Ind-AS Implementation Issues Himanshu Kishnadwala2 Accounting Standards in India Till 2006,...

Ind-AS –Implementation Issues

Himanshu Kishnadwala

What is I-GAAP?

2

Accounting Standards in India

Till 2006, Standards issued by ASB of ICAI were to be followed

Companies (Accounting Standards) Rules, notified in Dec 2006for companies [under sec 211(3C) of Companies Act 1956]

Sec 133 of Companies Act, 2013 and Rule 7 of the Companies(Accounts) Rules, 2014 have also notified the same AS

Under Sec 133 of the 2013 Act, National Financial ReportingAuthority (NFRA) is to issue AS (will replace NACAS)

AS 1 to AS 29 (except AS 8) (as amended) notified so far

ICAI has also issued AS 30, 31, 32, but not notified by NACAS

3

What is I-GAAP ?

I-GAAP refers to:

Notified Standards u/s 133

Accounting Standards issued by ICAI

ICAI pronouncements:

Statements

Guidance Notes

EACs

Council Announcements on topical matters

Application / Implementation Guides

FAQs

FAQs

IndAS Transition Facilitation Group Bulletins (ITFG)

4

Changes in AS pursuant to notification of Ind AS

MCA has issued a ‘upgraded’ set of AS: These will be nearer toInd AS• Applicable for entities having net worth < 250 crores• Several concessions/exemptions proposed in ‘upgraded’ set

of AS• Certain difficult concepts to be omitted from the ‘upgraded’

AS (e.g. fair value, derivative accounting., etc.)

Companies (AS) Amendment Rules, 2016 notified on 30th

March 2016 (effective 1st April 2016 or 2016-17 onwards)• 7 standards replaced – AS 2, 4, 10, 13, 14, 21, 29• AS 6 omitted

5

Amendments to Accounting Standards

Name of the Standard Key Revision

AS 2 Valuation ofInventories

Aligned spare parts accounting with AS10

AS 4 Contingenciesand events after theBalance Sheet date

Dividend declared after Balance Sheetdate, but before the financial statementsare approved for issue would be nonadjusting item

AS 6 DepreciationAccounting

Requirements for depreciation are nowincorporated in revised AS 10

6

Amendments to Accounting Standards …


AS 10 Fixed Assets • Cost of an item of property, plant andequipment would be cash price equivalentat that date

• Component accounting mandatory (alsomandated by Schedule II of Companies Act2013)

• Depreciation method to be required to bereviewed at least at each financial year end

• Clarity on spare parts accounting –definitions and recognition principles wouldbe applicable to spare parts accounting

• Decommissioning liability on a discountedbasis

7

Amendments to Accounting Standards …


AS 13 Accounting ofInvestments

Investment property to be accounted for inaccordance with cost model as prescribed inrevised AS 10

AS 14 Accounting forAmalgamations

Limited Revision to include reference to 2013Act in the standard

AS 21 ConsolidatedFinancial Statements

A company without a subsidiary but withassociates and JV to prepare CFS

AS 29 Provisions,Contingent Liabilitiesand Contingent Assets

Decommissioning liability provision would beon discounted basis

What is IFRS ?

9

What is IFRS?

1973International Accounting

Standards Committee (IASC) 2000

2001 onwards International Accounting Standards Board (IASB)

Future

International Accounting Standards (IAS)

International Financial Reporting Standards (IFRS)

IFRS seriesStandards

IAS SIC Interpretations IFRS IFRIC Interpretations

10

Structure of the IFRS Foundation and the Board

IFRS Foundation Monitoring Board

IFRS Foundation Trustees

IFRS Foundation

International Accounting Standards Boards

IFRS Implementation Committee

SME implementation group

IFRS AdvisoryCouncil

AccountingStandardsAdvisory Forum

11

What is IFRS? …

IFRS-IAS issued to date

Conceptual Framework

16 IFRS 28 IAS 17 IFRIC 8 SIC

• IFRIC – IFRS Interpretations Committee

• SIC – Standards Interpretations Committee

12

What is IFRS? …

Principle based – rather than Rule Based• Principles encourage compliance whereas Rules can promote

avoidance

Contains very few alternatives

Detailed Disclosure requirements

Extensive Judgement required – Involves subjectivity

Extensive consultative process before final issuance of anyStandard

13

How are IFRS developed?

