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Western India Regional Council of The Institute of Chartered Accountants of India

Two Days Workshop on IND-AS & IFRS

6th May, 2011 – Session 2

Anand Bathiya – B. Com, A.C.A., A.C.S., LL.B.

Today’s Agenda

• IAS 16 \ IND-AS 16 - Property Plant & Equipment

ET: 90 minutes

• IAS 8 \ IND-AS 8 - Accounting Policies, Changes in Accounting

Estimates and errors

Broad Coverage:

• IAS 16

• IAS 8

• IAS 10

• IAS 18

• Q&A

Estimates and errorsET: 20 minutes

• IAS 10 \ IND-AS 10 - Events After The Reporting PeriodET: 20 minutes

• IAS 18 \ IND-AS 18 – RevenueET: 20 minutes

• Q&AET: 10 minutes

2

IAS 16 \ IND-AS 16

Property, Plant and Equipment


Session 2

International Accounting Standard 16 - Property Plant & Equipment

- About IAS 16

- Recognition Concepts

- Models of Valuation

Principal Issues:

•Recognition

•Carrying Amount

•Depreciation

•Impairment

•Disclosures

- Models of Valuation

- Depreciation

- Disclosures

- Key differences

- Case Studies

- Extract from select Annual Reports

4

Objective & Scope of IAS 16

The objective of IAS-16 is:

- To prescribe the accounting treatment for Property, Plant &

Equipment (PPE)

- So that the users of Financial Statements can discern

information about the entity’s investment in its PPE and the

IAS 16:

--About IAS 16About IAS 16

-Recognition

-Valuation Models

-Depreciation

-Other Matters

-Disclosures

-Key Differences

-Case Study

-Annual Reportinformation about the entity’s investment in its PPE and the

changes in such investment.

The principal issues in accounting for PPE are:

- The Recognition of assets

- Determination of their Carrying Amounts

- Depreciation charges and Impairment charges

- Disclosures

-Annual Report

5Bare unaccompanied IFRS can be downloaded from www.ifrs.org

Converged Indian Accounting Standards can be downloaded from www.icai.org

Exclusions

IAS 16 does not apply to:

a) Property, plant and equipment classified as held for sale in

accordance with IFRS 5 Non-current Assets Held for Sale and

Discontinued Operations

b) Biological assets related to agricultural activity

IAS 16:


-Recognition

-Valuation Models

-Depreciation

-Other Matters

-Disclosures

-Key Differences

-Case Study

-Annual Report b) Biological assets related to agricultural activity

c) The recognition and measurement of exploration and

evaluation assets or

d) mineral rights and mineral reserves such as oil, natural gas

and similar non-regenerative resources.

However, this Standard applies to property, plant and

equipment used to develop or maintain the assets described

in (b)–(d).

-Annual Report

6

Related reporting coverage

The following Interpretations refer to IAS 16:

• SIC-21 Income Taxes—Recovery of Revalued Non-Depreciable

Assets (issued July 2000)

• SIC-29 Service Concession Arrangements: Disclosures (issued

December 2001 and subsequently amended)

IAS 16:


-Recognition

-Valuation Models

-Depreciation

-Other Matters

-Disclosures

-Key Differences

-Case Study

-Annual Report• SIC-32 Intangible Assets—Web Site Costs (issued March 2002 and

subsequently amended)

• IFRIC 1 Changes in Existing Decommissioning, Restoration and

Similar Liabilities (issued May 2004 and subsequently amended)

• IFRIC 4 Determining whether an Arrangement contains a

Lease (issued December 2004)

• IFRIC 12 Service Concession Arrangements (issued November 2006 and

subsequently amended).

____________________________________________________________________________

IAS 11 – Construction Contracts, IAS 36 – Impairment of Assets, IAS 38 – Intangible Assets,

IFRS 5 – Non-Current Assets held for Sale and Discontinued Operations,

IAS 40 – Investment Properties, IAS 17 – Leases,

-Annual Report

7

Terminologies

Distinct terminology:

• Fixed Assets – Property Plant & Equipment – Non-Current Tangible

Assets – Long-Lived Assets

• Investment Property – Land & Building held for the purposes of

earning rent or for capital appreciation.

IAS 16:

-About IAS 16

-Recognition

-Valuation Models

-Depreciation

-Other Matters

-Disclosures

-Key Differences

-Case Study

-Annual Report earning rent or for capital appreciation.

• Fair Value - is the amount for which an asset could be exchanged

between knowledgeable, willing parties in an arm’s length

transaction.

• Recognition, Measurement, Presentation and Disclosure.

-Annual Report

8

Recognition - Concepts

The cost of an item of PPE comprises:

a) its purchase price, including import duties and non-refundable

purchase taxes, after deducting trade discounts and rebates;

b) any costs directly attributable to bringing the asset to the location

IAS 16:

-About IAS 16

--RecognitionRecognition

-Valuation Models

-Depreciation

-Other Matters

-Disclosures

-Key Differences

-Case Study

-Annual Report b) any costs directly attributable to bringing the asset to the location

and condition necessary for it to be capable of operating in the

manner intended by management.

c) the initial estimate of the costs of dismantling and removing the

item and restoring the site on which it is located, the obligation for

which an entity incurs.

d) Borrowing Costs

-Annual Report

9

Recognition - Issues

T&L Construction Limited introduced a new production line.

