international financial reporting standards (ifrs) indian accounting standards a. indian accounting...

International Financial Reporting Standards (IFRS)

Indian Accounting Standards

a. Indian Accounting Standards converged with IFRS – with certain carve - outs (Ind AS) – Not yet implemented

b. Existing mandatory Indian Accounting standards (AS) (Formulated by ICAI and notified u/s 211 of the Companies Act)

IFRS and Indian Accounting Standards

1

Scope of the discussion

Carve-outs in converged Indian Accounting Standards (Ind AS) from IFRS

Difference between IFRS and existing Indian Accounting Standards (AS)

Recent developments / New standards

New projects in IFRS

2

Carve - outs

Presentation of financial statements (IAS -1)• Classification of expenses• Complete set of financial statements‒ Statement of other comprehensive income‒ Statement of changes in equity

Treatment of foreign exchange differences on long term monetary assets & liabilities (IAS 21)

Conversion option embedded in FCCB (IAS 32-39)

Changes in fair value due to changes in own credit risk (IAS 32-39)

3

Carve – outs (contd...)

Business combinations (IFRS 3)• Common control transactions• Gain on bargain purchase (negative goodwill)

Employee benefits (IAS 19)• Treatment of actuarial gains & losses• Application of discount rates

Revenue recognition – in contracts of construction in real estate (IAS 11)

Revenue from agreements for construction of real estate (IAS 11 / IAS 18 / IFRIC 15)

4

Carve – outs (contd...) First time adoption (IFRS 1)

• Date of transition / deemed date of transition

• Comparatives – in prior period – Relaxation in converged standards

• Reconciliation to explain transition to IFRS

• Exemptions‒ Previous GAAP carrying value of PPE as deemed cost

(similar exemptions for Intangible assets and Investment properties)

‒ Unrealised foreign exchange difference on long term monetary assets and liabilities

‒ Retrospective application of

•Effective interest method

•Impairment requirements

5


Consolidated financial statements (IAS 27) mandated by IFRS / regulations (SEBI)

Statement of cash flows (IAS 7) • Interest & dividend

Accounting policies, changes in accounting estimates and errors (IAS 8). • New Accounting Pronouncements & their impact• Absence of standard or interpretation that specifically applies to a

transaction

Investment property • Cost model Vs. fair value model

6


Determining whether an arrangement contains a lease (IFRIC 4)

Government grants (AS 20)• Fair value Vs. Nominal value

Disclosure which conflict with confidentiality requirements of statues / regulations (IAS 24)

Investments in associates (IAS 28) • Excess of share acquired in fair value of asset & liability of associate

over cost

‒ in P & L or equity?

No Indian standards yet formulated• Accounting and Reporting by Retirement Benefit Plan (IAS 26)

• Agriculture (IAS 41)7

Differences between IFRS and existing Indian Accounting Standards (AS)

Conceptual differences• Varying degree of focus on / importance of :- ‒ Fair value

‒ Time value of money

‒ Substance over form

‒ Legal control / control in substance

‒ Legal obligation / constructive obligation

8

Differences between IFRS and existing Indian Accounting Standards (AS)

Presentation of financial statements (IAS 1 / AS 1)• Components of financial statements ‒ Presentation of income statement / comprehensive income

‒ Statement of changes in equity

• Format of financial statements (Schedule VI)

• Classification of assets & liabilities ‒ Current - non current

‒ Classification of financial liabilities under refinancing arrangements

• Classification of expenses

9

Differences between IFRS and existing Indian Accounting Standards (AS) (Contd…)

Presentation of financial statements (IAS 1 / AS 1) (Contd…)

• Extraordinary items

• Reclassification in financial statements

• Critical judgments

• Estimation of uncertainty

Changes in accounting policies & estimates and errors (IAS 8 / AS 5)• Accounting treatment of changes in accounting policies

• Accounting treatment of changes in accounting estimates

• Accounting treatment of errors

10


Accounting of construction contracts (IAS 11 / AS 7)• Percentage of completion method

• Recognition of revenue by real estate developers

• Service concession arrangements

Income taxes (IAS 12 / AS 22)• Timing differences / temporary differences

• P & L approach / balance sheet approach

• Income / expenses recognised outside P & L account

• Recognition of deferred tax assets ‒ Virtual certainty

‒ Reasonable certainty

11


Income taxes (IAS 12 / AS 22) (contd…)

• Revaluation of fixed assets ‒ Deferred tax liability (based upon sale rather than through use)

‒ Reasonable certainty

• Deferred tax in respect of business combinations

• Deferred tax on unrealised intra-group profits (in consolidated financial statements)

• Numerical / tax rate reconciliation

12


Property plant and equipment (IAS 16 / AS 6 / AS 10) • Depreciation based on major components

