Finally India is converging to IFRS by adopting equivalent Standards i.e. Ind AS, as per the roadmap for implementation of Ind AS notified by the MCA. Ind AS contain numerous carve outs from IFRS and therefore Ind AS financials will not be the same as those prepared as per IFRS. Implementation of Ind AS is not a hassle-free job, it requires appropriate planning and an assessment of the impact on the financial statements as well.
The MCA, vide it’s notification dated 16th February, 2015 mandates the adoption of Ind AS in a phased manner by all companies except Banking Companies, Insurance Companies and Non-Banking Finance Companies.
The notification lays down the roadmap for adoption of Ind AS (except for Banking Companies, Insurance Companies and NBFCs) as under:
| Particulars | Voluntary adoption | Mandatory adoption | |
| Year of adoption | 2015-16 | 2016-17 | 2017-18 |
| Companies | All Companies | All companies having net worth INR 500 crores or more | All listed companies and other companies having net worth INR 250 crores or more but less than INR 500 crores. |
| Date of Transition | 01st April, 2014 | 01st April, 2015 | 01st April, 2016 |
Note:
1) The holding, subsidiary, joint venture and associate companies of a company, adopting Ind AS as per the above roadmap, shall also be covered.
2) The Comparative financial information shall also be as per Ind AS compliance.
As per RBI notification dated 11th February, 2016 and IRDA notification dated 1st March, 2016 Banking companies, NBFCs and Insurance companies shall comply with the Ind AS for accounting period beginning from 1st April, 2018 (1st April, 2019 phase II for NBFCs) . However Banks have to submit Proforma Ind AS Financial Statements to the RBI for the half year ended September 30, 2016 latest by November 30, 2016 as per RBI notification dated 23rd June, 2016.
Once the applicability of Ind AS is determined, the next step is to assess the impact of transition from IGAAP to Ind AS and identify the statements to be prepared. According to Ind AS 101”First-time Adoption of Indian Accounting Standards” an opening balance sheet as per Ind AS shall be prepared on the date of transition and while preparing the opening balance sheet an entity shall recognise, derecognise, classify and measure all the assets and liabilities as per the requirements of Ind AS subject to certain exemption and exception provided in the standard. The resulting changes on transition to Ind AS shall be adjusted to retained earnings.
As per Ind AS 101 an entity’s first Ind AS financial statements shall include at least three Balance Sheet, two Statements of profit and loss, two Statements of cash flows and two Statements of changes in equity and related notes, including comparative information for all statements presented. Further first Ind AS financial statements shall include reconciliations of its equity and total comprehensive income as per the requirements of paragraph 24 of Ind AS 101.
Transitional Impact Assessment
An entity need to assess the impact of transition from IGAAP to Ind AS on the various items of financial statements on the date of transition. The steps which are to be taken at the date of transition are as under:
a) Indentify the items of financial statements which may be affected by the application of Ind AS in terms of amount, classification, derecognition requirements, if any.
b) Identify any new asset, liability or equity which is required to be recognised as per Ind AS
c) Recognise the new asset, liability or equity and derecognize an existing asset, liability or equity as per the requirements of Ind AS
d) reclassify the items as per the requirements of Ind AS into Assets, liabilities and equity
e) Measure the assets, liabilities and equity in accordance with Ind AS
f) Quantify the overall impact of transition on Opening Balance Sheet and amount to be adjusted to Opening Reserve.
It is pertinent to note that while assessing the impact of Ind AS adoption exemptions and exceptions provided in Ind AS are required to be considered and Ind AS application is intended to be done on material items.
First time adoption of Ind AS and various items of financial statements
| Items of financial statements | Treatment in opening balance sheet considering the exemptions and exception provided in Ind AS 101 | Related Ind AS | Comments |
| Tangible fixed assets | At Deemed cost and deemed cost may be:
I. Previous GAAP carrying value or II. fair value |
16 | Considering the practical issues in the retrospective application of Ind AS 16 deemed cost exemption has been provided by Ind AS 101 as the records of PPE may not be available which was acquired a long back in the past. The adjustment for decommissioning cost, if any needs to be done. |
| Intangible Assets | Same as in case of PPE | 38 | As in case of PPE, deemed cost exemption is provided for intangible assets also. However it is to be carried over in the opening balance sheet only when it meets the recognition criteria as per Ind AS 38. |
| Capital work in progress | At previous GAAP carrying amount | 16 | CWIP is an item of PPE and PPE are initially recognised at cost. Thus considering the nature of CWIP, a first time adoption of Ind AS 16 doesn’t have any impact on the item of CWIP.