The expenditures incurred for this new line include:

1. Rs. 50,000 for the costs of employee in fixing the interior of the

factory to suit for the production line,

2. Rs. 100,000 in preparing the factory site,

3. Rs. 5,000,000 in purchasing the machines for the line,

IAS 16:

-About IAS 16


-Valuation Models

-Depreciation

-Other Matters

-Disclosures

-Key Differences

-Case Study

-Annual Report 3. Rs. 5,000,000 in purchasing the machines for the line,

4. Rs. 60,000 in arranging the initial delivery,

5. The installation and assembly costs of the machines of Rs. 55,000,

6. Costs of initial testing of Rs. 40,000,

7. Professional fees in assessing the function and installation of Rs.

20,000,

8. Costs of grand opening the new line of Rs. 30,000,

9. Costs of introducing a new product manufactured by this new

production line of Rs. 950,000, and

10. Administration and other general overhead costs in studying the

production performance of Rs. 25,000.

-Annual Report

10

Measurement after recognition

Measurement at Initial Recognition is always at Cost

Measurement after Initial Recognition:

• Cost Model –

After recognition as an asset, an item of property, plant and

equipment shall be carried at its cost less any accumulated

IAS 16:

-About IAS 16


-Valuation Models

-Depreciation

-Other Matters

-Disclosures

-Key Differences

-Case Study

-Annual Report equipment shall be carried at its cost less any accumulated

depreciation and any accumulated impairment losses.

• Revaluation Model –

An item of property, plant and equipment whose fair value can be

measured reliably shall be carried at a revalued amount.

• Deemed Cost Model - IFRS 1

A first-time adopter of IFRS has an option to voluntarily account as per

Deemed Cost Model

-Annual Report

11

Revaluation Model

What is Fair Value?

Fair value is the amount for which an asset could be exchanged between

knowledgeable, willing parties in an arm’s length transaction.

The fair value of

– Land and Buildings ⇒ is usually determined from market-based evidence by

⇒

IAS 16:

-About IAS 16

-Recognition

--Valuation ModelsValuation Models

-Depreciation

-Other Matters

-Disclosures

-Key Differences

-Case Study

-Annual Report – Land and Buildings ⇒ is usually determined from market-based evidence by

appraisal that is normally undertaken by professionally qualified valuers.

– Other Items of PPE ⇒ is usually their market value determined by appraisal.

If there is no market-based evidence of fair value because of the specialized

nature of the item of PPE and the item is rarely sold,

⇒ an entity may need to estimate fair value using

• an income or

• a depreciated replacement cost approach.

-Annual Report

12

Revaluation Model (contd.)

Reduction on revaluation to be taken to Income Statement except to the

extent that can be adjusted against revaluation reserve.

• Frequency of revaluation

• No mandatory requirement of professional valuers

Cost and Revaluation Model is applicable to the entire class of plant &

property. However, Deemed Cost model allows flexibility to apply to selected

IAS 16:

-About IAS 16

-Recognition


-Depreciation

-Other Matters

-Disclosures

-Key Differences

-Case Study

-Annual Report property. However, Deemed Cost model allows flexibility to apply to selected

assets within a class of asset.

The Ministry of Corporate Affairs has initiated steps by issuing Concept Paper

and draft Valuation Professionals Bill.

-Annual Report

13

Who will value?

The Valuation Professionals Bill, 20** (Act No. ***** of 20**)

Bill pending in Parliament

(i) The institutional structure for the regulation of valuers;

(ii) The participation of various professional bodies in the proposed Council of

Valuation Professionals;

IAS 16:

-About IAS 16

-Recognition


-Depreciation

-Other Matters

-Disclosures

-Key Differences

-Case Study

-Annual ReportValuation Professionals;

(iii) The role of the proposed Valuation Council in recognition of other

professional bodies.

(iv) The manner of cancellation of recognition of a professional institute

imparting training/education/qualification in valuations if such institute fails

to meet the standards required of it for continuation as a recognized institute;

(v) Provisions for Practice as CVP

(vi) Misconduct & Penalties

(vii) The manner of enabling quality in delivery of services by valuation

professionals;

-Annual Report

14

Presentation in FS (Revaluation)IAS 16:

-About IAS 16

-Recognition


-Depreciation

-Other Matters

-Disclosures

-Key Differences

-Case Study

-Annual Report

Z Enterprises

Income statement as at 31 December 2009

Revenue X

Cost of sales (X)

Gross profit X

Other income X

Distribution costs (X)

Administrative expenses (X)-Annual Report

15

Administrative expenses (X)

Other expenses (X)

Finance cost (X)

Profit for the year X

Other comprehensive income

Gains on property revaluation 200,000

Exchange differences on translating foreign operations X

Income tax relating to components of other comprehensive income (X)

Total other comprehensive income X

Total comprehensive income for the year X

Presentation in FS (Revaluation)IAS 16:

-About IAS 16

-Recognition


-Depreciation

-Other Matters

-Disclosures

-Key Differences

-Case Study

-Annual Report

Statement of Changes in Equity

Share

capital

Retained

earnings

AFS assets Cash flow

hedges

Revaluation

surplus

Total Non controlling

interest

Total

equity

Balance at

31/12/2008

X X X X X X X X

Changes in equity

2008

Issue of share

-Annual Report

16

capital

Dividends

Total

Comprehensive

income for the year

200,000

Transfer to retained

earnings

Balance at

31/12/2009

X X X X X X X X

Deemed Cost Model

IFRS 1 – First Time Adoption of IFRS

Deemed Cost:“the amount used as a surrogate for cost or depreciated cost

at a given date”.

