a new era of financial reporting - icai agra branch - 30th april

A New Era of Financial ReportingThe Agra Branch of CIRC of ICAI30th April’2016

FCA Aditya SinghalM.Com, DISA(ICAI), DipIFRS (ACCA)+91 [email protected]

Current Global Reporting Requirements

2

IFRS

FIN REP

GSIB

IFRS 9

HKMA

BoE

Schedule

VI

*A New Era of Financial Reporting*

Stress

Testing

By CA Aditya Singhal

What is IFRS

• IFRS

• IFRS

• IAS

• IFRIC

• SIC

• Order of authoritativeness

• IFRS including any appendices

• Interpretations

• Appendices to IFRS that do not form part of the standards

• Implementation guidance issued by IASB

3*A New Era of Financial Reporting*By CA Aditya Singhal

Why IFRS ?

• Globalization

• Better transparency

• Cost effectiveness

• Scope of professional judgment

• Fair valuations

• Comparability


IFRS Vs Indian Accounting Standards

• Substance over form

• Fair value

• Current and Non-Current Classification

• Discounting (Time value of money)

• Standards prevail over law


IFRS across the world

Europe

2005

Australia

2005

Canada

2009/11

South Africa

2005

United States

(2019?)

Current or anticipated requirement

or option to use IFRS (or equivalent)

Brazil

2010

China

2007

India

2017/18

Chile

2009

Japan

(2016)


7

Revised Road-map

Above limits not applicable to banks, insurance companies and NBFC’s

Listed companies, to-be listed companies, companies with net worth> Rs 250 crore and their subsidiaries and joint ventures

31st March 2018 with one year comparatives

Listed companies, to-be listed companies, companies with net worth> Rs 500 crore and their subsidiaries and joint ventures

31st March 2017 with one year comparatives

*A New Era of Financial Reporting*By CA Aditya Singhal

• Mandatory for accounting period ending on 31st March

2019

• Full Comparatives for 31st March 2018 need to be

provided in Ind AS

• As per Ind AS 101, an Ind AS Opening Balance Sheet

would need to be prepared as on 1st April 2017.

(effectively year ending 31st March 2017)

• RBI has mandated proforma Ind AS financial statements

for the half-year ended 30th September 2016 (clarity

awaited on the contents of the proforma)

8

Banks, Insurance companies, NBFC’s> 500

crores


The IFRS Architecture

Framework for preparation and presentation of Financial

Statements

IAS 1: Presentation of Financial Statements

IAS 7 Statement of Cash flow

IFRS 10: Cosl FS

IAS 34: Interim financials reporting

IFRS 1: First time Adoption

of IFRS

Other standards


11

Framework for preparation and presentation of Financial

Statements


Framework for preparation and

presentation of Financial Statements

12

Underlying assumptions

>Accrual Basis

>Going Concern

Quantitative Characteristics

> Presentation

- Understand ability

- Comparability

> Content

- Relevance

- Reliability

Elements

Recognition

Measurement


13

IAS 1: Presentation of Financial Statements


Objective and Scope of IAS-1

14

Provide information about the financial position, financial

performance, and cash flow of an entity

that is useful a wide range of

users

Sets the overall requirement

for the preparation

and presentation of

financial statements

Provide guidance for

the format and structure of

financial statements

Set out the minimum content

requirement for financial statements


Assets - Liability - Equity - Income - Expenses

15

-Resource

-Controlled by an entity

-As a result of past event

-From which economic benefits are expected to flow to the entity

-Present obligation

-Arising from past events

-The settlement of which is expected to result in an outflow from the entity of economic benefits