• Replacements costs

• Cost of major inspections / overhauls

• Revaluation

• Treatment of revaluation reserve

• Changes in method of depreciation

• Decommissioning, restoration and similar liabilities

13

Differences between IFRS and existing Indian Accounting Standards (AS) (Contd…) Leases (IAS 17 / AS 19)• Interest in leasehold land

• Initial direct costs / lease incentives

• Determination of whether an arrangement contains a lease (IFRIC 4)

Revenue (IAS 18 / AS 9)• Measurement of revenue

(When inflow receivable deferred - discounted by imputed rate of interest)

• Interest income- Recognised using the effective interest method

• Revenue from services rendered- Completed service contract method / Proportionate completion

method

14

Difference between IFRS and existing Indian Accounting Standards (AS) (Contd…) Employee benefits (IAS 19 / AS 15)

• Treatment of actuarial gains & losses‒ Income statement

‒ Other comprehensive income

‒ Corridor approach

• Discount rates‒ Government bonds / high quality corporate bonds

15

Difference between IFRS and existing Indian Accounting Standards (AS) (Contd…)

The effects of changes in foreign exchange rates (IAS 21 / AS 11)• Functional and presentation currency

• Treatment of exchange differences‒ Financing cost

‒ Schedule VI

‒ Para 46 of AS 11

• Integral / Non – integral operations‒ Income statement / Reserves (recycled to Income statement on

disposal)

‒ Other comprehensive income (recycled to Income statement when control is lost)

16


Consolidated financial statements (IAS 27 / AS 21)• Requirement for preparation‒ By standard or by statute ?

• When not required (Intermediate subsidiary)• Legal control / control in substance• Dual control• Potential voting rights• Uniform accounting policies• Time lag of 3 months• Presentation of Non-controlling interest• Partial disposal of investment in subsidiary‒ When control retained

‒ When control lost

• Special Purpose Entities17


Interest in Joint Ventures (IAS 31 / AS 27)• Proportionate consolidation Vs. Equity method‒ Issues involved

Financial Instruments• Presentation (IAS 32 / AS 31)

• Recognition and Measurement (IAS 39 / AS 30)

• Disclosures (IFRS 7 / AS 32)

• AS 30, 31, 32 - not yet notified‒ Relevance of AS 30, 31, 32 ?

• Ind AS 32, 39, 107 - Prepared as converged standards

• AS 11 and AS 13 – Present mandatory standards

18

Difference between IFRS and existing Indian Accounting Standards (AS) (Contd…) Financial Instruments (Contd …)

• Presentation (IAS 32 / AS 31)‒ Liability Vs. Equity

• Form Vs. Substance

• Redeemable preference capital / convertible debentures

‒ Presentation of Treasury shares

‒ Conversion option

• Embedded in FCCB

• Embedded in entity’s functional currency

• Disclosures (IFRS 7 / AS 32)‒ Detailed requirements of disclosures in IFRS 7 to evaluate

• The significance of financial instruments to an entity

• The nature and extent of their risks

• How the entity manages those risks19

Difference between IFRS and existing Indian Accounting Standards (AS) (Contd…) Financial Instruments (Contd …)

• Recognition and Measurement (IAS 39 / AS 30)‒ Classification and Measurement

• Fair value through Profit & Loss (FVTPL)

• Held to Maturity (HTM)

• Available for Sale (AFS)

• Loans & Receivables

‒ Loans and receivables impairment

• Provisioning norms of RBI

• Subjective Vs. Objective approach

‒ New IFRS 9 for Financial Assets (1.4.2013)

‒ Impairment

• Recognition

• Reversal 20


Financial Instruments (Contd …)

• Recognition and Measurement‒ Derivative and embedded derivatives

‒ Derivatives and hedge accounting

• Fair value hedge

• Cash flow hedge

• Hedge of a net investment in a foreign entity

‒ De-recognition of financial assets and securitisation

‒ De-recognition of financial liabilities

‒ Recognition & measurement of financial guarantee contracts

21


Provisions, Contingent liabilities and Contingent assets (IAS 37 / AS 29)• Legal obligation Vs. Constructive obligation

• Discounting of liabilities to the present value

Intangible Assets (IAS 38 / AS 26)• Useful life may be finite or indefinite

• Amortisation or Impairment or both

22


Business Combinations (IFRS 3 / AS 14)• Amalgamation in the nature of acquisition or pooling of interest

• Amalgamation between entities under common control

• Measurement of Goodwill

‒ Fair valuation of other assets and liabilities ?

• Negative Goodwill

‒ Bargain purchase (accounting treatment ?)

• Business combination achieved in stages

23

Recent Developments / New Standards

IFRS 9 Financial Instruments (w.e.f. - 1.1.2013)• Limited to financial assets

• Requirements for financial liabilities are under finalization

• Second and third phase related to Impairment of financial assets and Hedge accounting – when completed, IAS 39 will be replaced

• Impairment of financial assets ‒ Incurred loss model Vs. Expected loss model

24

Recent Developments / New Standards (Contd.)