Agenda Consultation

Request forinformation

3-5 yearplan

Research Programme

Research

Discussionpaper

AgendaProposal

Standards Development

Exposuredraft

FinalStandard

Implementation

Interpretationor narrow-scopeamendment

Postimplementationreview

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Global application of IFRS

Currently, more than 149 countries require or permit listed entities use ofIFRS.

European Union (EU) required listed companies in its member states to followIFRS from 2006 for CFS

Most countries in Africa, America (except USA) have adopted IFRS China, Japan have recently adopted IFRS (with minor changes) USA is the only major country which has not yet adopted IFRS

• SEC, however, permits foreign companies to follow IFRS withoutdoing a reconciliation with US GAAP

• On-going discussions between IASB-FASB for convergence into asingle set of standards – likely date 2018/2019

India had initially set date of 1st April 2011 – deferred mainly due toindustry pressure and tax related issues

New standards notified by MCA in Feb 2015 – phase-wiseapplicability

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Use of IFRS – 149 profiles (as on 1 Jan 2017)

Number of Jurisdictions surveyed

Region That requireIFRS for all or

most domestic publicly

accountableEntities

That requireIFRS as % of

total jurisdictionsin the region

That permit or require IFRS for at

least some (but not all or most)

domestic publiclyaccountable

Entities

That neitherrequire nor

permit IFRS for any domestic

publicly accountable

Entities

Europe 43 42 98% 1 0

Africa 23 19 83% 1 3

Middle East 13 13 100% 0 0

Asia-Oceania 33 24 73% 3 6

Americas 37 27 73% 8 2

Total 149 125 84% 13 11

As % of 149 100% 84% 9% 7%

GDP of 149 profiled jurisdictions represents 98.6% of the total world GDP. (2015 data)

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IFRS Framework (Pillars of IFRS)

Historical Cost is not relevant

Fair Value more relevant for measurement of assets and liabilities

Time Value of Money

Discounting to be done for future cash flows

Substance over Form

Contractual Substance over Legal Form

Balance Sheetis the focus

rather than the statement of

profit and loss

Difference between 2 BS is Income statement

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Fair value hierarchy

Full Information

available

If not available, use quoted market prices for similar assets

and liabilities

If not available, use other valuation techniques (most subjective)

Level 1

Level 2

Level 3

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What is IFRS? … comparison of pages

Number of Pages

IFRS > 3,000

US GAAP > 17,000

I-GAAP > 1,000

Ind AS > 2,000

IFRS application in India

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Adoption vs. Convergence

Adoption: start applying IFRS from an announced date Convergence: modify IFRS to suit local requirements In India, ASB / NACAS decided to converge rather that adopt

India accordingly issued a new set of standards called Ind AS

These Ind AS contain certain “carve-outs” from IFRS

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IFRS Implementation in India

Converged Standards to be called Ind AS xx

Changes in many Ind AS as compared to IFRS

Ind AS finalized by ICAI and notified by MCA (NACAS)

IFRIC and SIC incorporated within respective Ind AS itself

IAS / IFRS Corresponding Ind AS

IAS 1 Ind AS 1

IAS 2 Ind AS 2

IFRS 1 Ind AS 101

IFRS 2 Ind AS 102

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IFRS vs. Ind AS

IFRS-IAS issued to

date


16 IFRS 28 IAS 17 IFRIC 8 SIC

Ind AS issued to

date


14 Ind AS*26 Ind AS**

Included in Ind AS

Included in Ind AS

**Ind AS 26 : Accounting and Reporting by Retirement Benefit PlansInd AS 39: Financial Instruments: Recognition and Measurement - (since 109 is notified)

*IFRS 15: Revenue, IFRS 16 : Leases (effective later)

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Timelines for Ind AS implementation

