International Financial Reporting Standards (IFRS)

IFRS Convergence Preliminaries

Convergence with International Accounting Standards (IASs) / International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB) is getting its due weightage over a period of time and in the present context the convergence to IFRS is in the process of shaping up all over the world such that more than 100 countries are currently requiring and permitting the use of or have a policy of convergence with IFRSs. Some countries have announced their intention to adopt IFRS from a future date, e.g., Canada from the year 2011, and China from the year 2008. Even FASB, USA and IASB are also working towards the convergence of the US GAAPs and the IFRS The Securities & Exchange Commission recently proposed permitting filing of IFRS-compliant financial statements without requiring presentation of a reconciliation statement between US GAAPs and IFRSs in near future. India has also joined this bandwagon by the fact the Council of the Institute of Chartered Accountants of India (ICAI), at its 259th meeting, held on May 2-4, 2006, expressed the view that the IFRS may be adopted in totality at least for listed and large entities, also keeping in view the expected advantages such as saving in cost of capital for Indian entities raising capital abroad, saving in cost for such entities for not preparing separate set of financial statements, expected improvement in the image of Indian industry and the accounting profession in the eyes of the world, and increasing opportunities for Indian professionals abroad.

ICAI has also issued a concept paper in this regard (available at www.icai.org) which is basically structured in the following manner:

“The Concept Paper comprises a chapter on Introduction and Background containing the need and effectiveness for convergence with IFRSs, the objective of convergence and the meaning of convergence with IFRSs for the purposes of the Concept Paper. The second chapter evaluates the present status of Indian Accounting Standards, vis-à-vis, the International Financial Reporting Standards and identifies the major reasons for departure from the IFRSs. The third chapter lays down the strategy for convergence with IFRSs including the approach to be followed in this regard and the road map for convergence.” (as per Preface to the Concept Paper).

India has decided to go for convergence route. Accounting Standard Board (ASB) of ICAI has al ready issued exposure drafts on all of the converged standards (Indian standards equivalent to lAS / IFRS). Once these Standards are approved by the Council of ICAI these will be sent to NACAS. On approval from NACAS, the same will need to be notified in the Gazette. Looking at the stringent timelines for roadmap of IFRS implementation in India, this process needs to be completed at the earliest. The existing set of Indian accounting standards will continue to be in force. These accounting standards will be applicable to those entities which are not required to migrate to Indian equivalent of IFRS (Ind-AS).

Ind AS the Indianised Version of IFRS

The Ministry of Corporate Affairs (MCA) notified the Companies (Indian Accounting Standards) Rules, 2015 (the ‘Rules’) on 16 February 2015. The Rules specify the Indian Accounting Standards (Ind AS) applicable to certain class of companies and set out the dates of applicability. The present write up provides an overview of the roadmap to Ind AS (as notified) and a succinct guidance to First Time Adoption of Ind AS.

The above implementation timeline for phase II companies will have comparative period ending 31 March 2017 and annual reporting period ending 31 March 2018.

(1)  Voluntary adoption

Companies may voluntarily adopt Ind AS for financial statements for accounting periods beginning on or after 1 April 2015, with the comparatives for the periods ending 31 March 2015 or thereafter. Once a company opts to follow the Ind AS, It will be required to follow the same for all the subsequent financial statements.

(2)  Mandatory adoption

The following companies will have to adopt Ind AS for financial statements from the accounting periods beginning on or after 1 April 2016:

• Companies whose equity and/or debt securities are listed or are in the process of listing on any stock exchange in India or outside India (listed companies) and having net worth of Rs. 500 crores or more.
• Unlisted companies having a net worth of Rs. 500 crores or more.
• Holding, subsidiary, joint venture or associate companies of the listed and unlisted companies covered above.

           Comparative for these financial statements will be periods ending 31 March 2016 or thereafter.

The following companies will have to adopt Ind AS for financial statements from the accounting periods beginning on or after 1 April 2017:

Comparative for these financial statements will be periods ending 31 March 2017 or thereafter. The road map will not be applicable to:

·    Companies whose securities are listed or in the process of listing on SME exchanges.

·    Companies not covered by the roadmap in the “Mandatory adoption” categories above.

·   Insurance companies, banking companies and non-banking finance companies.

These companies should continue to apply existing Accounting Standards prescribed in the Annexure to the Companies (Accounting Standards) Rules, 2006, unless they opt for voluntary adoption. Insurance companies, banking companies and non-banking finance companies cannot voluntarily adopt the Ind  ASs.