Financial Assets (Under IFRS 9)• Two measurement category approach‒ Fair value / Amortised cost

• Classification based on assessment of the way in which the instrument is managed (the entity’s business model)

• Hybrid contracts are classified in accordance with the classification criteria in their entirety

• Strategic equity investments‒ Option to record all fair value changes in OCI (No recycling

between P&L and OCI permitted)

• All Equity investments measured at fair value‒ Cost exception for unquoted equity investments not available

25


IFRS 10 Consolidated Financial Statements (w.e.f. – 1.1.2013)• Changes the criteria for determination of control‒ Earlier – Power to govern operating and financial policies

‒ Now – Whether the investor is exposed or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee

• Prescribes‒ The criteria for preparation of consolidated financial statements‒ Consolidation procedures‒ Presentation of Non-controlling interests‒ Treatment for changes in ownership interests

26


IFRS 11 Joint Arrangements (w.e.f. – 1.1.2013)• Joint arrangement has two characteristics‒ A contractual arrangement

‒ 2 or more parties have joint control

• Joint arrangement is either a‒ Joint Operation

‒ Joint Venture

• Joint Operation‒ The parties that have a Joint Control have rights to the assets and

obligations for the liabilities relating to the arrangement

• Joint Venture‒ The parties that have Joint Control have rights to the Net Assets of

the arrangement

27


IFRS 11 Joint Arrangements (Contd…)

• Existence of a separate vehicle - Joint operation / Joint venture ?‒ A joint arrangement that is not structured through a separate vehicle

is a Joint Operation

‒ If assets and liabilities held in a separate vehicle, it can be either a Joint Venture or Joint Operation

• Accounting treatment under Joint operation / Joint venture

28


IFRS 12 Disclosure of Interests in Other Entities (w.e.f. – 1.1.2013)• Disclosure of interest in any of the following‒ Subsidiaries

‒ Joint arrangements (Joint operations or Joint ventures)

‒ Associates

‒ Unconsolidated structured entities

• Disclosure requirements excluded from IFRS 10 and IFRS 11 - combined in this standard

29


IFRS 12 Disclosure of Interests in Other Entities (w.e.f. – 1.1.2013) (Contd…)

• Significant judgments and assumptions made in determining‒ Control

‒ Joint Control or Significant Influence

‒ The type of joint arrangement (i.e. Joint operation or Joint venture) when arrangement has been structured through a separate vehicle

• Prescribes separate lists of requirements of disclosure in case of‒ Interest in Subsidiaries

‒ Interest in Joint arrangements & Associates

‒ Interest in unconsolidated structured entities

30


IFRS 13 Fair Value Measurements• IFRS 13‒ Defines Fair Value

‒ Sets out in a single IFRS a framework for measuring fair value

‒ Requires disclosures about fair value measurement

• Definition of Fair Value‒ Exit price

‒ To sell asset or paid to transfer a liability

‒ An orderly transaction

‒ At the measurement date

31


IFRS 13 Fair Value Measurements (Contd…)

• Objective of IFRS 13‒ To increase consistency and comparability through “Fair Value

hierarchy”

‒ Fair Value hierarchy categorizes and describes the inputs used in valuation techniques in 3 levels - Level 1 Input, Level 2 Input and Level 3 Input

• Overview of Fair Value measurement approach

• Guidance on Measurement

• Valuation techniques‒ Market approach

‒ Cost approach

‒ Income approach

• Elaborate disclosure requirements32

New Projects in IFRS

Revenue from Contracts with customers (Joint Proposal under consideration)

• Uniform revenue recognition in complex transactions such as long term service contracts and multiple element arrangements

• A company should recognise revenue when it satisfies a performance obligation by transferring a good or service to a customer. A good or service is transferred to a customer when the customer obtains control of that good or service.

33

New Projects in IFRS (Contd…)

Revenue from Contracts with customers (Contd…) (Joint Proposal under consideration)

• When multiple elements / contracts are bundled together, apply the following steps‒ Identify the contract(s) with the customer

‒ Identify the separate performance obligations in the contract

‒ Determine the transaction price

‒ Allocate the transaction price to the separate performance obligations

‒ Recognise revenue when (or as) the entity satisfies each performance obligation

34


Leases (Joint Proposal under consideration)

• According to the World Leasing Yearbook 2010, leasing activity in 2008 amounted to US$ 640 billion. However, the assets and liabilities arising from many of those contracts are not shown in a lessee’s Statement of Financial Position (Balance sheet)

• In the books of Lessee‒ New project envisages that a lessee would recognise a liability to

make lease payments and a corresponding right to use asset upon lease commencement

35


Leases (Joint Proposal under consideration) (Contd…)

• In the books of Lessor‒ There was a proposal to adopt “the receivable and residual

approach” (i.e. to allocate the carrying value of underlying asset being leased between the right of use granted to the lessee and the residual asset. However, at present the consensus is against this approach in the books of lessor.

36

Thank you

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