involvement
c. Ability to use the power to affect the investors return.
•
Subsidiary may be company or non-corporate
•
Potential voting rights (PVR) – to consider for determining
control
CA KUSAI GOAWALA
• PVR to be considered in totality for determining Control.
•
However PVR not considered for computing profits/losses
•
Minority Interest – Non Controlling Interests
•
Consolidation is compulsory
•
Exceptions: All of the following conditions satisfied.
1.
2.
3.
4.
Parent has a parent who has agreed
Not listed
not a potential - listing
Intermediate or ultimate Parent - prepares CFS.
•
No exemption
•
•
A subsidiary under severe long-term restriction for transfer of funds.
All subsidiaries to be included except those acquired and held for sale.
CA KUSAI GOAWALA
Group A Standalone
Holdco
Sales
0
PAT
0
Equity Capital
Reserves
3000
0
3000
Investments
3000
Operating Assets
3000
Group A Standalone
Holdco
SPV1
SPV2
SPV3
Sales
0
1000
1000
1000
PAT
0
200
200
200
3000
1000
1000
1000
0
200
200
200
3000
1200
1200
1200
1200
1200
1200
1200
1200
1200
Equity Capital
Reserves
Investments
3000
Operating Assets
3000
Standalone
Co A
Co B
Sales
0
2500
PAT
0
500
3000
3000
0
500
3000
3500
3000
0
0
3500
3000
3500
Equity Capital
Reserves
Investments
Operating Assets
CFS
A
Sales
PAT
Equity
Reserves
Operating Assets
B
3000
2500
600
500
3000
3000
600
500
3600
3500
3600
3500
3600
3500
•
•
•
•
Acquisition Cost:
Add : Cost of acquisition of share.
Add : All other cost associated with acquisition is cost of acquisition.
Deduct : Dividends received in respect of income prior to acquisition –
reduce cost
•
•
•
•
Consolidation is compulsory till Subsidiary ceases to be subsidiary.
Eliminate intra group transactions/unrealized profits
Deferred tax implication on such eliminations
Intra group Losses may indicate impairment – test for impairment
•
Three months gap allowed between reporting dates of Parent &
Subsidiaries F.S.
•
Minority Interest disclose under Equity.
•
•
•
Recognition of Goodwill in CFS (100% / Parent Co. Share)
Uniform Accounting Policies to be followed.
Line by line consolidation.
CA KUSAI GOAWALA
• Step disposal:
• Substance of chain transactions is to lose control – take total transactions as
one.
• Accounting for disposal – results in –
• No loss of control :
Account for changes in Equity – owner with owner
Loss of control
• Derecognise asset/liabilities from the date control is lost
• Derecognise non controlling interest
• Recognise consideration
• Retained investment at FV
• Recognise any profit/loss in P&L
• Transfer incomes held under OCI to P&L
• Transfer Revaluation Reserve directly to Retained Earnings
• In case of retained investment without control – Apply IAS 39
• FV on date of loss of control is FV on initial recognition
• In Separate FS : Account either at cost or as per IAS 39
CA KUSAI GOAWALA
Comparisons
Sr.
No.
Point for
Consideration
IAS 27 Consolidated & Separate FS
AS-21
Consolidated FS
1
Consolidation
Mandatory
Mandatory to Listed/in the process of
listing
2
Control
Power to govern the Financial &
Operating Policies of an entity
1.If voting power more than 50%
2. Able to remove major Board of
Directors
3
If Dual Control
Company which has control will
consolidate
Both entities will consolidate
4
Potetial Voting
Rights (PVR) –
control
Only currently exercisable PVR
considered for assessing control
Not considered in assessing control
5
Partial Disposal
- Control retained
Accounted as equity basis
No Specific Guidance
- Loss of Control
Remeasure of residual holding to fair
value. Difference between carrying
value & fair value is recognise in Profit
& Loss Account
No Specific Guidance
6
Accounting in
Separate FS
Cost less impairment Loss or IAS 39 –
AFS
Cost less impairment loss.
7
Minority Interest
Under Equity
Between own fund & Loan fund
8
Goodwill
Either for 100% or parents holding.
Only in relation to parents share
9
Special purpose
entity
If control exist then consolidate
Not prescribed
CA KUSAI GOAWALA
CA KUSAI GOAWALA
IndAS 17 : Leases
•Operating vs Finance Lease
•Substance over Form
•Cost allocation
•Inception and Commencement of Lease
•Minimum Lease Amount
•Gross Investment at absolute amount
•Net Investment in Lease – PV
•Contingent Rent
CA KUSAI GOAWALA
•IRR
•Land Building Separate
•Finance Lease – Initial Recognition : FV or PV of
minimum lease payments
•Disclose Assets = Liability – Direct cost incurred
•Subsequent measurement – apportion finance cost and
repayments
•Brokerage – expense in P&L for lessor and capitalize
for lessee
•Operating Leases – Income and Expense over straight
line method
•Brokerage over lease term
•Depreciation to be provided
CA KUSAI GOAWALA
•Impairment
•Sales and Lease Back transaction
•Whether finance or operating lease
•If Finance Lease :
•Profit on sale deferred and amortised over lease period
•If Operating Lease
Sales at Fair Value – recognize profit
•Sales below fair value – profit/loss recognized – if compensated by rentals –
amortise
•Sales above fair value – excess - amortise over lease period
CA KUSAI GOAWALA
Comparisons
Sr.
No.
Point for
Consideration
IndAS 17 (Leases)
AS 19 (Leases)
1
Interest in
leasehold
land
Recognized as Operating
Lease unless recognized as
Investment Property
Classified as Fixed Assets
2
Initial direct
costs by lessor
under finance
lease
Included in finance lease
receivable and reduce the
income recognized over the
lease term
Recognized immediately in
P&L a/c or allocated against
the finance income over the
lease term
3
Initial direct
costs by lessor
under
operating
lease
Either deferred and
allocated to income over the
lease term in the proportion
as rent income or recognized
as an expense in the period
in which they are incurred
CA KUSAI GOAWALA
CA KUSAI GOAWALA
Differences between IndAS and existing Indian
Accounting Standards
The Standard replaces the following Standards :
AS 9 Revenue Recognition IAS18
AS 7 Construction Contracts IAS 11
 Includes : Revenue from Contracts with Customers
--for sale of goods
--for sale of services
--for other income
--for construction
 Scopes out : lease contracts
insurance contracts
financial instruments etc
CA KUSAI GOAWALA