The exemption may be used selectively within the class of assets . A first-

time adopter need not use fair value as deemed cost for all assets in the

IAS 16:

-About IAS 16

-Recognition


-Depreciation

-Other Matters

-Disclosures

-Key Differences

-Case Study

-Annual Reporttime adopter need not use fair value as deemed cost for all assets in the

same class.

Subsequent depreciation is based on the deemed cost and starts from the

date at which the fair value measurement or revaluation was established.

Optional exemption arising through IFRS-1. Choice available with the entity.

IFRS-1 allows 16 such exemptions to the First-time adopters enabling and

encouraging a smoother transition to IFRS.

-Annual Report

17

Model évaluationIAS 16:

-About IAS 16


-Valuation Models

-Depreciation

-Other Matters

-Disclosures

-Key Differences

-Case Study

-Annual Report

A. COST MODEL 2005-06 2006-07 2007-08 2008-09 2009-10

Opening Block of Building 1,000,000 900,000 800,000 700,000 600,000

Less: Depreciation for year (SLM 10%) 100,000 100,000 100,000 100,000 100,000

Net Block 900,000 800,000 700,000 600,000 500,000

B. REVALUATION MODEL 2005-06 2006-07 2007-08 2008-09 2009-10

Opening Block of Building 1,000,000 900,000 800,000 875,000 750,000-Annual Report

18


Add: Revaluation - - 200,000 - 200,000


Net Block 900,000 800,000 875,000 750,000 791,667

C. DEEMED COST EXEMPTION 2005-06 2006-07 2007-08 2008-09 2009-10


Add: Revaluation on transition - - 200,000 -


Net Block 900,000 800,000 875,000 750,000 625,000

Depreciation

• Component Accounting

• No rate of depreciation – Debated in India

• The depreciable amount of an asset is determined after deducting its

residual value.

• If residual life and value of the asset differs in subsequent year-end,

IAS 16:

-About IAS 16

-Recognition

-Valuation Models

--DepreciationDepreciation

-Other Matters

-Disclosures

-Key Differences

-Case Study

-Annual Report • If residual life and value of the asset differs in subsequent year-end,

the same will be a change in accounting estimate.

• Usage method of depreciation is permitted and depreciation of idle

time may not be charged under that scenario.

• An increase in the value of the land on which a building stands does

not affect the determination of the depreciable amount of the

building.

-Annual Report

19

Treatment of Depreciation

No prescribed depreciation method – Method to be reviewed at every

year end and any change to be effected Prospectively. (Change of

Estimate)

Accounting Entry for Depreciation on Revalued Assets:

IAS 16:

-About IAS 16

-Recognition

-Valuation Models

--DepreciationDepreciation

-Other Matters

-Disclosures

-Key Differences

-Case Study

-Annual Report

Depreciation ….. Dr. XX

To Fixed Assets ….. Cr. XX

Revaluation Reserve ….. Dr. XX

To Retained Earnings ….. Cr. XX

At every year-end Depreciation method and useful life needs to be reviewed.

-Annual Report

20

Derecognition

Distinct terminology:

• Derecognition of assets incase of:

1. On Disposal

2. When no future benefits are expected

IAS 16:

-About IAS 16

-Recognition

-Valuation Models

-Depreciation

--Other MattersOther Matters

-Disclosures

-Key Differences

-Case Study

-Annual Report • Derecognition profit\loss to be charged to Profit & Loss Account.

• If proceeds of sale are deferred, interest income to recognized

accordingly.

• Assets held for sale to be accounted as per IFRS-5 under a separate

category and no depreciation to be charged on the same.

-Annual Report

21

Capitalisation of Borrowing Costs

Allowable subject to incurred for qualifying asset.

Interest cost can be capitalized from the period from which all the

conditions are first fully met:

• It incurs expenses for the asset

• It incurs borrowing costs

• It undertakes activities that are necessary to prepare the asset for its

IAS 16:

-About IAS 16

-Recognition

-Valuation Models

-Depreciation


-Disclosures

-Key Differences

-Case Study

-Annual Report • It undertakes activities that are necessary to prepare the asset for its

intended use or sale.

An entity shall cease capitalizing borrowing costs when substantially

all the activities necessary to prepare the qualifying asset for intended

use or sale are complete.

An entity shall suspend capitalization of borrowing costs during

extended periods in which it suspends active development of a

qualifying asset.

Foreign Exchange Fluctuation difference not allowable unless included

as borrowing cost.

-Annual Report

22

Matters of discussion

Deferred Payment for purchase of Asset to be considered as Finance Cost

rather than added to the cost of the Asset

Exchange of Assets to be at their individual Fair Values

Fixed Assets Register to change drastically for incorporating component

IAS 16:

-About IAS 16

-Recognition

-Valuation Models

-Depreciation


-Disclosures

-Key Differences

-Case Study

-Annual ReportFixed Assets Register to change drastically for incorporating component

accounting, revaluation reserve, deferred tax adjustment, depreciation on

revaluation, site restoration costs, replaceable costs, etc.