July 201416th Feb

201529th Sept

201517th Nov

20157th Dec

2015

Announcement toimplementInd AS byFinanceMinister inhis UnionBudget

IRDA issuesDiscussionPaper on Ind ASimplementationfor insurancesector

IRDAannouncesthatinsurancesector is toconverge withInd AS

RBIrecommendsa road mapto MCA forbanks andNBFC’s

MCA issuesCorporate roadmap for Cos. Forimplementationof Ind AS in 2phasesbeginning from1st April, 2015

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Timelines for Ind AS implementation …

18th Jan 2016 11th Feb 20171st March

201630th March

2016

MCA announces aroad map forimplementation ofInd AS for SCBs(excluding RBI),insurancecompanies andNBFCs

RBI issues acircular requiringSCBs to complywith Ind AS inphases beginningfrom 1st April 2018

IRDA issues acircular for Ind ASimplementationfor all insurersin phasesbeginning from 1st

April 2018

MCA notifies aroad map forimplementation ofInd AS by NBFCs inphases beginningfrom 1st April 2018

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Corporate Road Map

Current Requirements

Phase I Phase II Voluntary Adoption

Year of Adoption FY 2016 – 17 FY 2017 – 18 FY 2015 – 16 orthereafter

Comparative Year FY 2015 – 16 FY 2016 – 17 FY 2014 – 15 orthereafter

Companies covered:

Listed Companies All companies withnet worth >= INR 500crores

All companies listedor in the process ofgetting listed

Any company couldvoluntarily adopt IndAS

Unlisted Companies All companies withnet worth >= INR 500crores

Companies having anet worth >= INR250 crores

Group Companies Applicable to holding, subsidiaries, joint ventures, or associates ofcompanies covered in (a) and (b) above. This may also impactfellow subsidiary companies while preparing consolidated financialstatements of the holding company.

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Phase I

Date of Transition Ind AS opening BS

1st April, 2015

30th June, 2015

`First Ind AS Financial

Statements

31st March, 2016 31st March, 2017

30th

December 2016

Comparative Period

For Interim reporting

30th

September 2015

30th

December 2015

30th June, 2016

30th

September 2016

Reporting DateEquity and profit reconciliations

15th

September, 2016

15th

December,2016

15th

February,2017

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Phase II

2016-17 2017-18

April March MarchApril

Opening balance sheet 1 April 2016

Comparative for31 March 2017

Financial Statements for the

year ended 31 March 2018

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Road Map of Ind AS adoption: Banking, NBFC’s and Insurance Companies

Current Requirements

Banking & Insurance

Companies

NBFC’s - Phase I NBFC’s - Phase II

Year ofAdoption

FY 2018 – 19 FY 2018 – 19 FY 2019 – 20

ComparativeYear

FY 2017 – 18 FY 2017 – 18 FY 2018 – 19

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How many Ind AS are issued?

Notification dated 16 February 2015:• Companies (Indian Accounting Standards) Rules, 2015• 39 Ind AS notified effective from 1st April, 2015• Rule 4 states: ‘ The Companies and their auditors shall comply with

the Indian Accounting Standards (Ind AS)…’

Notification dates 30th March 2016:• Companies (Indian Accounting Standards)(Amendment) Rules, 2016• Gives roadmap for Banks and NBFCs for Ind AS implementation• Ind AS 115 omitted – Ind AS 11 and Ind AS 18 notified• Several other Ind AS amended• Total Ind AS now applicable: 40

Notification dated 6th April 2016:• Schedule III of Companies Act 2013 amended to prescribe format for

Ind AS financial statements

Major Carve-Outs

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Key Carve Outs in Ind AS - Mandatory

Accounting Area Ind AS requirements IFRS requirements

Law overridesaccountingstandards

Law would overrideaccounting standards. Itwould imply that courtschemes whereby expensesare charged to reserves maybe grandfathered and alsopossibly for future schemes(subject to compliance withother regulatoryrequirements)

Not specificallycovered

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Key Carve Outs in Ind AS - Mandatory …


Previous GAAP Ind AS 101, First-time Adoption ofIndian Accounting Standards,specifies the previous GAAP asthe one which is applied bycompanies for their reportingrequirements in Indiaimmediately before Ind AS i.e.existing notified standards