Recognition
•
•
•
Recognize revenue once the performance obligations are
fulfilled.
Recognize revenue when the control of the promised asset is
transferred by the entity. The standard provides indicators of
transfer of control.
Satisfaction of performance obligations over a period of
time.
CA KUSAI GOAWALA
Combination of Contracts
 Guidance for evaluation of performance obligations
 Allocation of the transaction price to separate obligations
 Revenue recognised :
-- as “ Control “ of the goods and services underlying the
performance obligation is transferred to the customer
 Need to determine
--Whether control is transferred over time, if not, at a point of
time

CA KUSAI GOAWALA
If performance obligation satisfied over time, revenue is
recognised by measuring progress towards complete
satisfaction ( by using either output or input methods )
--and only if it can reasonably measure its progress, else,
revenue should be recognised, only to the extent of contract
costs incurred of which recovery is probable
 Application guidance for transactions, such as
--Sale with a right to return
--Warranties etc.

CA KUSAI GOAWALA
Recognition :
--a financial asset (right to cash/other financial asset)
--an intangible asset (right to receive cash from public on use
--both.
Contract Cost – Incremental cost for obtaining the Contract
Cost is an asset to be amortised when transfer to the customer
takes place.
Impairment loss to be provided if consideration receivable is less
than the carrying amount.
Presentation – Contract Asset/Contract Liability