PPE in construction cannot be revalued.

Of 144 companies surveyed which are listed on LSE only 20 adopted

Revaluation Approach.

-Annual Report

23

Disclosures under IAS 16

Disclosures under IAS 16:

The financial statements shall disclose, for each class of property, plant

and equipment:

(a) the measurement bases used for determining the gross carrying

amount;

(b) the depreciation methods used;

IAS 16:

-About IAS 16

-Recognition

-Valuation Models

-Depreciation

-Other Matters

--DisclosuresDisclosures

-Key Differences

-Case Study

-Annual Report (b) the depreciation methods used;

(c) the useful lives or the depreciation rates used;

(d) the gross carrying amount and the accumulated depreciation at the

beginning and end of the period; and

(e) a reconciliation of the carrying amount at the beginning and end of the

period showing:

(i) additions;

(ii) assets classified as held for sale or included in a disposal group

classified as held for sale in accordance with IFRS 5 and other

disposals;

(iii) acquisitions through business combinations;

-Annual Report

24


Disclosures under IAS 16 (contd.):

(iv) increases or decreases resulting from revaluations and from

impairment losses recognised or reversed in other

comprehensive income in accordance with IAS 36;

(v) impairment losses recognised in profit or loss in accordance with

IAS 36;

IAS 16:

-About IAS 16

-Recognition

-Valuation Models

-Depreciation

-Other Matters


-Key Differences

-Case Study

-Annual Report IAS 36;

(vi) impairment losses reversed in profit or loss in accordance with IAS

36;

(vii) depreciation;

(viii) the net exchange differences arising on the translation of the

financial statements from the functional currency into a

different presentation currency, including the translation of a

foreign operation into the presentation currency of the

reporting entity; and

(ix) other changes.

-Annual Report

25



(f) the existence and amounts of restrictions on title, and property, plant

and equipment pledged as security for liabilities;

(g) the amount of expenditures recognised in the carrying amount of an

item of property, plant and equipment in the course of its

construction;

IAS 16:

-About IAS 16

-Recognition

-Valuation Models

-Depreciation

-Other Matters


-Key Differences

-Case Study

-Annual Report construction;

(h) the amount of contractual commitments for the acquisition of

property, plant and equipment; and

(i) if it is not disclosed separately in the statement of comprehensive

income, the amount of compensation from third parties for items of

property, plant and equipment that were impaired, lost or given up

that is included in profit or loss.

(j) depreciation, whether recognised in profit or loss or as a part of the

cost of other assets, during a period; and

(k) accumulated depreciation at the end of the period.

-Annual Report

26



(l) residual values;

(m) the estimated costs of dismantling, removing or restoring items of

property, plant and equipment;

If items of property, plant and equipment are stated at revalued

IAS 16:

-About IAS 16

-Recognition

-Valuation Models

-Depreciation

-Other Matters


-Key Differences

-Case Study

-Annual Report If items of property, plant and equipment are stated at revalued

amounts, the following shall be disclosed:

(a) the effective date of the revaluation;

(b) whether an independent valuer was involved;

(c) the methods and significant assumptions applied in estimating the

items’ fair values;

(d) the extent to which the items’ fair values were determined directly by

reference to observable prices in an active market or recent market

transactions on arm’s length terms or were estimated using other

valuation techniques;

-Annual Report

27



(e) for each revalued class of property, plant and equipment, the carrying

amount that would have been recognised had the assets been carried

under the cost model; and

(f) the revaluation surplus, indicating the change for the period and any

restrictions on the distribution of the balance to shareholders.

IAS 16:

-About IAS 16

-Recognition

-Valuation Models

-Depreciation

-Other Matters


-Key Differences

-Case Study

-Annual Report restrictions on the distribution of the balance to shareholders.-Annual Report

28


Encouraged Disclosures under IAS 16:

(a) the carrying amount of temporarily idle property, plant and

equipment;

(b) the gross carrying amount of any fully depreciated property, plant and

equipment that is still in use;

(c) the carrying amount of property, plant and equipment retired from

IAS 16:

-About IAS 16

-Recognition

-Valuation Models

-Depreciation

-Other Matters


-Key Differences

-Case Study

-Annual Report (c) the carrying amount of property, plant and equipment retired from

active use and not classified as held for sale in accordance with IFRS 5;

and

(d) when the cost model is used, the fair value of property, plant and

equipment when this is materially different from the carrying amount.

-Annual Report

29

Key GAAP differencesIndian GAAP Vs. IFRS

# Description IFRS \ IND-AS Indian GAAP

1 Replacement

costs

Replacement cost of an item of PPE is

capitalized if replacement meets the

recognition criteria. Carrying amount of

items replaced is derecognized.

Replacement cost of an

item of PPE are generally

are expensed when

incurred.

2 Cost of major

inspection

Costs of major inspections and overhauls

are recognised in the carrying amount of

PPE.

Costs of major inspections

are expensed when

incurred.

3 Revaluation Revaluation needs to be done to the No specific requirement

IAS 16:

-About IAS 16

-Recognition

-Valuation Models

-Depreciation

-Other Matters

-Disclosures

--Key DifferencesKey Differences

-Case Study

-Annual Report 3 Revaluation Revaluation needs to be done to the

entire class of assets under the

revaluation model.

