Overview of Significant Differences between International Financial Reporting Standards (IFRS) and Indian GAAP

TOPICS COVERED IN OUR SESSION

Differences with respect to:

Conceptual Accounting Framework Content of Financial Statements Accounting Differences

ACCOUNTING FRAMEWORK Historical cost

IFRS: Historical cost, but intangible assets, property plant and equipment

(PPE) and investment property may be revalued. Derivatives, biological assets and most securities must be revalued.

Indian GAAP:Historical cost, but fixed assets, other than intangibles, may be

revalued.

 

ACCOUNTING FRAMEWORK

First-time adoption of accounting frameworks

IFRS: Full retrospective application of all IFRS’s effective at the reporting

date for an entity’s first IFRS financial statements, with some optional exemptions and limited mandatory exceptions.

Indian GAAP: The accounting standard on Disclosure of Accounting Policies addresses

the issue of adoption of accounting policies. Also, particular standards specify the transitional treatment upon the first-time application of those standards

FINANCIAL STATEMENTS

Contents of financial statements

IFRS: Two years’ balance sheets, income statements, cash-flow statements,

changes in equity, accounting policies and notes.

Indian GAAP: Two years’ balance sheets, profit and loss accounts, accounting policies

and notes. Listed entities are required to give their consolidated financial statements and the related notes along with the standalone financial statements. (Financial Statements should also include cash flow statements in certain cases)

FINANCIAL STATEMENTS- BALANCE SHEETIFRS: Does not prescribe a particular format; an entity uses a liquidity

presentation of assets and liabilities, instead of a current/non-current presentation, only when a liquidity presentation provides more relevant and reliable information. Certain items must be presented on the face of the balance sheet

Indian GAAP: The Indian Companies Act and other industry-specific laws like

banking, insurance, etc. specify respective formats

FINANCIAL STATEMENTSIncome StatementsIFRS Does not prescribe a particular format. However, expenditure must be

presented in one of two formats (function or nature). Certain items must be presented on the face of the income statement.

Indian GAAP The Indian Companies Act does not prescribe a particular format. The

Company law and accounting standards however, prescribes certain disclosure norms for income and expenditures. For certain industries, industry specific laws specify formats.

Reporting currency IFRS: Requires the measurement of profit using the functional currency. Entities

may, however, present financial statements in a different currency. Indian GAAP: Schedule VI to the Companies Act, 1956 specifies Indian Rupees as the

reporting currency.

FINANCIAL STATEMENTS Statement of changes in shareholders’ equity IFRS: Statement showing capital transactions with owners, the movement in

accumulated profit and a reconciliation of all other components of equity. The statement must be presented as a primary statement.

Indian GAAP:Changes in shareholders’ equity are disclosed by way of a schedule.

Statement of recognised gains and losses / Other comprehensive income

IFRS: Give a statement of recognised gains and losses either as a separate

primary statement or highlight it separately in the primary statement of changes in shareholder’s equity

Indian GAAP:Not prescribed

ACCOUNTING DIFFERENCES

Subject IFRS Indian GAAP

Special purposes entities (SPEs)

Consolidate where the substance of the relationship indicates control.

No specific guidance.

Non-consolidation of subsidiaries

Dissimilar activities or temporary control are not a justification for non-consolidation.

Only if acquired and held for resale or there are severe long-term restrictions to transfer funds to the parent.

Business combinations All business combinations are acquisitions.

No comprehensive accounting standard on business combinations. All business combinations are acquisition; however, required use of pooling of interests method in certain amalgamations [when all the specified conditions are met]. To summarize: On consolidation, for an entity acquired and held as an investment: treated as acquisition. On amalgamation of an entity, either uniting of interests or acquisition. On business acquisition (i.e. assets and liabilities only) treated as acquisition.

ACCOUNTING DIFFERENCES

Subject IFRS Indian GAAP

Uniting of interests method

Prohibited. Required for certain amalgamations when all the specified conditions are met, else accounted under the purchase method.

Acquired intangible assets

Capitalise if recognition criteria are met; intangible assets must be amortised over useful life. Intangibles assigned an indefinite useful life must not be amortised but reviewed annually for impairment. Revaluations are permitted in rare circumstances.

Capitalise if recognition criteria are met; intangible assets must be amortised over useful life with a rebuttable presumption of not exceeding 10 years.

Revaluations not permitted.