-Residual interest in the entity’s assets after deducting all of its liabilities

-It is sub-divided in the statement of financial position

-Increase in economic benefit

- During the accounting period

- In the form of inflows, enhancement in assets or decrease in liability

-Other than those relating to contribution from equity participants

- Decrease in economic benefits

- During the period

- In the form of outflows, depletion of assets or incurrence of liability

- Other than that which relates t o distributions to equity participants

Financial Statements - Elements


General Feature of Financial Statement

Presentation

16

Fair PresentationCompliance with

IFRS

Going Concern Accrual

Materiality &

AggregationOffsetting

Comparative

InformationConsistency


Fair Presentation and Compliance with

IFRS

• Requires faithful representation of effects of transactions,

other events and conditions

• Required to make an explicit and unreserved statement of

compliance with IFRS in the notes (Not applicable in case of Ind- AS)

• An entity shall not describe financial statements as

complying with IFRSs unless they comply with all the

requirements of IFRSs

• Absence of an IFRS –management judgment : relevant

and reliable

• IFRS hierarchy


Going Concern & Accrual

• Ability to continue operations for the foreseeable

future

• Management required to make an assessment of

the entity’s ability to continue as a going concern

– should cover a period of 12 months from the

end of the reporting period


Materiality and Aggregation

19

Materiality

• Present separately each material class of similaritems

• An entity shall present separately items of adissimilar nature or function unless they areimmaterial

Offsetting

• An entity shall not offset assets and liabilities orincome and expenses, unless required orpermitted by an IFRS


Comparative Information &

Consistency

• Disclose comparative information in respect of the

previous period for all amounts reported in the current

periods financial statements

• Shall include comparative information for narrative and

descriptive information when it is relevant to an

understanding of the current period’s financial

statements

• Retain the presentation and classification of items in

financial statements from one period to another unless

IFRS requires a change in presentation or another

presentation or classification would be more

appropriate


Identification of Financial Statements

• Clearly identify the financial statements and distinguishthem from other information in the same published document

• Prominently display following information• Name of reporting entity and any change in that information from

the end of the reporting period

• Whether the financial statements are of an individual entity or agroup of entities

• Date of the end of the reporting period covered by the set offinancial statements

• Presentation currency

• Level of rounding used in presenting amounts in the financialstatements

• Domicile and legal form of the entity including country ofincorporation and address of its registered office

• A description of the nature of the entity’s operations and itsprincipal activities


Components of Financial Statements

22

Statement of Financial Position Statement of Comprehensive Income

Statement of changes in Equity Statement of Cash Flows

Notes, comprising a summary of significant accounting policies and other explanatory notes

A SOFP as the beginning of the earliest comparative period under certain circumstances


The Standard does not specify the order of presentation

or format to be used prescribes only certain minimum

lines items , with a provision that additional line items

may also be presented if so warranted by the nature or

function of the item.

For Example, under the head Property, Plant and

Equipment an entity may present if so warranted by the

assets that are measured using “Revaluation Model”.

By CA Aditya Singhal *A New Era of Financial Reporting* 23

Statement of Comprehensive Income

Current Vs Non-Current Classification

• Criteria for Classification as Current Assets:

An entity expects to realize the asset, or intends to sell or consume it, in its normal operating cycle,

holds it primarily for trading purposes,

expects to realize the asset within 12 months after the reporting period,

the asset is a cash or cash equivalent

• Criteria for Classification as Current Liabilities

it expects to settle the liability in the course its normal operating cycle

holds the liability primarily for trading purposes

or the liability is due to be settled within a year after the reporting period

it does not have an unconditional right to defer settlement of the liability for at least a year after the reporting period


Statement of Comprehensive Income

• An entity shall present all items of income and

expenses recognized in a period:

• in a single statement of comprehensive income, or

• in two statements: a statement displaying components of profit

or loss (separate income statement) and a second statement

beginning with profit or loss and displaying components of

other comprehensive income (statement of comprehensive

income)


Component of SOCI

27

Profit or Loss Account

Other Comprehensive

Income

Total Comprehensive

Income


Minimum Information in SOCI

• Revenue

• Finance costs

• Share of the profit or loss of associates and joint

ventures accounted for using the equity method

• Tax expense

• Post-tax profit or loss of discontinued operations

• Profit or loss

• Each component of other comprehensive income

classified by nature

• Total comprehensive income


SOCI-Others

• An entity shall present additional line items, heading

and sub-totals in the statement of comprehensive

income when such presentation is relevant to an

understanding of the entity’s financial performance

• No item of income or expense shall be presented as

extraordinary items in the statement of comprehensive

income


SOCI – Layout cont…..