No specific requirement

4 Depreciation PPE are componentized and are

depreciated separately.

PPE are not generally

componentized and

depreciated.

5 Interest If payment is deferred beyond normal

credit terms, the difference between the

cash price equivalent and the total

payment is recognised as interest over the

period of credit.

No specific requirement

under AS 10.

-Annual Report

30

Key GAAP differences# Description IFRS \ IND-AS Indian GAAP

6 Depreciation Depreciation rates are not

prescribed as they are based on

useful life. Unit of Production

method can also be applied.

Minimum depreciation rates are as

per Schedule XIV. SLM WDV are

prescribed.

7 Estimate of

residual

useful life

Estimates of useful life and

residual value need to be

reviewed at least at each financial

year-end.

No need for an annual review of

estimates of useful life and residual

value.

IAS 16:

-About IAS 16

-Recognition

-Valuation Models

-Depreciation

-Other Matters

-Disclosures


-Case Study

-Annual Reportyear-end.

8 Revaluation Revaluations are required to be

made with sufficient regularity to

ensure that the carrying amount

does not differ materially from

that which would be determined

using fair value at the balance

sheet date.

No specific requirement. For e.g.,

an enterprise may revalue a whole

class of assets within a unit.

9 Site

Restoration

Provision on site-restoration and

dismantling is mandatory. To the

extent it relates to the fixed asset,

the changes are added/deducted

(after discounting) from the asset

in the relevant period.

No guidance in the standard.

However, guidance note on oil and

gas issued by ICAI, requires

capitalization of site restoration

cost. Discounting is prohibited

under Indian GAAP.

-Annual Report

31

Key GAAP differences# Description IFRS \ IND-AS Indian GAAP

10 Depreciation

on revalued

assets

Depreciation on revalued assets

needs to be routed through P&L.

However, subsequently the

equivalent portion of depreciation

on revalued asset needs to be

transferred to retained earnings.

Depreciation on revalued assets

needs to be reduced from

revaluation reserve itself.

11 Shift in

Models

Movement from Cost Model to

Revaluation Model is permitted.

No such guidance.

IAS 16:

-About IAS 16

-Recognition

-Valuation Models

-Depreciation

-Other Matters

-Disclosures


-Case Study

-Annual ReportModels Revaluation Model is permitted.

But vice-versa not permitted.

12 Method of

Depreciation

Treated as Change in Accounting

Estimate as per IAS 8 and given

prospective effect.

Treated as Change in Accounting

Policies and given retrospective

effect.

-Annual Report

32

Case Studies

Facts:

• Green-Dart Logistics Ltd. has acquired a heavy road truck at cost of Rs. 100,000

(with no breakdown of the component parts). The estimated useful life is 10

years. At the end of the sixth year, the Engine requires replacement, as further

maintenance is uneconomical due to the off- road time required. The remainder

of the vehicle is perfectly roadworthy and is expected to last for the next four

years. The cost of a New Engine is Rs.45,000. The original invoice for the

transporter did not specify the cost of the power train. Assess impact on Gross

Block.

IAS 16:

-About IAS 16

-Recognition

-Valuation Models

-Depreciation

-Other Matters

-Disclosures

-Key Differences

--Case StudyCase Study

-Annual ReportBlock.

Solution:

• The New Engine will produce economic benefits to Green-Dart Logistics Ltd.,

and the cost is measurable. Hence the item should be recognized as an asset.

The original invoice for the transporter did not specify the cost of the Engine;

however, the cost of the replacement i.e. Rs. 45,000 can be used as an

indication (usually by discounting) of the likely cost, six years previously. If an

appropriate discount rate is 5% per annum, Rs. 45,000 discounted back six years

amounts to Rs. 33,500 [Rs.45,000/(1.05)]6, which would be written out of the

asset records. The cost of the new Engine, Rs.45,000, would be added to the

gross asset record, resulting in a new asset cost of Rs.111,500 (Rs.100,000-

Rs.33,500+ Rs.45,000).

-Annual Report

33

Case Studies

Facts:

• Queenfisher Airways, an aviation company, acquired an aircraft for Rs. 2.1mn.

The aircraft is expected to have life of 15 years. Queenfisher Airways is required

to have aircraft inspected every three years to ascertain whether they are

travel-worthy.

Without the inspection, which requires a high degree of expertise, Queenfisher

Airways cannot operate the aircraft. The cost attributable to inspection is Rs.

600,000.

IAS 16:

-About IAS 16

-Recognition

-Valuation Models

-Depreciation

-Other Matters

-Disclosures

-Key Differences


-Annual Report

Queenfisher acquired the aircraft on the previous inspection, which was carried

out on 1 April 2007, As at 1 April 2010, Queenfisher Airways incurred Rs.

750,000 as the cost of the new inspection.

Solution:

• Queenfisher Airways will recognize the aircraft at Rs.1.5m and depreciate it over

15 years and will recognize the inspection cost at Rs.600,000 and depreciate it

over 3 years.

-Annual Report

34

Case Studies

April 2007 to March 2010

Depreciation Charge: Rs.