CA KUSAI GOAWALA
STEPS TO ACCOUNT FOR REVENUE
(STEP 1) Identify the contract(s) with a customer.
Contract modification.
(STEP 2) Identify the separate performance obligations in the contract
Non – refundable upfront fees (and some related costs)
(STEP 3) Determine the transaction price
Variable consideration
Volume discounts – first specific and then proportionately
Rebate and coupons
Time value of money
Prompt payment discounts
Non cash considerations
Consideration payable to a customer
CA KUSAI GOAWALA
(STEP 4) Allocate the transaction price to the separate
performance obligations.
 Allocation based on standalone selling prices.
 Allocation of a discount
 Allocation of variable consideration
 Changes in transaction prices
CA KUSAI GOAWALA
(STEP 5) Recognize Revenue when (or as) the entity
satisfies a performance obligations
 Performance obligations completed at a point in time
 Customer acceptance
 Bill and hold arrangements
 Performance obligations satisfied over time
 Simultaneous receipt and consumption of the benefits of the
entity’s performance
 Customer controls the asset as it is created or enhanced
 Alternative use to the entity
CA KUSAI GOAWALA
•
In cases where performance obligations are fulfilled over a
period of time, revenue can be recognized if:• Customer avails the benefit soon as company renders
services (for e.g. cleaning services)
• Additional work-in-process where the asset is controlled by
customer or
• Entity has a legal right to recover payment against part of
the work done and the work so done is of no use to the
company.
Apply these methods only when control is transferred to
customer. Any change in progress is treated as change in
accounting estimate.
CA KUSAI GOAWALA
• Stage of completion can be determine as under
a) Output Method :
By survey of work performed
By milestones achieved
Units of production/deliveries
b) Input Method
Cost to cost method : The % completion would be
estimated by comparing total cost incurred to
date with total cost expected for the entire contract.
However this is not acceptable method as wastages can
creep in
Labour Hours, Machine Hours etc
Completion of Physical proportion of the contract work.
• Uncertainty in collection amounts to expenses to be written of as
an expense and not deductible from revenue.
• Contract Losses to be recognized immediately.
CA KUSAI GOAWALA
•
•
•
•
•
Measurement
Initial measurement
Subsequent measurement
Multiple performance obligations- transaction price
Transaction price
•
•
•
•
•
•
Variable consideration
Factoring difficulties in estimating variable consideration
Financing component
Non-cash consideration
Consideration payable to customer
At the time of recognition of revenue there is a presumption
that contracts won't be cancelled.
CA KUSAI GOAWALA
•
Variable consideration
•(discounts,
refunds, price concessions. Rebates, credits, performance
bonus, incentives, contingent upon some event)
•
•
•
•
Customer is expecting a price concession from the company
based on the past practices, policies, etc. and it is expected
that the price to customer shall be less than the price stated in
the contract.
The company has an intention to provide price concessions to
customer
whichever method is applied, it should be applied consistently.
Refund liabilities or contract liabilities expected to be paid
should be updated at each period end. The standard contains
separate guidance on sale with a right-to-return basis.
CA KUSAI GOAWALA
•
•
Financing component
Interest expense/ income
•
•
Non-cash consideration
•
•
Deferred Consideration
At fair value
Consideration payable to consumer
Coupons etc
• Case Study :
• Company sells oats breakfast to a convenience stores. It pays for (a) Slotting fee for
placement of its products
• (b) Advertisement fee for billboard
Item (a) Should be deducted from Transaction Price as no separate service rendered
Item (b) should be considered as advertisement expense
•
CA KUSAI GOAWALA
Other principles
• The standard also defines specific guidance on following:•
Sale with a right to return
•
•
•
•
•
•
Warranties
•
•
•
•
•
•
Customer dissatisfaction
Expectation about refund liability
Exchanges will not be considered as returns
Recognise the amount expected to be retained and not return
Assurance that the product will perform
Above assurance with service to be provided
Provide warranty cost IndAS37
Warranties purchased separately – separate service
A law that requires to entity to pay compensation for damages does
not give rise to performance obligation.
CA KUSAI GOAWALA
Case Study
• Company sells 100 jeans at Rs.1000 – with 30 day return
period.
• Cost of jean Rs.600
• Estimated Expected returns 25%
• Sales 75 x 1000 = 75000
• Cost 75 x 600 = 45000
• Create Asset 25 x 600 = 15000
• Create liability 25 x 1000 = 25000
•
CA KUSAI GOAWALA
Principle vs Agent
•
•Agent
will only recognise fee or commission when control of goods
transferred
•Principle will recognise only when agent has performed
Customer options for additional goods or services
Sales incentives, customer awards, points, contract renewal
options, discount on further goods or services.
Estimate the discount and benefit and deduct from
Transaction price
CA KUSAI GOAWALA
Non refundable upfront fees
•
•Joining
fees of health clubs, activation fee in telecom, set up fee in
service industry, initiation fee in supply contracts
•Principle will recognise when the performance obligation has been met
•Case Study – Coaching classes collect 25% upfront fee – no upfront
recognition
Licensing
Software, motion pictures, franchisee fees, patents, TM.
Distinct or combined with goods/services
License forms part of tangible goods
Granting license to access contents – online
Entity’s promise for use of license
- License to use IP at point of time
- License to use IP at a period of time
CA KUSAI GOAWALA
Repurchase Agreements
•
•Obligation
to repurchase (forward)
•Right to repurchase (Call option)
•For
both the above options
•Do not recognise sale
•Account as Finance Lease
•Financing Arrangement
•If option lapses, recognise revenue – derecognise liability
•Obligation
to repurchase at the request of the customer (Put Option)
•If
PP (Put Price) < SP – account for lease as per IndAS17
•However, if customer does not have any incentive since PP < Market Price
•Account
as normal sale minus provision for right of return
•If
PP (Put Price) >= SP – account as financing transaction
•However, if customer does not have any incentive since PP < Market Price
•Account
as normal sale minus provision for right of return
If option lapses, recognise revenue – derecognise liability
CA KUSAI GOAWALA
Consignment Arrangements
•
•Donot
recognise unless controlled by third parties
•Indication of consignment nature
•Product
controlled by entity until delivered to customer or specific period expires
•Dealer is able to return the goods
•No obligation to pay for the products although he may give a deposit
Bill and Hold
Transfers effective control although no physical delivery
Indicators
Goods should be identifiable
Ready for despatch
the reason must be substantive – customer requests
entity should not have the ability to use the goods
Recognise the sales except for pending performance for any custodial
services
CA KUSAI GOAWALA
•
Customer Acceptances
•To
objectively determine
•Customer’s acceptance is a formality. Acceptance is based on
specifications supplied. If supplied as per specifications, recognise.
•Pending performance – installations etc
•Cannot determine transfer of control – do not recognise
•Trial period – lapses – recognise
CA KUSAI GOAWALA
•
Real Estate Sales in India and IndAS115
•Under
Indian GAAP – Guidance Note – AS7
•Transfer
of significant risk and reward, revenue can be determined
•Conditions of threshold limits are met
•Conditions under AS 9 and AS7 are met
•Recognise on percentage completion basis
•IndAS115
requires compliance of the following conditions :
•Customer
simultaneously receives and consumes benefit
•Developers performance enhances the value of the asset controlled by customer
•No alternative use to the developer
•Enforceable right to recover payment for performance completed upto date
•Compliance
with last two is possible. However, first two is difficult.
•Terms of contract to be seen
•What happens in case of 10% on booking and 90% on possession
CA KUSAI GOAWALA
Disclosures
•
•
•
•
•
•
•
•
•
The standard prescribes various disclosures as under :Qualitative and Quantitative aspects about the contract
Disaggregation of revenue
Contract Balances
Performance obligations
Transaction price allocation
Significant judgments applied
Timing of satisfaction of performance obligation
Determination of transaction price and amount allocated to
performance obligation
CA KUSAI GOAWALA
CA KUSAI GOAWALA
Appetizers :