Previous GAAP is thebasis of accounting thata first-time adopterused immediatelybefore adopting IFRS

Provides anadditionaloption/ choice todetermine thedeemed cost ontransition to IndAS

Ind AS 101 allows an additionalchoice to consider previous GAAPcarrying values as ‘deemed cost’for Property, Plant andEquipment, Intangible Asset, orInvestment Property acquiredprior to the transition date

IFRS 1, ‘First-timeAdoption of IFRS’ doesnot provide this option

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Foreign currencyconvertible bonds -treatment ofconversion Option

Recognition of embeddedforeign currency conversionoption as ‘equity’

Conversion option treatedas derivative and carriedat fair value

Businessacquisitions – gainon bargainpurchase

Recognition of ‘bargainpurchase gains’ in a businesscombination as ‘capitalreserve’

‘Bargain purchase gains’in a business combinationrecognised as income inthe statement of PL

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Accounting Area

Ind AS requirements IFRS requirements

Classificationof loan withcovenantbreaches

Entities to continue classifying loans as non-current even in case of breach of a materialprovision if, before the approval of the FS,the lender agrees not to demand payment

Loansreclassified as‘current liability’

Lease rentalrecognition

No straight-lining for escalation of leaserentals in line with expected generalinflation

Requiresstraight-lining oflease rentals

Investment inassociates –gain onbargainpurchase

Excess of the investor’s share of the net fairvalue of the investee’s identifiable assetsand liabilities over the cost of investment tobe transferred to the capital reserve

Excessrecognised asincome in thestatement of PL

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Revenue recognitionfrom sale of realestate

IFRIC 15, Agreements forConstruction of Real Estatewill not be applicableunder Ind AS 18, Revenuefor real estate developers.

GN on “Accounting of RealEstate Transactions forIndAS companies” issuedby ICAI.

IFRIC 15 focuses onaccounting for revenueand associated expensesby entities that undertakeconstruction of real estatedirectly or throughsubcontractors. IFRIC 15provides guidance ondetermining revenue fromconstruction of real estateshould be accounted for inaccordance with IAS 11,Construction Contracts orIAS 18 and the timing ofrevenue recognition.

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Key Carve Outs in Ind AS – Optional …


Foreign exchangefluctuations

Option to continue the policyadopted for accounting forexchange differences arising fromtranslation of long-term foreigncurrency monetary itemsrecognised in the financialstatements for the period endingimmediately before the beginningof the first Ind AS financialreporting period as per theprevious GAAP

Requires recognitionof exchange ratefluctuations on long-term foreigncurrency monetaryitems in thestatement of PL

Accountingpolicies of jointventures (JVs) andassociates

Option not to align the accountingpolicy of associates and JVs withthat of the parent, if impracticable.

Requires alignmentof accountingpolicies.

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Key Carve In’s in Ind AS …


Common control Appendix C of Ind AS 103,Business Combination,provides specific guidanceon common control anddeals with accounting forbusiness combinations ofentities or businessesunder common control.

IFRS 3, BusinessCombination, excludesfrom its scope businesscombination of entitiesunder commoncontrol.

Other Major Changes in Ind AS vis-à-vis IFRS not

resulting in Carve-outs

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Ind AS 1 ‘Presentation of Financial Statements’

IFRS/IAS Ind AS

IAS 1 provides an option either to followthe single statement approach or tofollow the two statement approach.

Ind AS 1 allows only the single statementapproach with statement of PL and OCIpresented in two sections.

IAS 1 requires that items of dissimilarnature or function shall be presentedseparately unless these are immaterial

Para 31 provides that specific disclosurerequired by IFRS need not be provided ifthe information is not material.

In Ind AS 1 such paras have beenmodified to include words ‘except whenrequired by law’.

40

Ind AS 7 ‘Statement of Cash Flows’

IFRS/IAS Ind AS

IAS 7 gives an option to classify theinterest paid and interest anddividends received as item ofoperating cash flows.

Ind AS 7 does not provide such anoption and requires these items tobe classified as items of financingactivity and investing activity,respectively.

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Ind AS 12 ‘Income Taxes’

IFRS/IAS Ind AS

IAS 12 allow the option of deductingspecified grant from the cost of therelated assets.