|
| Intangible asset under development | At previous GAAP carrying amount | 38 | If it meets the criteria of recognition as an intangible in accordance with Ind AS 38 on the date of transition, otherwise balance shall be transferred to retained earnings. |
| Investment property | At previous GAAP carrying amount (deemed cost exemption)
|
40 | As per Ind AS 40 on initial recognition, it should be measured at cost plus transaction costs, if any. Subsequently it is measured as per Ind AS 16 (cost model) |
| Goodwill/Capital Reserve | At previous GAAP carrying amount | 103 | As per Ind AS 101, if first time adopter does not apply Ind AS 103 retrospectively, the carrying amount of goodwill/capital reserve in the opening balance sheet shall be its carrying amount in accordance with previous GAAP and the carrying amount of goodwill/capital reserve shall be adjusted for recognition of an intangible asset previously subsumed in goodwill/capital reserve or reclassification of an intangible asset to goodwill/capital reserve recognised previously. Further at the date of transition goodwill shall be tested for impairment in accordance with Ind AS 36 |
| Investment in subsidiaries, associates or joint venture | Either
I. At cost or II. As per Ind AS 109 As per Ind AS 101 cost means: a) Cost as per Ind AS 27 b) Deemed cost: • fair value or • previous GAAP carrying amount) |
109 & 27 | As per Ind AS 109 Investment in equity instruments shall be measured at FVTPL. However an entity can irrevocably choose to measure such investments at FVTOCI.
|
| Investment- Debt instruments | At fair value on the date of transition using EIR method | 109 | If on the date of transition debt instrument meets the business model and SPPI tests it shall be measured at amortised cost. Further if on the date of transition is it impracticable to apply EIR method, fair value on the date of transition shall be the carrying amount for opening balance sheet. |
| Investment- Equity Instruments | At fair value on the date of transition | 109 | On the date of transition, entity may make an irrevocable election to designate the same at FVTOCI, if it is not held for trading, thereafter any change in fair value shall be transferred to OCI. |
| Loans and advances | At fair value on the date of transition using EIR method | 109 | Same as in case of investment in debt instruments |
| Other assets- Prepaid Expenses | I. Previous GAAP carrying amount or
II. Fair value (discounted at EIR if financing element is inherent in the same |
Prepaid expenses are not financial assets as benefit in return shall be the receipt of goods or services. This is also not specifically covered by any other Ind AS. Each case is to be evaluated separately and treated accordingly | |
| Inventories | Retrospective application of Ind AS 2 | 2 | There is no exemption and exception provided for first time application of Ind AS 2. Measurement at lower of cost and net realisable value is required by both – AS 2 and Ind AS 2. Therefore apparently Ind AS application does not affect the value of inventory. |
| Trade receivables | Previous GAAP carrying amount | 32 & 109 | Trade receivables are financial assets and generally of short term nature. They reflect the fair value themselves at their transaction price. However if it is of long term nature and any significant financing element is inherent then a necessity of discounting of the same may arise. |
| Cash and bank balances | Previous GAAP carrying amount | 109 | There is no impact on transition to Ind AS |
| Equity share capital | Previous GAAP carrying amount- no adjustment | 32 | As per Ind AS 32 An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. |
| Preference share capital | To be reclassified to liability if it meets the definition of a financial liability | 32 | As per Ind AS 32 a preference share is a financial liability in any of the following cases:
|
| Reserves & Surplus(Retained earnings) | All differences arising from first time adoption of Ind AS to be adjusted | 101 | As per Ind AS 101 all differences arising due to transition to Ind AS from IGAAP shall be adjusted to retained earnings, except the adjustments to be made to goodwill |
| Foreign currency translation reserve | I. FCTR are deemed to be zero and entire balance is transferred to retained earnings or
II. retrospective application |
21 | Ind AS 21 gives voluntary exemption from retrospective application for all foreign operations. If this exemption is not availed then retrospective application of Ind AS 21 is required to be done for each foreign operation. |
| Revaluation Reserve | I. At previous GAAP carrying amount or
II. Reallocation to retained earnings |
16 | If on the date of transition entity decide to apply the cost model and scrapping the revaluation model as per previous GAAP revaluation reserve shall be transferred to retained earnings |
| Minority Interest | At previous GAAP carrying amount | 110 | Ind AS 101 provides for mandatory exception in this respects |
| Borrowings | At fair value on the date of transition and transaction costs attributable to the borrowing to be deducted at initial recognition and amortised at EIR over the tenure of the borrowing | 109 & 32 | Ind AS 109, provides the optional exemption for fair value of financial liability at initial measurement therefore on the date of transition borrowings shall be fair valued and measured at amortised cost. |