The Accounting Standards are constituted to bring out real
profit or loss of an entity
The financial engineering in various products are exposed and
impact on profit and loss is correctly reflected
Financial Instruments are complex in nature due to its creation
out of fertile minds of financial wizards
They are common in nature and found everywhere.
Derivative is one of the most complicated aspect of this
Standard
CA KUSAI GOAWALA
Appetizers :
One may find such derivatives in many contracts.
For example :

Sale proceeds determined based on lease rentals

Lease rentals linked to sales of tenants

Technical consultancy – kicker incentive by way of stock
option

Variable Interest rates in bank loans

Convertible Preference Shares
CA KUSAI GOAWALA
Appetizers :
IFRS is replaced IAS 39 with a new simplified standard IFRS
9.
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
Presentation IndAS 32
Substance over Form
 Redeemable Preference Shares
 Compulsorily Convertible Debentures
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Standards under
discussion :
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Standards under discussion :
Description
Under
Indian
GAAP
Under
IFRS
Financial Instruments –
AS30
Recognition and Measurement
IFRS 9
Financial Instruments –
Presentation
AS31
IAS 32
Financial Instruments –
Disclosures
AS32
IFRS 7
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Basic Principles underlying these Standards
(a)
Fair Value Concept
(b)
Present Value method
(c)
Effective Interest Method
(d)
IRR and Amortised Value
(e)
Substance over form - Presentation
(f)
Off Balance Sheet Items will be recognised
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What is a Financial
Instrument (FI) ??
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Financial Instrument (FI)