Ind AS 12 does-not allow the optionof deducting specified grant fromthe cost of the related asset as thisoption is not permitted.

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Ind AS 18 ‘Revenue’

IFRS/IAS Ind AS

No specific guidance Para 1A is inserted in Ind AS 18 whichstates that recognition of interest isdealt in this standard whereasmeasurement of interest is dealt inaccordance with Ind AS 109, FinancialInstruments.

Para 1B is inserted in Ind AS 18, whichprescribes the impairment of anycontractual right to receive cash oranother financial asset arising from thisstandard, shall be dealt in accordancewith Ind AS 109, Financial Instruments.

43

Ind AS 19 ‘Employee Benefits’

IFRS/IAS Ind AS

IAS 19, the government bonds can beused only where there is no deepmarket of high quality corporate bonds.

According to Ind AS 19, the rate to beused to discount post employmentbenefit obligations (both funded andunfunded) shall be determined byreference to the market yields ongovernment bonds.

44

Ind AS 20 ‘Accounting for Government Grants and Government Assistance’

IFRS/IAS Ind AS

IAS 20 gives an option to measure non-monetary government grants either attheir fair value or at nominal value.

Ind AS 20 requires measurement of suchgrants only at their fair value.

IAS 20 gives an option to present thegrants related to assets, including non-monetary grants at fair value in thebalance sheet either by setting up thegrant as deferred income or bydeducting the grant in arriving at thecarrying amount of the asset.

Ind AS 20 requires presentation of suchgrants in balance sheet only by settingup the grant as deferred income.

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Ind AS 21 ‘The Effects of Changes in Foreign Exchange Rates’

IFRS/IAS Ind AS

When there is a change in functionalcurrency, IAS 21 requires disclosure ofthat fact and the reason for the changein functional currency.

Ind AS 21 requires an additionaldisclosure of the date of change infunctional currency.

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Ind AS 23 ‘Borrowing Costs’

IFRS/IAS Ind AS

No specific guidance Ind AS 23 provides guidance as to howthe adjustment prescribed in Para 6(e)i.e. ‘exchange differences arising fromforeign currency borrowings to theextent that they are regarded as anadjustment to interest costs’, is to bedetermined.

47

Ind AS 24 ‘Related Parties Disclosures’

IFRS/IAS Ind AS

No specific guidance In Ind AS 24, disclosures which conflictwith confidentiality requirements ofstatute/regulations are not required tobe made since Accounting Standardscannot override legal/regulatoryrequirements.

48

Ind AS 27 ‘Separate Financial Statements’

IFRS/IAS Ind AS

IAS 27 requires to disclose the reason forpreparing separate financial statementsif not required by law.

In India, since the Companies Actmandates preparation of separatefinancial statements, such requirementhas been removed in Ind AS 27.

IAS 27 allows the entities to use theequity method to account forinvestment in Subsidiaries, JointVentures and Associates in theirSeparate Financial Statements (SFS)

This option is not given in Ind AS 27, asthe equity method is not ameasurement basis like cost and fairvalue but is a manner of consolidationand therefore would lead to inconsistentaccounting conceptually.

49

Ind AS 33 ‘Earnings Per Share’

IFRS/IAS Ind AS

IAS 33 provides that when an entitypresents both CFS and SFS, it may giveEarnings Per Share (EPS) relatedinformation in CFS only

Ind AS 33 requires Earnings Per Share(EPS) related information to be disclosedboth in CFS and SFS

50

Ind AS 34 ‘Interim Financial Reporting’

IFRS/IAS Ind AS

No specific guidance A footnote has been added to Para 1 ofInd AS 34, Interim Financial Reportingthat Unaudited Financial Resultsrequired to be prepared and presentedunder Clause 41 of Listing Agreementwith stock exchanges is not an ‘InterimFinancial Report’ as defined inparagraph 4 of this Standard.

51

Ind AS 40 ‘Investment Property’

IFRS/IAS Ind AS

IAS 40 permits both Cost model and FairValue model (except in some situations)for measurement of investmentproperties after initial recognition.