Property, plant and equipment

Use historical cost or revalued amounts. Regular valuations of entire classes of assets are required when revaluation option is chosen.

Use historical cost. Revaluations are permitted, however, no requirement on frequency of revaluation. On revaluation, an entire class of assets is revalued, or selection of assets is made on a systematic basis.

Depreciation Allocated on a systematic basis to each accounting period over the useful life of the asset.

Similar to IFRS, except where the useful life is shorter than that envisaged under the Companies Act or the relevant statute, the depreciation is computed by applying a higher rate.

ACCOUNTING DIFFERENCES

Subject IFRS Indian GAAP

Deferred income taxes Use full provision method (some exceptions) driven by balance sheet temporary differences. Recognise deferred tax assets if recovery is probable.

Recognise tax effect of timing difference as deferred tax asset or liability. Recognise deferred tax assets (a) for entities with tax losses carry forward, if realisation is virtually certain, whereas (b) for entities with no tax losses carry forward, if realisation is reasonably certain. A number of other specific differences.

Fringe benefits tax Included as part of related expense (fringe benefit) which gives rise to incurrence of the tax.

Disclosed as a separate item after profit before tax on the face of the income statement.

Convertible debt Account for convertible debt on split basis, allocating proceeds between equity and debt

Convertible debt is recognised as a liability based on legal form without any split.

Functional currency Currency of primary economic environment in which entity operates.

Does not define functional currency.

ACCOUNTING DIFFERENCES

Subject IFRS Indian GAAP

Compensated absences Provision on actual cost to the company basis

Provision based on actuarial valuation

Preliminary expenses Charged to income statement. Deferred and written off over the period of 5 years.

loans Origination Cost Origination cost is amortized Charged to Profit and loss account

Financial liabilities - classification

Mandatory redeemable preference shares are classified as liabilities.

All preference shares are classified as shareholders’ funds.

Employee benefits -Pension costs defined benefit plans

Must use the projected unit credit method to determine benefit obligation

Provision in the accounts is normally made on the basis of actuarial valuation – no specific method is prescribed

ACCOUNTING DIFFERENCES CONTD……Subject IFRS Indian GAAPDepreciation Allocated on a systematic basis

to each accounting period over the useful life of the asset.

Depreciation is provided based on the useful lives of assets or the minimum rates prescribed by the Indian Companies Act, whichever is higher. Asset lives are not prescribed by the Companies Act, but can be derived from the depreciation rates.

Capitalisation of borrowing costs

Permitted, but not required for qualifying assets.

Compulsory when relates to the construction of certain assets.

Foreign exchange fluctuation

Under IAS such gains or losses are required to be expensed

Indian GAAP requires that any profit/loss arising on the restatement of foreign exchange liabilities incurred for the acquisition of imported fixed assets as a result of change in exchange rates is capitalized as part of the original cost of the assets.

Impairment of long lived assets

IAS require that assets be reviewed for impairment and impairment losses recognized in the accounts

Indian GAAP also has adopted the provisions of IFRS with effect from 1.4 2004 for listed companies and commercial enterprise with a turnover > 50 crores

Leasehold Land Disclosed as prepaid assets and accounting treatment is similar to operating leases.

Disclosed as a part of fixed assets.

ACCOUNTING DIFFERENCES CONTD….Subject IFRS Indian GAAP

Changes in accounting policies

Restate comparatives and prior-year opening retained earnings.

Include effect in the income statement of the period in which the change is made except as specified in certain standards where the change resulting from adoption of the standard has to be adjusted against opening retained earnings.

Correction of fundamental errors

Restatement of comparatives is mandatory.

Include effect in the current year income statement with appropriate disclosure

Deferred Taxes Use full provision method (some exceptions), driven by balance sheet temporary differences. Recognise deferred tax assets if recovery is probable.

Deferred tax assets and liabilities should be recognised for all timing differences subject to consideration of prudence in respect of deferred tax assets.

Lease Accounting Has been in place for a much longer time.

Applicable since 2001

Asset Retirement Obligation (ARO)

Obligations that are legally enforceable and unavoidable, and are associated with the retirement of tangible long-lived assets, be recorded as liabilities when those obligations are incurred and recorded at fair value.

No such guidance available.