Any contract :
That creates a Financial Asset (FA) for one entity
And
Creates Either a Financial Liability (FL) or Equity (E) for other
entity
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Example Financial Instrument (FI)
Entity A
Entity B
Loan Given ( FA )
Loan Taken ( FL )
Debtor ( FA )
Creditor ( FL )
Shares of B ( FA )
Equities
Debentures ( FA )
Debentures ( FL )
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What is a
Financial Asset
(FA) ??
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Financial Asset (FA)
Any asset that is:
(a)
Cash
(b)
Equity of another entity
(c)
Right to receive cash or any other FA
(d)
Right to exchange FA or FL
(e)
Derivative
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What is a
Financial Liability
(FL) ??
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Financial Liability (FL)
Any liability that is:
(a)
Contract to deliver cash or any FA of the entity
(b)
Exchange FA or FL with another entity
(c)
Contract to settle by issuing own variable numbers of equity
(for e.g. Conversion of a liability to Equity)
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Classification of FA
and FL
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


Classification
 based on business model
 Characteristics of cash flow from contract
Types
FA that are subsequently measured at :
1.
Amortised Cost (Earlier HTM and LR)
2.
Fair Value through OCI (earlier AFS)
3.
Fair Value through PL (Earlier FVPL)
Classification can change if the business model changes
Entity cannot reclassify its liabilities
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Classification of FA and FL
(a)
(b)
(c)
Fair Value through OCI
At amortised cost
Fair Value through Profit and Loss (FVPL)
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At amortised cost
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At Amortised Cost
Includes debt / assets acquired by entity to hold till maturity
Having business model to collect cashflows
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Fair Value
through OCI
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Fair Value through OCI
(a)
(b)
(c)
Debt Instruments
Business Model to collect cash flows and sale
Equity Instruments not held for trading – can opt for
irrevocable election
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Fair Value through
Profit or Loss (FVPL)
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Fair Value through Profit or Loss (FVPL)
(a)
(b)
(c)
FA or FL acquired and held for trading (purchasing and
selling in near term)
Derivatives other than - hedge and Financial Guarantee
contract
This is a Residue Section
(All Derivatives will be classified under this category only)
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Treatment in accounts for each
of the above classification
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Treatment in accounts for each of the
above classification
Initial
Recognition
FVPL
AC
FVOCI
Fair Value
Fair Value
Fair Value
++ Unquoted
shares
Cost
++ Short term
receivables
Subsequent
++ Unquoted
shares
Fair Value
Amortised
Cost
Fair Value
Cost
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Treatment in accounts for each of the
above classification
FVPL
Difference
P&L
Test for
impairment
No
AC
P&L as
interest
FVOCI
Revaluati
on
Reserve
Under
Equity
Yes
No
Impairment Loss NA
P&L
NA
Transaction Cost
P&L
FA
Reserve
Reclassification
Yes
Yes
Yes
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General
Reclassification of liabilities not permitted
Reclassification of assets permitted
(a)
(b)
(a)
(b)
(c)
(d)
a)
FVOCI to FVTPL = recognise gain/loss in PL
FVTPL to FVOCI = FV will be new amortised cost
AC to FVOCI = recognise gain/loss in OCI
FVOCI to AC = whatever was in OCI adjust against FV
Modification in Cash flows – revised value and carrying
amount – difference in Profit and Loss
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How to calculate
Fair Value :
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How to calculate Fair Value :
(a)
(b)
(c)
Active Market – quoted price
Arm’s length price
Non active market – Valuation Techniques –
i)
Discounted Cash Flow Method
ii)
Similar transactions of similar products
iii)
Options Model pricing
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How to calculate Fair Value :
Options model pricing :

Binomial Method

Black Scholes Model

Greeks Model (Delta, Gamma, Theta, Vega)

Cost to carry model
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How to calculate Fair Value :


Fair value of a loan given can be calculated by applying
market rate of interest and discounting the cash flows from
the same to the present value.
This will determine the effective interest loaded in FA.
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How to calculate
amortised cost
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How to calculate amortised cost


The stream of cash flows including interest and other
receivables or transaction cost payables from the FA/FL to be
calculated in such a way that the net present value of the cash
flows reduces to zero.
The effective interest worked out as above will be carried to
profit and loss and the actual interest received/paid will be
considered as cash inflow/outflow for the said FA/FL
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What is a
Derivative
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What is a Derivative
1)
2)
3)
A Financial instrument that meets all the following criteria :
The fair value of the entire instrument changes with the
changes in the value of that underlying asset
Net investment is zero or negligible compared to the total
value
Settled in future
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Derivatives
No
Smoke
Derivatives
without
Fire
underlying
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Derivatives