Ind AS 40 permits only the Cost Model.

IAS 40 permits treatment of propertyinterest held in an operating lease asinvestment property, if the definition ofinvestment property is otherwise metand fair value model is applied. In suchcases, the operating lease would beaccounted as if it were a finance lease.

Since Ind AS 40 prohibits the use of fairvalue model, this treatment is prohibitedin Ind AS 40. Also the expression‘investment property under a finance oroperating lease’ appearing in IAS 40 hasbeen modified as ‘investment propertyunder finance lease’ in Ind AS 40.

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Ind AS 101 ‘First-time Adoption of Indian Accounting Standards’

IFRS/IAS Ind AS

IFRS 1 provides various examples of first IFRS FinancialStatements.

Ind AS 101 specifies that anentity’s first Ind AS FSs arethe first annual FSs in whichthe entity adopts Ind AS inaccordance with Ind AS

IFRS 1 provide various examples of instances when anentity does not apply this IFRS.

Ind AS 101 does not provideexamples of instances.

IFRS 1 requires the first-time adopter shall exclude fromits opening Balance Sheet any item recognized inaccordance with previous GAAP that does not qualify forrecognition as an asset or liability under IFRS.

The first-time adopter shall account for the resultingchange in the retained earnings as at the transition dateexcept in certain specific instances where it requiresadjustment in the goodwill.

Similar to IFRS, but thespecific instances where itrequires adjustment inGoodwill can be adjusted inCapital Reserve.

53

Ind AS 101 ‘First-time Adoption of Indian Accounting Standards’

IFRS/IAS Ind AS

IFRS 1 provides for transitionaladjustment requiring companies to applythe provisions of IAS 23 prospectivelyafter the transition date to IFRS. IAS 23provided an option to expense out suchborrowing cost.

This Para has not been included inAppendix D of Ind AS 101 since this wasconsidered as not relevant in Indiansituation as existing AS 16 alwaysrequired an entity to capitalizeborrowing costs.

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Ind AS 105: ‘Non-current Assets Held for Sale andDiscontinued Operations’

IFRS/IAS Ind AS

IFRS 5 prescribes the conditions forclassification of a non-current asset (ordisposal group) as held for sale.

In Ind AS 105, a clarification has also beenadded that the non-current asset (ordisposal group) cannot be classified asheld for sale, if the entity intends to sell itin distant future.

55

Ind AS 108 ‘Operating Segments’

IFRS/IAS Ind AS

IFRS 8 requires that the standard shallapply to : the separate or individual financial

statements of an entity:i. whose debt or equity instruments

are traded in a public market orii. that files, or is in the process of

filing, its financial statements with asecurities commission or otherregulatory organization for thepurpose of issuing any class ofinstruments in a public market; and

the CFS of a group with a parent who isincluded in (a) above

This has been deleted in the Ind AS108 as the applicability or exemptionsto the Indian Accounting Standardsare governed by the Companies Actand the Rules made thereunder.

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Ind AS 109 ‘Financial Instruments’

IFRS/IAS Ind AS

IFRS 9 provides an option to applyrequirements of IAS 39 FinancialInstruments: Recognition andMeasurement for fair value hedge ofthe interest rate exposure of aportfolio of financial assets or financialliabilities

The said option has been removed in IndAS 109.

57

Ind AS 114 ‘Regulatory Deferral Accounts’

IFRS/IAS Ind AS

No specific guidance Appendix A ‘Defined terms’ of Ind AS 114 havebeen modified to clarify that Guidance Note ofAccounting for Rate Regulated Activities wouldbe considered as the previous GAAP for thepurpose of Ind AS 114.

No specific guidance Under paragraph 6 of Ind AS 114, a footnotehas been added to clarify the application ofrequirements of previous GAAP in the case ofan entity subject to rate regulation coming intoexistence after Ind AS coming into force or anentity whose activities become subject to rateregulation as defined in this Ind AS subsequentto preparation and presentation of its first IndAS financial statements.

Some important terms in Ind AS

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Some important terms in Ind AS

Effective Interest Rate (EIR) method:

• It is a method of calculating the amortised cost of a financial asset or afinancial liability and of allocating the interest income or interest expenseover the relevant period.