SOCI - Layout


Statement of Changes in Equity (SOCIE)

• Statement of Changes in Equity (SOCIE) requirements

• Total comprehensive income for the period, showing separately the

total amounts attributable to owners of the parent and to non-

controlling interests

• For each component of equity, the effects of retrospective application

or retrospective restatement recognized in accordance with IAS 8-

Accounting Policies, Changes in Accounting Estimates and Errors

• For each component of equity, a reconciliation between the

carrying amount at the beginning and end of the period,

separately disclosing changes resulting from:

• Profit or Loss,

• Each item of other comprehensive income, and

• Transactions with owners in their capacity as owners showing

separately contributions by and distribution to owners


SOCIE- Layout


Cash Flow- IAS 7

• An entity shall prepare a statement of cash

flows in accordance with IAS -7

• Special Attention

• Foreign Currency transactions

• Tax on Income

• Non-Cash transactions

• Transactions resulting in changes in ownership

interest

• Dividends


Cash flow- IAS 7

• Disclosure requirement:

• Management commentary on special areas

• Reconciliation of opening and closing cash items

• Optional disclosure:

• Restricted cash

• Cash belongs to Joint ventures

• Cash flow relating to each reporting segments reported

• Minimum cash required to maintain the operating capacity


Notes

• Present information about the basis of the preparation

of the financial statements and the specific accounting

policies

• Disclose information required by IFRS that is not

presented elsewhere in the financial statements

• Provide information that is not presented elsewhere in

the financial statements, but is relevant to an

understanding of any of them


Notes- Sequence

• Statement of compliance with IFRS

• Summary of significant accounting policies

• Supporting information for items presented in the

statements of financial position

• Other disclosures including contingent liabilities, non-

financial disclosures


40

IFRS 1: First time Adoption of IFRS


First time Adoption - 5 step process

1. Identification of date of transition

2. Selection of accounting policies that comply with

IFRSs

3. Preparation of an opening IFRS balance sheet

4. Preparation of the first IFRS financial statements

5. Reconciliations and disclosures


Identification of date of transition

42

•Transition Date - 1st April’ 2010

•Adoption Date - 1st April’2011

•Reporting Date - 31st March’2012

If entity presents comparative statements

•Transition/Adoption Date – 1st April’ 2011

•Reporting Date- 31st March’2012

If entity does not present comparative statements


Selection of accounting policies that comply

with IFRSs

a) Need to apply IFRS effective at the

Reporting Date.

b) May apply a new IFRS that is not yet

mandatory, if it permits early application.

c) Determine which exceptions to use

d) Take into account the exceptions to

retrospective application


Preparation of an opening IFRS Balance Sheet

• Does not recognize items as assets or liabilities

if IFRS does not permit such recognition

• Recognize all assets and liabilities whose

recognition is required by IFRS

• Reclassify assets, liabilities and items of equity

as per the requirements of IFRS

• Measure all assets and liabilities in accordance

with IFRS


Preparation of an opening IFRS Balance

Sheet

45

Assets/ Liability

as per IFRS?

Recognised under Indian

GAAP

Whether Measurement in line with IFRS?

Re-classify, if required by IFRS

Include as per IFRS

prescription

Recognised under Indian

GAAP?

Exclude and do not recognise

No Change required

Adjust carrying amount as per

IFRS

YES YES

YES

YES

NoNo No


ABC Corp presented its financial statements under the national GAAP of

“Strangeland” (country) until 2004. It adopted IFRS from 2005 and is required to

prepare an opening IFRS balance sheet as at January 1, 2004. In preparing the IFRS

opening balance sheet Exuberance Corp. noted

• Under its previous GAAP, ABC Corp. had deferred advertising costs of $1,000,000

and had classified proposed dividends of $500,000 as a current liability.