Loan sanctioned @ 12% fixed rate –not yet availed
Market rate goes up to 12.5%
Embedded Derivative 0.5%
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Derivatives
Derivative
Underlying
Mentioned
Amount
Settlement
Amount
Stock Option
Market Price of
Shares
Number of
Shares
(MP at
settlement –
stock price) *
No. of Shares
Currency
forward
Currency Rate
Number of
Currency Units
(Spot rate at
settlement –
forward rate ) *
no. of currency
units
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Derivatives
Derivative
Underlying
Mentioned
Amount
Settlement
Amount
Interest Rate
Swap
Interest Rate
Index
( e.g. Receive
5% fixed and
pay LIBOR)
No forward
Amt.
Amount in
Currency
(Interest rate
index- fixed rate
)*amount in
currency
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Embedded
Derivative
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Embedded Derivatives v/s Compound
Instruments
To explain in simple terms : any variable component of a contract
which can impact the cash flows.
For Holder
Embedded
Derivatives
For Issuer
Compound
Instrument
Deliberate Financial Engineering and intentional shifting of
certain risks between parties
Causes modification to a contract’s cash flow, based on changes
in a specified variable.
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
X Ltd. Invest in following two products of A Ltd.
Product 1
Product 2
Type
10% Convertible
Debentures
10% Convertible Debentures
Numbers Debentures
50000 @ ` 10/-
50000 @ ` 10/-
Conversion
1 equity share for each
debentures
Such numbers of equity
shares work out based on
price on date of conversion
Amount
Invested
Conversion
Period
` 5,00,000/-
2 Yrs
` 5,00,000/-
2 Yrs
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Product 1
Product 2
MV of shares on
date of conversion
` 50/-
` 50/-
No. of shares to be
allotted
50000
10000
Value of Product
Value changes
` 25,00,000/-
` 5,00,000/-
(50000*50)
(10000*50)
Yes
No
Hence Classified as
For Issuer
Equity (CI)
Liabilities
For Holder
Embedded
derivatives
Loan
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Embedded Derivative :
(a)
(b)
Host agreement – could be financial as well non financial
instrument.
Derivative component
If Host agreement is financial instrument – do not split
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Embedded Derivative :
(a)
(b)
(c)
(d)
If the entire FI is covered under FVPL, then it need not be
separated irrespective whether CR or NCR.
If Derivative component is closely related – no need to
separate – account with the host component
If Derivative is NCR, then account the same separately at FV.
If Value of a Derivative cannot be computed, directly apply
FV of total contract – FV of host contract
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Embedded Derivative


Loan – fixed rate contracts with an option to borrow, to repay
the loan any time it chooses
Embedded Derivatives
Embedded Derivative can be in Debtor /Equity Investments /
lease / Normal Sale / Purchase / Service Agreements /
Loan Agreements
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Compound Instrument
– from the perspective
of Issuer
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Compound Instrument – from the
perspective of Issuer
First identify whether :
 Liability
 Compound
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Pure Liability :
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Pure Liability :
Settlement by paying cash or issuing another FA
Examples :
o
Loans
o
Compulsorily redeemable Debentures
o
Compulsorily redeemable Preference Shares
o
Option to the issuer to issue variable number of its shares
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Compound (Liability
+ Equity)
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Compound (Liability + Equity)

The instrument provides for conversion option with fixed
number of its shares for a fixed amount.
Examples :
o Convertible Debentures/Preference Shares with fixed
number of shares
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Treatment in the
books
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Treatment in the books of Issuer :
(a)
(b)
Split Equity and Liability by first working out PV of the
cash flows discounted on market rate of Interest
applicable to similar instruments without conversion
options.
The remaining portion to be classified as equity
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Treatment in the books of Holder :
(a)
(b)
(c)
(d)
(e)
If the entire instrument is classified as FVPL, then do not split
If not, then check whether the embedded derivative is closely
related to the host or not
If risks of derivative closely related to the risks associated
with host, do not split. Recognise the same together wherever
the host is classified
If not closely related, then split by working out FV of
derivative and classify the derivative component as FVPL
and the remaining host wherever the same would have been
classified
If fair value cannot be worked out classify the entire contract
as FVPL.
(This is to prevent some companies to avoid classifying the
Derivative at Fair Value for its negative impact in P&L)
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Treatment of Financial Guarantee.
(a)
(b)
To recognize to the extent there is a probable outflow
of resources.
For example Bills Discounted to be continued as
debtors as well as liability to the discounter as the
continued involvement is of the entity.
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Derecognition :
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Derecognition :