• The effective interest rate is the rate that exactly discounts estimated futurecash payments or receipts through the expected life of the financialinstrument.

• The effective interest rate is determined on the basis of the carryingamount of the financial asset or liability at initial recognition. Under theeffective interest method:a) the amortised cost of a financial asset (liability) is the present value of

future cash receipts (payments) discounted at the effective interestrate, and

b) the interest expense (income) in a period equals the carrying amountof the financial liability (asset) at the beginning of a period multipliedby the effective interest rate for the period.

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Some important terms in Ind AS…

Amortised cost:

The amortised cost of a financial asset or financial liability at each reportingdate is the net of the following amounts:• the amount at which the financial asset or financial liability is measured at

initial Recognition;• minus any repayments of the principal;• plus or minus the cumulative amortisation using the effective interest

method of any difference between the amount at initial recognition and thematurity amount;

• minus, in the case of a financial asset, any reduction for impairment

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Example of effective interest rate calculation and amortised cost…

A bank gives loan to its customer as per the following terms:

Loan amount: Rs.5,00,000

Processing charges: 2 % of loan amount.

Maturity : 5 years

Interest : year 1 – 6%, year 2 – 6%, year 3 – 7%, year 4 – 7%, year 5 – 8%

Interest to be paid annually and principal at the maturity date.

EIR is calculated at the rate that exactly discounts estimated future cash flowsthrough the expected life of this instrument.

5,00,000

30,000/(1+EIR)1+30,000/(1+EIR)2+35,000/(1+EIR)3+35,000/(1+EIR)4+(40,000+5,00,000)/ (1+EIR)5

XIRR function to be used in excel for EIR calculation

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Accounting as per current I-GAAP

• The amortized cost of the loan at the end of each period will be accounted as follows:

Year Opening Balance (Rs.)

Principal + Interest (Rs.)

Closing Balance (Rs.)

1 5,00,000 30,000 5,00,000

2 5,00,000 30,000 5,00,000

3 5,00,000 35,000 5,00,000

4 5,00,000 35,000 5,00,000

5 5,00,000 5,40,000 0

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Accounting as per Ind AS

• The amortized cost of the loan at the end of each period will be accounted as:

Year Amortized Cost at the Start of the

Year (A)

EIR (B)(A)*7.22%

Cash Flow (C)

Amortized Cost at the end of the Year(D) = (A) +(B) – (C)

1 4,90,000 35,386 30,000 4,95,386

2 4,95,386 35,775 30,000 5,01,160

3 5,01,160 36,192 35,000 5,02,352

4 5,02,352 36,278 35,000 5,03,630

5 5,03,630 36,370 5,40,000 0

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Functional Currency:

The primary economic environment in which an entity operates is normallythe one in which it primarily generates and expends cash. An entityconsiders the following factors in determining its functional currency:(a) The currency:

(i) that mainly influences sales prices for goods and services (this willoften be the currency in which sales prices for its goods and servicesare denominated and settled); and

(ii) of the country whose competitive forces and regulations mainlydetermine the sales prices of its goods and services.

(b) the currency that mainly influences labour, material and other costs ofproviding goods or services (this will often be the currency in whichsuch costs are denominated and settled).

65


Functional Currency ...:

The following factors may also provide evidence of an entity’s functionalcurrency:

(a) the currency in which funds from financing activities (i.e. issuingdebt and equity instruments) are generated.

(b) the currency in which receipts from operating activities are usuallyretained.

66


Subsidiary Control:

An investor, regardless of the nature of its involvement with anentity (the investee), shall determine whether it is a parent byassessing whether it controls the investee.An investor controls an investee when it is exposed, or has rights, tovariable returns from its involvement with the investee and has theability to affect those returns through its power over the investee.Thus, an investor controls an investee if and only if the investor hasall the following:(a) power over the investee;(b) exposure, or rights, to variable returns from its involvement with

the investee; and(c) the ability to use its power over the investee to affect the

amount of the investor’s returns.

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Fair Value:

This Ind AS defines fair value as the price that would be received to sellan asset or paid to transfer a liability in an orderly transaction betweenmarket participants at the measurement date.