| Deferred tax assets/liabilities | Retrospective application of Ind AS 12. | 12 | No exemption or exception is provided for first time adoption of Ind AS 12. Therefore full retrospective application of Ind AS needs to be done. Further deferred tax effect of the adjustments made to the balance sheet on transition date will be accounted for. |
| Trade Payables | At previous GAAP carrying amount | 32 & 109 | Trade payables are financial liability and initially measured at fair value which is equivalent to its transaction price. Generally they are of short term nature However if Trade payable is of long term nature and any significant financing element is inherent therein it is measured at amortised cost using effective interest rate method |
| Proposed Dividend | Liability for dividend proposed after the reporting date to be derecognized and transferred to retained earnings. Liability is recognised in the year in which it is authorized and becomes payable | 10 | According to Ind AS 10 If dividends are declared after the reporting period but before the financial statements are approved for issue, the dividends are not recognised as a liability at the end of the reporting period because no obligation exists at that time. Such dividends are disclosed in the notes in accordance with Ind AS 1, |
| Provisions | Discounting of provisions to be done where the effect of time value of money is material to disclose at their present value. As the time passes unwinding of discount will be recognised as finance cost. | 8 | There is no specific exemption in Ind AS 101 for provisions but mandatory exception is provided for estimates. An entity shall not adjust the estimate in opening balance sheet for the information received after the date of transition. However new information shall be reflected in profit or loss of the current year. |
Important Notes:
- The accounting treatment of the items in the opening balance sheet has been explained under the assumption that the entity implementing Ind AS is considering the optional exemptions provided by Ind AS 101.
- Calculation of Effective Interest Rate: Use the XIRR function in excel to calculate the effective interest rate with estimated dates of expected future cash flows.
Some items of Statement of Profit and Loss and their accounting treatment as per Ind AS
| Items of profit or loss | Accounting treatment as per Ind AS | Related Ind AS | Comments |
| Revenue from Operations | At fair value of consideration received or receivable and excise duty will not be netted off from revenue and shown as a part of expenses. | 18 | AS per Ind AS 18 revenue is recognised at fair value of consideration received or receivable. Any discount, incentive or rebates will be deducted from the revenue. |
| Interest Income | Interest revenue shall be calculated by using the EIR method | 109 | Interest income on interest free/concessional rate loans given to employees/related entities are recognised using EIR on accretion of interest thereon at passage of time.
|
| Employee benefits- actuarial gains/losses | To be recognised in OCI | 19 | As per AS 19, actuarial gains and losses on remeasurement of net defined benefit liability is recognised in OCI. However net interest on the net defined benefit liability is recognised in Profit or Loss |
| Transaction Cost on borrowings | To be deducted from the relevant borrowing and amortised using EIR over the tenure of borrowing. | 109 | As per Ind AS 109, at initial recognition of a financial liability, transaction costs directly attributable to the acquisition thereof shall be reduced from it. |
| Amortisation of Intangibles | I. Finite useful life: SLM, WDV or other appropriate method.
II. Infinite useful life: No amortization but to be tested for impairment |
38 | As per Ind AS 38, The entity shall amortize the intangible asset over its useful life based on the method which reflects the pattern of consumption of the expected future economic benefits embodied in the asset. However revenue based amortization is allowed for intangible assets (toll roads) created under SCA. Goodwill arising on business combination is not be amorised but tested for impairment. |
| Finance Cost | Interest on borrowings is recognised at EIR | 109 | Other finance costs like bank guarantee commission etc. are recognised at actual cost but this does not include any attributable transaction costs on borrowing which is directly reduced from the amount of borrowing |
An effort has been made to cover some common items of the financial statements and explain the impact of application of Ind AS thereon, based on the practical approach applied in the adoption of Ind AS.
Refer – http://www.mca.gov.in/MinistryV2/Stand.html
Thanks for reading
Author is a partner of G Y & Company, Chartered Accountants and can be reached at dheeraj.c@gyco.in / dheerajchaurasiya@gmail.com
Excellent Job
thanks. nice article
Well explained , Thank you 🙂
Thank you for the comprehensive explanation
wonderful detailing and pleasant presentation. Many thanks
it’s good compilation of difference between IGAAP & IND AS ..
Good Research and almost covered significant parts/items required as at transitional dates.
A very Comprehensive presentation which would be very useful to all the concerned..!!!.