If future cash flow ceases to exists
If all substantial risks and rewards transferred
If although substantial risks and reward not transferred but
control transferred
In case where the term of loan is changed substantially which
changes the FV of the loan by 10% - derecognize the old loan
and recognize the loan with revised term as new loan.
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Impairment
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Impairment of Financial Assets




Assess at each balance sheet date for any objective
evidence that a FA or group of FA is impaired and
determine the amount
Method for working impairment amount follow AS-28
Impairment of Assets
Compare credit risk
Recognise loss allowance for expected credit losses
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Impairment of Financial Assets


The objective evidence that FA is impaired includes but not
restricted to following loss events.
a) Significant financial difficulties of the issuer or obligor
b) A breach of contract, such as default or delinquency in
interest or principal payments
c) It becoming probable that the borrower will enter
bankruptcy or other financial reorganization
Collateral security will not affect the impairment of FA
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Hedge Accounting
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Hedge Accounting
Three types of Hedges :
(a) Fair Value Hedge (FVH)
(b) Cash Flow Hedge (CFH)
(c) Net investment in Non integrated foreign investment
Foreign currency hedge can either be FVH or CFH
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Fair Value Hedge
(a)
(b)
Recognised Asset or Liability for its changes in fair
value
Unrecognised Firm Commitment
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Cash Flow Hedge

Highly probable forecast transaction
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Hedge
Firm Commitment
Non Cancelable PO
Forecast Transaction
Cancelable PO but transaction
Possible
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How does FV Hedge works



Contract 1 : $ 100000 :- payable on 30/06/2011 (With
Supplier )
Contract 2 : Forward rate $100000 @ `45: - buy on
30/06/2011.(with Bank)
On Settlement- 30/06/2011-spot rate ` 48
100000 * 48 4800000
Net Bank ` 3
- 300000
4500000
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When to recognize Hedge
in Financial Accounts
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When to recognize Hedge in Financial
Accounts
(a)
(b)
A written agreement with third party
Hedge is effective
If the above conditions are met
The hedge is accounted at initial recognition at fair value
– which will be zero.
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On subsequent
reporting dates
before settlement
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On subsequent reporting dates before settlement :
(a)
(b)
Fair Value – the difference to the derivative asset and
credit to firm commitment
Cash Flow Hedge – to Hedge reserve account in equity
and on settlement transfer to the respective account.
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Disclosures
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Disclosures :
General Principles for disclosure :

An entity should disclose information that enables users of its
financial statements to evaluate the significance of financial
instruments for its financial position and performance.
Specific principles :
(a) Accounting policy for recognition of FA and FL
(b) Classifications - basis
(c) Valuation techniques used and assumptions made
(d) Reclassification
(e) Derecognition
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Disclosures :
(f)
(g)
(h)
(i)
(j)
(k)
(l)
Collateral
Allowances account for credit losses (RDD)
Defaults and breaches
Financial assets that are either past due or impaired
Risk assessment strategy and policy
Credit Risk for debtors and receivables
Liquidity risk for liabilities
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Disclosures :
(m)
(n)
(o)
(p)
(q)
Market risk
Hedging policy and coverage
Impact of open exposures to variable risks.
Sensitivity analysis (impact on P&L if interest rate to go
up by 0.5% basis on variable interest loan)
Quantitative and Qualitative Risk assessment
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Stringent Disclosures
(a)
(b)
(c)
(d)
(e)
Note on Interest income
Note on Financial Instruments – Recognition and
Measurement
Change in method due to implementation of Accounting
Standard.
Credit Risk management of receivables
Risk on fluctuation of Interest Rates for variable interest
loans
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Miscellaneous



Regular way Purchase or Sale of financial assets
Treasury Shares
Offsetting FA and FL
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Posers :
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Posers :
(a)
(b)
(c)
Interest free loans given to Subsidiaries/JV/Associates
whether covered under IndAS 109 or their respective
standards.
Bills discounting – to continue to show the same as
liability and not contingent liability
ICD where terms of repayment is not specified.
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Any Doubts
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CA Kusai Goawala
kusai@gkdj.in
9823140520
www.gkdj.in