A fair value measurement is for a particular asset or liability. Therefore,when measuring fair value an entity shall take into account thecharacteristics of the asset or liability if market participants would takethose characteristics into account when pricing the asset or liability atthe measurement date. Such characteristics include, for example, thefollowing:

(a) the condition and location of the asset; and(b) restrictions, if any, on the sale or use of the asset

68

Some important terms in Ind AS …

Other Comprehensive Income (OCI):

Other Comprehensive Income comprises items of income and expense that arenot recognised in profit or loss as required or permitted by other Ind ASs.

Items of OCI that will not be reclassified to Profit & Loss :

Changes in revaluation surplus

Re measurements of the defined benefit plans;

Equity Instruments through OCI

Fair value changes relating to own credit risk of financial liabilities designatedat fair value through profit or loss

Share of OCI in Associates and Joint Ventures, to the extent not to be classifiedinto profit or loss

69

Some important terms in Ind AS …

Items of OCI that will be reclassified to Profit & Loss:

Exchange differences in translating the financial statements of a foreignoperation

Debt Instruments through OCI

The effective portion of gains and loss on hedging instruments in a cash flowhedge

Share of Other Comprehensive Income in Associates and Joint Ventures, to theextent to be classified into profit or loss

Other Comprehensive Income (OCI): …

Some Implementation Issues

71

Some Implementation Issues Revenue –Whether Gross vs. Net: Treatment for Excise Duty, Service Tax /VAT

Defn of Revenue in Ind AS 18:Paragraph 8 of Ind AS 18, inter alia, provides that revenue includes onlythe gross inflows of economic benefits received and receivable by theentity on its own account.

IFTG 4: Issue 1 and 2 Using AS 9 analogy, it concludes that Revenue is Gross of Excise Duty For Service Tax, concludes that since it is collected on behalf of third

party Revenue should be net For VAT, GN on VAT requires Revenue to be shown as Net.

NSE Circular dated 10 Sept 2016: Requires Revenue Gross of Excise

72

Some Implementation Issues …Re-classification of Stores & Spares as PPE

Issues Awareness of change? Improper availability of data Threshhold determination

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Some Implementation Issues …Net Worth criteria for applicability To be considered as per standalone FS of 31st March 2014 Applies also to subsidiaries, associates and joint venturesNet Worth means ‘’Aggregate value of the paid-up share capital and all reservescreated out of the profits and securities premium account, after deducting theaggregate value of the accumulated losses, deferred expenditure andmiscellaneous expenditure not written off, as per the audited balance sheet, butdoes not include reserves created out of revaluation of assets, write-back ofdepreciation and amalgamation”

Issues Definition as per Companies Act, 2013 to be considered Company falling in phase I having subsidiaries as NBFCs? What if Net Worth falls subsequently? Applicability to associates registered under section 25 or section 8? Grant received and considered as capital reserve in FS – is it part of net

worth?

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Some Implementation Issues …Amalgamations and Mergers

Issues Will scheme override law or AS? Provisions of M&A in Companies Act 2013 notified recently Minutes of SEBI Board meeting dt 14 Jan 2017 What about old schemes having continuing effect? What is ‘’Effective date’’ for Ind AS 103 applicability?

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Some Implementation Issues …Deferred Tax Adjustments for assets carried at Fair Value For Goodwill Concept of ‘’Unused Tax Credit” Tax paid under MAT

Issues Timing vs. Temporary differences (AS 22 vs IndAS 12) Whether MAT credit available is part of Deferred tax Asset? Presentation of MAT in IndAS FS? Whether current or non-current?

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Some Implementation Issues …Security Deposits collected

Issues Whether Current of Non-Current?

ITFG Issue 2:

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Some Implementation Issues …Application of Effective Interest Rate method

Issues Adjustment of loan processing and other charges? Adjustments done earlier under Securities Premium Account Re-schedulement of Loans

Application of Expected Credit Loss Model

Issues Improper availability of past data Complex model

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Ind-AS Implementation Issues Himanshu Kishnadwala2 Accounting Standards in India Till 2006,...

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