Aircraft to be depreciated over 15 years=1,500,000/15 years 100,000

Inspection cost to be depreciated over 3 years=600,000/3

years

200,000

Total depreciation to be recognized each year 300,000

IAS 16:

-About IAS 16

-Recognition

-Valuation Models

-Depreciation

-Other Matters

-Disclosures

-Key Differences


-Annual Report

April 2010 to March 2013

Depreciation Charge: Rs.

Aircraft to be depreciated over 15 years=1,500,000/15 years 100,000

Inspection cost to be depreciated over 3 years=750,000/3

years

250,000

Total depreciation to be recognized each year 350,000

Total depreciation to be recognized each year 300,000-Annual Report

35

Case Studies

Facts:

• Tej Airways had an asset having carrying value of Rs. 50,000. It was

revalued at Rs. 60,000 by crediting the increase of Rs. 10,000 to

revaluation reserve. Later it was sold for Rs. 75,000.

Solution:

IAS 16:

-About IAS 16

-Recognition

-Valuation Models

-Depreciation

-Other Matters

-Disclosures

-Key Differences


-Annual Report Solution:

• The profit on sales is Rs.15,000 (75,000-60,000) and it is presented in

the statement of comprehensive income. The revaluation reserve of

Rs.10,000 is transferred directly from the reserve account to the

retained earnings.

-Annual Report

36

Case Studies

Facts:

At 1st Jan. 1985, Mr. A bought a flat in Colaba at Rs. 500,000. Mr. A aimed

to use it for 50 years until the end of its estimated useful life . The original

estimated residual value is zero. Depreciation is calculated on a straight-

line basis. At 31 Dec. 2004, the depreciated historical cost (and carrying

amount) of the property was Rs. 0.3 million.

IAS 16:

-About IAS 16

-Recognition

-Valuation Models

-Depreciation

-Other Matters

-Disclosures

-Key Differences


-Annual Report

• Now, the price of a similar flat in Colaba is about Rs. 3M. Shall A revise

the residual value?

Ans: No! A has not changed its usage plan and the residual value

after the estimated useful live would still be around zero

• If A changes its intention and aims to dispose of the flat in 10 years (i.e.

2015). Shall A revise the residual value?

Ans: Yes! If A can demonstrate that it has an intention to dispose of

it before the end of its economic life

-Annual Report

37

Dr. Reddy’s Laboratories- 2009

Property, plant and equipment

IAS 16:

-About IAS 16

-Recognition

-Valuation Models

-Depreciation

-Other Matters

-Disclosures

-Key Differences

-Case Study

--Annual ReportAnnual Report--Annual ReportAnnual Report

38

Vedanta Annual Report Depreciation

IAS 16:

-About IAS 16

-Recognition

-Valuation Models

-Depreciation

-Other Matters

-Disclosures

-Key Differences

-Case Study


39

Vedanta Annual Report IAS 16:

-About IAS 16

-Recognition

-Valuation Models

-Depreciation

-Other Matters

-Disclosures

-Key Differences

-Case Study


40

Marks & Spencer - 2008IAS 16:

-About IAS 16

-Recognition

-Valuation Models

-Depreciation

-Other Matters

-Disclosures

-Key Differences

-Case Study


41

Marks & SpencerIAS 16:

-About IAS 16

-Recognition

-Valuation Models

-Depreciation

-Other Matters

-Disclosures

-Key Differences

-Case Study


42

Accounting Policies, Changes in Accounting

Estimates and Errors


International Accounting Standard 8 \ IND-AS 8

Objective & Scope of IND-AS 8

The Objective of IND-AS 8 is:

- to prescribe the criteria for selecting and changing accounting

policies, together with the accounting treatment and disclosure of

changes in accounting policies, changes in accounting estimates and

corrections of errors.

IAS 8:

-Objective & Scope

-Important terms

-Hierarchy

-Change in Policy

-Change in Estimate

-Prior Period

-Other Matters

-Disclosures

- Disclosure requirements for accounting policies are set out in Ind AS 1

Presentation of Financial Statements.

The Scope of IND-AS 8 is:

- This Standard shall be applied in selecting and applying accounting

policies, and accounting for changes in accounting policies, changes in

accounting estimates and corrections of prior period errors.

44

Few important terms

Accounting Policies:

Accounting policies are the specific principles, bases,

conventions, rules and practices applied by an entity in

preparing and presenting financial statements.

Materiality:

IAS 8:

-Objective & Scope

-Important terms

-Hierarchy

-Change in Policy

-Change in Estimate

-Prior Period

-Other Matters

-DisclosuresMateriality:

Material Omissions or misstatements of items are material if

they could, individually or collectively, influence the

economic decisions that users make on the basis of the

financial statements

Impracticable:

Applying a requirement is impracticable when the entity

cannot apply it after making every reasonable effort to do so.

45

Few important terms

Retrospective application : is applying a new accounting policy to

transactions, other events and conditions as if that policy had

always been applied.

Retrospective restatement: is correcting the recognition,

measurement and disclosure of amounts of elements of financial

statements as if a prior period error had never occurred.

IAS 8:

-Objective & Scope

-Important terms

-Hierarchy

-Change in Policy

-Change in Estimate

-Prior Period

-Other Matters

-Disclosures

statements as if a prior period error had never occurred.