Particulars	Voluntary Adoption	Phase I	Phase II
Financial Year of Adoption	2015-16 or thereafter	2016-2017	2017-2018
Corresponding Previous Year for comparatives	2014-15 or thereafter	2015-2016	2016-2017
Companies within Ind AS      coverage :
(i)Listed Companies	Any company can voluntarily adopt Ind AS	All companies with net worth > = Rs. 500 crores	All companies listed or in the process of being listed
(ii)Unlisted Companies		All companies with net worth > = Rs. 500 crores	Companies having a net worth > = Rs. 250 crores
(iii)Groups Companies		Applicable to holding, subsidiaries, joint ventures, or associates of companies covered in (i) and (ii) above. This may also impact fellow subsidiary companies while preparing CFS of the holding company.
Common Requirements: (A)  The Id As would apply to stand-alone and consolidated financial statements (CFS). (B)  The Rules clarify that an Indian company: 1.   having an overseas subsidiary, associate, joint venture and other similar entities, or 2.    Which is a subsidiary, associate, joint venture and other similar entities is required to prepare its financial statements, including CFS, where applicable, in accordance with the Rules. (C)  The net worth for implementation of Ind AS should be calculated based on the stand alone financial statements of the company as on 31 March, 2014 or the first audited financial statements for accounting period ending subsequently.\ The net worth of companies which are not existing on 31 March, 2014 or an existing company falling under any of thresholds for the first time after 31 March 2014 should be calculated based on the first audited financial statements ending after 31 March, 2014. (D) Net worth is to be calculated as defined in the Companies Act, 2013 and does not include reserves created out of revaluation of assets, write back of depreciation and amalgamation. (E) Once a company applies Ind AS voluntarily, it will be required to follow the Ind AS for all the subsequent financial statements. Thus, no roll back is permitted. (F)  The above companies would not be required to prepare another set of financial statements in accordance with the accounting standards prescribed in the Companies (Accounting Standards) Rules, 2006 prescribed under the Companies Act 1956. (G) Words and expressions used in the Rules but not defined in the Rules would have the same meaning as assigned in the Companies Act, 2013.

Ind AS 101, First-time Adoption of Indian Accounting Standards

The objective of the Ind AS 101, First-time Adoption of Indian Accounting Standards is to:

• provide a suitable starting point for accounting in accordance with Ind AS,
• set out the procedures that an entity would follow when it adopts Ind AS for the first time as the basis for preparing its financial statements,
• transition at a cost that does not exceed the benefits, and
• ensure that the entity's first Ind AS financial statements contain high quality information that is transparent for users and comparable over all periods presented.

(1) General requirements

An opening balance sheet is prepared at the date of transition, which is the starting point of account ing in accordance with Ind AS. The ‘date of transition’ is the beginning of the earliest comparative period presented on the basis of Ind AS. Further, at least one year of comparatives is presented on the basis of Ind AS, together with the opening balance sheet. Ind AS 101 also requires the equity and profit reconciliations to be provided by the first-time adopters.

(2) Selection of accounting policies

Accounting policies are chosen from Ind AS effective at the first annual Ind AS reporting date. Gen erally, those accounting policies are applied retrospectively in preparing the opening balance sheet and in all periods presented in the first Ind AS balance sheet. Ind AS 101 prescribes mandatory exceptions and optional exemptions for first-time adopters of Ind AS thereby facilitating a smooth transition to Ind AS. In the absence of these exceptions/exemptions, all the standards forming part of Ind AS would have been required to be applied with retrospective effect thereby posing significant challenges (such as availability of necessary information, impracticability of application of some of these requirements with ;retrospective effect, etc.) in the process of transition to Ind AS. Accordingly, careful consideration of these exceptions/ exemptions and their impact on the first and subsequent Ind AS financial statements would be required.

The accounting policies that an entity uses in its opening Ind AS balance sheet may differ from those that it used for the same date using its previous GAAP The resulting adjustments arise from events and transactions before the date of transition to md AS. Therefore, an entity shall recognise those adjustments directly in retained earnings (or, if appropriate, another category of equity) at the date of transition to Ind AS.

(3) Key mandatory exceptions

• Estimates: To be consistent with estimates made under the previous GAAP unless there was an error, or the estimate and related information under previous GAAP is no longer relevant because the entity elects a different accounting policy on the adoption of Ind AS.
• Derecognition of financial instruments: The derecognition requirements are to be applied prospectively. An entity may apply the derecognition requirements in Ind AS 109 retrospectively from a date of the entity’s choice, provided that the information needed to apply md AS 109 to financial assets and financial liabilities derecognised as a result of past transactions was obtained at the time of initially accounting for those transactions
• Hedge accounting: Ind AS 101 Prevents the use of hindsight from retrospectively designating derivatives and qualifying instruments as hedges
• Classification and measurement of financial assets: The assessment is required to be made based on the conditions that exist at the date of transition.
• Impairment of financial assets: Impairment requirements as per Ind AS 109 are to be applied retro spectively, subject to certain exceptions.
• Government loans: The principles of md AS 20, Accounting for Government Grants and Disclosure of Government Assistance and lnd AS 109 are applied prospectively. However, these may be applied retrospectively, if information was obtained at the time of initial recognition.