ACCOUNTING DIFFERENCES - INVESTMENTSInvestments: IFRS: Depends on the classification of investment – if held to maturity or

loan or receivable, then carry at amortised cost, otherwise at fair value. Unrealised gains/losses on fair value through profit or loss classification (including trading securities) recognised in the income statement and on available-for-sale investments recognised in equity.**

Indian GAAP: Carry long-term investments at cost (with provision for other than

temporary diminution in value). Current investments carried at lower of cost or fair value determined on individual basis or by category of investment but not on overall (or global) basis. Specific guidance exists for banking industry.

**There is an option in IFRS to classify any financial asset ‘at fair value through profit or loss’. Changes in fair values in respect of such securities are recognized in the income statement. It must be noted that it is an irrevocable option to classify a financial asset at fair value through profit or loss.

DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS - MEASUREMENT OF DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

IFRS: Measure derivatives and hedge instrument at fair value. Recognise

the changes in fair value in the income statement, except for effective cash flow hedges, where the changes are deferred in equity until effect of the underlying transaction is recognised in the income statement.

Gains / losses on hedge instrument used to hedge forecast transaction, included in the cost of asset/liability (basis adjustment).

Indian GAAP: No comprehensive guidelines currently. Accounting treatment for

forward contracts and equity index and equity stock futures and option is prescribed. Guidance prescribed for banking companies.

DEPRICIATION

INVENTORY

Cost of inventory = costs of purchase + costs of conversion + other costs.

Costs of purchase = purchase price + import duties + other taxes (non-refundable in nature) + other direct costs.

Costs of conversion = direct costs + indirect costs (allocated production overheads).

Allocated production overheads = fixed production overheads + variable production overheads.

Ex 10 A retailer imported goods at a cost of CU130(1), including CU20 non-refundable

import duties and CU10 refundable purchase taxes. The risks and rewards of ownership of the imported goods were transferred to the retailer upon collection of the goods from the harbour warehouse. The retailer was required to pay for the goods upon collection. The retailer incurred CU5 to transport the goods to its retail outlet and a further CU2 in delivering the goods to its customer. Further selling costs of CU3 were incurred in selling the goods. The cost of purchase is CU125. It includes the costs incurred in bringing the goods to their sale location, ie the CU100 purchase price (CU130 less CU20 import duties less CU10 purchase taxes), the non-refundable import duties (CU20) and the transport to

the retail outlet (CU5). Note: The cost of purchase excludes the refundable purchase taxes paid on

acquisition of the good as the CU10 paid will be refunded to the retailer. It excludes the selling expenses incurred (ie CU2 delivery costs and CU3 other selling costs).

Ex 11 A retailer buys a good priced at CU500 per unit. However, the supplier awards the

retailer a 20 per cent discount on orders of 100 units or more. The retailer buys 100 units in a single order. The retailer measures the cost of the inventory at CU40,000 [ie 100 units x (CU500

list price less 20% of CU500 volume discount)]. Ex 12 A retailer buys a good priced at CU500 per unit. However, the

supplier awards the retailer a 20 per cent discount on orders of 100 units or more. Furthermore, when the retailer has purchased 1,000 or more units in a calendar year, the supplier awards the retailer a further volume discount of 10 per cent of the list price. The additional volume discount applies to all units acquired by the retailer during the calendar year. On 1 January 20X1 the retailer buys 1,000 units from the supplier in a single order. The retailer measures the cost of the inventory at CU350,000 [ie 1,000 units x

(CU500 list price less 30% of CU500 volume discount)].

COST OF PURCHASE

An entity may purchase inventories on deferred settlement terms. In some cases, the arrangement effectively contains an unstated financing element, for example, a difference between the purchase price for normal credit terms and the deferred settlement amount.

In these cases, the difference is recognised as interest expense over the period of the financing and is not added to the cost of the inventories.

Notes This paragraph ensures that the inventory is not

overvalued by inclusion of the interest cost inherent in the purchase arrangement in the cost of inventories.

Examples – costs of purchase Ex 16 An entity acquired an item of inventory for

CU2,000,000 on two-year interest-free credit. The identical item is available in the same market for

CU1,654,000 if payment is made within 30 days of the date of purchase (ie normal credit terms). The cost of the inventory is CU1,654,000 (ie the purchase price for normal credit terms).

Ex 17 An entity acquired an item of inventory for CU2,000,000 on two-year interest-free credit.

An appropriate discount rate is 10 per cent per year. The cost of the inventory is CU1,652,893 (ie the present value of the future payment.) Calculation: CU2,000,000 future payment ÷ (1.1)2.