Prospective application: applying the new accounting policy to

transactions, other events and conditions occurring after the date

as at which the policy is changed;

46

Selection of Accounting Policies

IND-AS

Other IND-AS and Framework

IAS 8:

-Objective & Scope

-Important terms

-Hierarchy

-Change in Policy

-Change in Estimate

-Prior Period

-Other Matters

-Disclosures

IASB pronouncements

Other standard setting body and accepted industry practice

47“Post-selection Accounting Policies to be applied Consistently”

Change in Accounting Policy

An entity shall change its accounting policies only if the change:

1. Is required by and IND-AS

2. results in the financial statements providing reliable and more

relevant information about the effects of transactions

IAS 8:

-Objective & Scope

-Important terms

-Hierarchy

-Change in Policy

-Change in Estimate

-Prior Period

-Other Matters

-Disclosures

Change in Accounting Policies unless specifically excluded shall be

done RETROSPECTIVELY.

i.e. the entity shall adjust the opening balance of each affected

component for the earliest prior period presented as if the new

accounting policy had always been applied.

48

Change in Accounting Estimates

Instances of Acocunting Estimates:

(a)bad debts;

(b)inventory obsolescence;

(c)the fair value of financial assets or financial liabilities;

IAS 8:

-Objective & Scope

-Important terms

-Hierarchy

-Change in Policy

-Change in Estimate

-Prior Period

-Other Matters

-Disclosures

(c)the fair value of financial assets or financial liabilities;

(d)Depreciation

(e)warranty obligations.

The effect of change in an accounting estimate, other than a change to

which paragraph 37 applies, shall be recognised prospectively.

49

Prior Period Errors

An entity shall correct material prior period errors retrospectively in the

first set of financial statements approved for issue after their discovery

by:

(a)restating the comparative amounts for the prior period(s) presented

in which the error occurred; or

IAS 8:

-Objective & Scope

-Important terms

-Hierarchy

-Change in Policy

-Change in Estimate

-Prior Period

-Other Matters

-Disclosures

(b)if the error occurred before the earliest prior period presented,

restating the opening balance

No concept of “Prior-Period Items” as currently prevelant in the Indian

GAAP.

50

Matters of Discussion

When it is difficult to distinguish a change in an accounting policy from

a change in an accounting estimate, the change is treated as a change

in an accounting estimate.

IAS 8:

-Objective & Scope

-Important terms

-Hierarchy

-Change in Policy

-Change in Estimate

-Prior Period

-Other Matters

-Disclosures

51

DisclosuresWhen initial application of an Ind AS has an effect, an entity shall disclose:

(a)the title of the Ind AS;

(b)when applicable, that the change in accounting policy is made in

accordance with its transitional provisions;

(c)the nature of the change in accounting policy and description of

transitional provisions;

IAS 8:

-Objective & Scope

-Important terms

-Hierarchy

-Change in Policy

-Change in Estimate

-Prior Period

-Other Matters

-Disclosures

transitional provisions;

(f)for the current period and each prior period presented, the amount of the

adjustment:

• (i)for each financial statement line item affected; and

• (ii) if Ind AS 33 Earnings per Share applies to the entity, for basic and

diluted earnings per share;

(g)the amount of the adjustment relating to periods before those presented,

to the extent practicable; and

(h) If impracticable then circumstances which support the reasoning 52

DisclosuresWhen voluntary change in application of a policy has an effect, an entity

shall disclose:

(a)the nature of the change;

(b)the reasons why applying the new accounting policy provides reliable and

more relevant information

(c)for the current period and each prior period presented, the amount of the

IAS 8:

-Objective & Scope

-Important terms

-Hierarchy

-Change in Policy

-Change in Estimate

-Prior Period

-Other Matters

-Disclosures

53

(c)for the current period and each prior period presented, the amount of the

adjustment:

(i) for each financial statement line item affected; and

(ii) if Ind AS 33 Earnings per Share applies to the entity, for basic

and diluted earnings per share;

(g)the amount of the adjustment relating to periods before those presented,

to the extent practicable; and

(h) If impracticable then circumstances which support the reasoning

DisclosuresWhen an entity has not applied a new Ind-AS that has been issued but is not

yet effective, the entity shall disclose:

(a) This fact;

(b) known or reasonably estimable information relevant to assessing the

possible impact that application of the new Ind AS will have on the

entity’s financial statements in the period of initial application

IAS 8:

-Objective & Scope

-Important terms

-Hierarchy

-Change in Policy

-Change in Estimate

-Prior Period

-Other Matters

-Disclosures

54

entity’s financial statements in the period of initial application

(c) the title of the new Ind AS;

(d) the nature of the impending change or changes in accounting policy;

(e) the date by which application of the Ind AS is required;

(f) the date as at which it plans to apply the Ind AS initially; and

(g) either:

(i) a discussion of the impact that initial application of the Ind AS is

expected to have on the entity’s financial statements; or

(ii) if that impact is not known or reasonably estimable, a

statement to that effect.

DisclosuresDisclosures in relation to Change in Accounting Estimate:

(a) An entity shall disclose the nature and amount of a change in an

accounting estimate that has an effect in the current period or is expected

to have an effect in future periods.

(b) If the amount of the effect in future periods is not disclosed because

estimating it is impracticable, an entity shall disclose that fact.