• It had not made a provision for warranty of $200,000 in the financial statements

presented under previous GAAP since the concept of “constructive obligation” was

not recognised under its previous GAAP.

• In arriving at the amount to be capitalized as part of costs necessary to bring an

asset to its working condition, Exuberance Corp. had not included professional fees

of $300,000 paid to architects at the time when the building it currently occupies

as its head office was being constructed.

By CA Aditya Singhal 46

Preparation of an opening IFRS Balance Sheet

*A New Era of Financial Reporting*

Preparation of the first IFRS financial

statements - Mandatory Exceptions

47

Assets held for sale and discontinued operations

(IFRS 5)

Non- Controlling interests

(IFRS 3)

Hedge accounting & Embedded derivatives

(IAS 39 & IFRS 9)

Derecognition of financial assets and financial liabilities

(IAS 39 & IFRS 9)

Estimates

(IAS 8 & 10)


Preparation of the first IFRS financial

statements - Optional Exemptions

48

Fixed Assets

•Use of fair value as deemed cost

•Decommissioning liabilities included in the cost of property, plant and equipment.

•Leases

•Service concession arrangements

•Borrowing costs

Business Combination

•Business combinations

•Assets and liabilities of subsidiaries, associates and joint ventures

•Investments in subsidiaries, jointly controlled entities and associates in separate financial statements

•Cumulative translation differences

Financial Instruments

•Compound financial instruments

•Designation of previously recognized financials instruments

•Fair value measurement of financial assets or financials liability at initial recognition

Others

•Employees benefits

•Share- based payment transactions

•Insurance contracts


Reconciliations and Disclosures

• Equity from previous GAAP to IFRS at the

transition date and the end of the last period

presented in the entity‘s most recent financial

statements under previous GAAP

• Net profit from previous GAAP to IFRS for the last

period in the entity's most recent financial

statements under previous GAAP.

• Other disclosures in the first IFRS financial

statements


Challenges involved in First Time

Adoptions

1. Fair value override permitted under IFRS

2. Retrospective application

3. Barred – extraordinary items

4. Impact of change in accounting policy

5. The use of revaluation for fixed assets,

intangibles and investment property

…. cont


Challenges involved in First Time

Adoptions

6. Consolidation of financials – Special purpose

entities

7. Goodwill/negative goodwill treatment

8. Revenue recognition of long term construction

contract

9. Impairment of non-current assets

10. Classification of financial instrument


Reporting: Opportunity and Career


Role of CAs in Industry

• Change Agents

• Preparing internal processes to meet the information compilation

to meet the requirements of the IFRSs

• Developing Human Resources for Adaptation

• First time adoption

• The Board has to approve first time adoption choices (IFRS1)

• Detailed communication plan is necessary to educate stakeholders

and actively manage perceptions.

• Communication of key policy choices, interpretations and

accounting decisions to explain the financial results.

• Need for additional resources to replace those allocated to the IFRS

convergence programme.

• Budgets, forecasts, management accounts and KPIs need to be on

IFRS basis


Role of CAs in Practice

• Handholding

• Consultation

• Advise on internal processes on adoptation

• Training HRs on IFRSs’ processes

• Guidance


55

Questions ?


Key Learning Points

1. First time adoption is more of a business decision

than accounting

2. Doing it right at the first time is very critical

3. Judiciously applying the optional exemptions will

help reduce the GAAP difference

4. Practice with options will guide to refine decisions

5. Significant disclosure and reconciliation

requirements


Thanks !

FCA Aditya SinghalM.Com, DISA(ICAI) ,Dip IFRS (ACCA)

+91 8800334745

[email protected]


a new era of financial reporting - icai agra branch - 30th april

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