(4) Optional exemptions

A number of exemptions are available from the general requirement for retrospective application of Ind AS accounting policies. Some of the key optional exemptions from other Ind AS are as follows.

• Business combinations: This exemption applies to all business combinations that occurred before the date of transition, or before an earlier date if so elected. It applies also to acquisitions of associates and interests in joint ventures. If a first-time adopter does not restate its previous business combinations, then the previous acquisition accounting remains unchanged. However, some adjustments - e.g. to reclassify intangibles and goodwill - may be required.
• Deemed cost: The deemed cost exemption permits the carrying amount of an item of property, plant and equipment to be measured at the date of transition based on a deemed cost. If it is elected, then the deemed cost exemption may be based on any of the following:

(a) Fair value

(b) A previous GAAP revaluation that was broadly on a basis comparable to fair value under Ind AS

(c) A previous GAAP revaluation that is based on a cost or depreciated cost measure broadly comparable to Ind AS adjusted to reflect, for example, changes in a general or specific price index

(d) An event-driven valuation - e.g. when an entity was privatised and at that point valued and recognised some or all of its assets and liabilities at fair value.

Ind AS 101 also includes a choice to consider previous GAAP carrying values as 'deemed cost' for property, plant and equipment, intangible asset, or investment property acquired prior to the transition

date.

• Long term foreign currency monetary items: Ind AS 101 provides an option to a first-time adopter to continue the policy adopted for accounting for exchange differences arising from translation of longterm foreign currency monetary items recognised in the financial statements for the period ending immediately before the beginning of the first Ind AS financial reporting period as per the previous GAAP.
• Leases: When a lease includes both land and building elements, a first time adopter may assess the classification of each element as finance or an operating lease at the date of transition to Ind ASs on the basis of the facts and circumstances existing as at that date. If there is any land lease newly classified as finance lease then the first time adopter may recognise assets and liability at fair value on that date; and any difference between those fair values is recognised in retained earnings.
• Cumulative translation differences: If a first-time adopter uses this exemption:

(a) the cumulative translation differences for all foreign operations are deemed to be zero at the date of transition to Ind ASs; and

(b) the gain or loss on a subsequent disposal of any foreign operation shall exclude translation differences that arose before the date of transition to Ind ASs and shall include later translation differences.

• Compound financial instruments: Ind AS 32 Financial Instruments: Presentation requires an entity to split a compound financial instrument at inception into separate liability and equity components. If the liability component is no longer outstanding, retrospective application of Ind AS 32 involves separating two portions of equity. The first portion is in retained earnings and represents the cumulative interest accreted on the liability component. The other portion represents the original equity component. However, in accordance with this Ind AS, a first-time adopter need not separate these two portions if the liability component is no longer outstanding at the date of transition to Ind ASs.
• Revenue from contracts with customers: A first-time adopter may use one or more of the following practical expedients when applying Ind AS 115 retrospectively:

(a) for completed contracts, an entity need not restate contracts that begin and end within the same annual reporting period;

(b) for completed contracts that have variable consideration, an entity may use the transaction price at the date the contract was completed rather than estimating variable consideration amounts in the comparative reporting periods; and

(c) for all reporting periods presented before the beginning of the first Ind AS reporting period, an entity need not disclose the amount of the transaction price allocated to the remaining performance obligations and an explanation of when the entity expects to recognise that amount as revenue.

(5) Tax Issues

In order to make the transition to Ind AS smooth, the related tax issues also need to be addressed. In this regard, the Ministry of Finance had issued drafts of 12 ICDS in January 2015. These standards have been notified on 1st April, 2015, and will therefore provide an independent framework for computation of taxable income, which is delinked from the statutory financial reporting by companies. However, the basis for ‘minimum alternative tax’ (MAT) computation for companies reporting under Ind AS still remains an issue to be addressed.

(6) Conclusion

The transition to Ind AS has an organisation wide impact, and not just accounting. Companies need to plan in advance and invest time. Given the pervasive nature of the impact of these new standards, in addition to the financial reporting impacts, companies will also have to assess impact on other stakeholders such as investors and analysts. Companies would also have to determine the impact of the standards on areas such as tax planning, compliance with loan covenants, incentive plans, funding, etc. This would also require changes to systems and processes including, sales and contracting processes, IT systems, internal controls, etc.