Disclosures in relation to Prior Period Errors:

IAS 8:

-Objective & Scope

-Important terms

-Hierarchy

-Change in Policy

-Change in Estimate

-Prior Period

-Other Matters

-Disclosures

55

Disclosures in relation to Prior Period Errors:

(a) the nature of the prior period error;

(b) for each prior period presented, to the extent practicable, the amount of

the correction:

(i) for each financial statement line item affected; and

(ii) if Ind AS 33 applies to the entity, for basic and diluted earnings

per share;

(c) the amount of the correction at the beginning of the earliest prior period

presented; and

(d)if impracticable for a particular prior period, the circumstances that led to

the existence of that condition and a description of how and from when the

error has been corrected.

Events After The Reporting Period



Objective & Scope of IND-AS 10

The Objective of IND-AS 10 is:

- When an entity should adjust its financial statements for events after

the reporting period; and

- the disclosures that an entity should give.

IAS 10:

-Objective & Scope

-Summary

-Key Differences

-Evaluation

-Disclosures

The Scope of IND-AS 10 is:

- This Standard shall be applied in the accounting for, and disclosure of,

events after the reporting period.

57

Events after Reporting Period

Timeline

End of Reporting

Period

Board approval

date

Members

approval

IAS 10:

-Objective & Scope

-Summary

-Key Differences

-Evaluation

-Disclosures

58

Events after Reporting Period

Adjusting EventsNon- Adjusting

Events

Conditions that existed at

the end of the reporting

period

Conditions that arose

after the reporting period

Recognize in FS Disclose in FS if material

Key Differences with I-GAAP

# IFRS\IND-AS Indian GAAP

Material Non-

Adjusting Events

Disclose in Financial

Statement

Disclose in Directors

Report

Dividend Recognize a liability

in the year on

declaration

Provide for proposed

dividend in the

applicable year

IAS 10:

-Objective & Scope

-Summary

-Key Differences

-Evaluation

-Disclosures

59

declaration applicable year

Disclosure Disclose the date of

authorization and

the authority which

authorized the issue

of FS.

No such direct

disclosure

requirement.

EvaluationIssue Whether

Adjusting or Non-

Adjusting?

A major business combination after the reporting

period

The destruction of a major production plant by a

fire after the reporting period

Commencing major litigation arising solely out of

IAS 10:

-Objective & Scope

-Summary

-Key Differences

-Evaluation

-Disclosures

60

Commencing major litigation arising solely out of

events that occurred after the reporting period.

The receipt of information after the reporting

period indicating that an asset was impaired at the

end of the reporting period

The bankruptcy of a customer that occurs after the

reporting period usually confirms that a loss existed

at the end of the reporting period on a trade

receivable

the discovery of fraud or errors that show that the

financial statements are incorrect.

Disclosures

A. The date when the financial statements were approved for issue

and who gave that approval.

B. If the entity’s owners or others have the power to amend the

financial statements after issue, the entity shall disclose that fact.

C. Disclose the following for each material category of non-adjusting

IAS 10:

-Objective & Scope

-Summary

-Key Differences

-Evaluation

-Disclosures

C. Disclose the following for each material category of non-adjusting

event after the reporting period:

(a)the nature of the event; and

(b)an estimate of its financial effect, or a statement that such

an estimate cannot be made.

61

Revenue



Key differences

Major differences between the IFRS and current I-Gaap

1. Definition of ‘revenue’ given in the IAS 18 is broad compared to the

definition of ‘revenue’ given in existing AS 9.

2. As per existing AS 9, revenue is recognised at the nominal amount of

consideration receivable. IAS 18 requires the revenue to be measured

at fair value of the consideration received or receivable.

3. IAS 18 specifically deals with the exchange of goods and services with 3. IAS 18 specifically deals with the exchange of goods and services with

goods and services of similar and dissimilar nature. In this regard

specific guidance is given regarding barter transactions involving

advertising services. This aspect is not dealt with in the existing AS 9.

4. IAS 18 provides guidance on application of recognition criteria to the

separately identifiable components of a single transaction in order to

reflect the substance of the transaction. Existing AS 9 does not

specifically deal with the same.

5. For recognition of revenue in case of rendering of services, existing AS

9 permits the use of completed service contract method. IAS 18

requires recognition of revenue using percentage of completion

method only.

63

Key differences

Major differences between the IFRS and current I-Gaap

6. Existing AS 9 requires the recognition of revenue from interest on time

proportion basis. IAS 18 requires interest to be recognised using effective

interest rate method.

7. Disclosure requirements given in the IAS 18 are more detailed as

compared to existing AS 9.compared to existing AS 9.

8. IAS 18 specifically provides guidance regarding revenue recognition in

case the entity is under any obligation to provide free or discounted goods

or services or award credits to its customers due to any customer loyalty

programme. Existing AS 9 does not deal with this aspect.

9. IAS 18 deals with accounting of transfer of property, plant and

equipment by the customers to the entity, which are used by the entity to

connect the customer to a network or to provide the customer with

ongoing access to a supply of goods or services. Existing AS 9 does not

deal with this aspect.

64

Two-Day Workshop on

IND-AS \ IFRS

Questions invited

or can be subsequently emailed to:or can be subsequently emailed to:

[email protected]

Anand Bathiya – B.Com., A.C.A., A.C.S., LL.B.

© S. H. Bathiya & Associates – 2011

www.shbathiya.com 65

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