CA Debasis Sahoo
The new era of Accounting and presentation for corporate entities has been set by Ministry of Corporate Affairs (MCA) by notifying 39 new Indian Accounting Standards (INDAS) vide its notification dated 16th February,2015. These INDASs are applicable to companies other than Banking, Insurance & Non Banking Finance companies. At the time of transition to INDAS Company and auditor need to have more cautious about the accounting treatment as well as presentation factors prescribed in INDAS.
Let’s have a glimpse on Notification and Transition method on a FAQ basis.
1.0 How Many Accounting Standards Rules are in force?
Ans: At present there are 2 types of Accounting Standards Rules are in force. As per Rule 4 of Companies (Indian Accounting Standards) Rules, 2015 which was notified by MCA on 16-02-2015 clearly prescribed for applicability of following 2 Accounting Standards Rules.
i. Companies (Indian Accounting Standards) Rules, 2015.(cover New INDAS)
ii. Companies (Accounting Standards) Rules, 2006 (cover existing Accounting Standards)
2.0 To whom above standards are applicable ?
a. Applicability of Companies (Indian Accounting Standards) Rules, 2015.
| Description | Phase-I | Phase-II | Phase-III |
| Effective Date | 01-04-2016 | 01-04-2017 | 01-04-2015 |
| Condition | Listed or Unlisted Companies
Ø Net worth is > ` .500 crores Ø Holding, Subsidiary, joint ventures or associates of these companies. |
Ø Listed Companies whose net worth is < ` .500 crores
Ø Unlisted companies whose net worth is >=` 250.00 Croes but <` 500.00Crores Ø Holding, Subsidiary, joint ventures or associates of these companies. |
Company May Comply, this is voluntary for every company.
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b. Companies (Accounting Standards) Rules, 2006 is applicable to those companies which are not falling under any category specified above.
3.0 What is the Cut-off Date for Calculation of Net Worth and how Net worth is to be calculated?
Ans: Net Worth shall be calculated in accordance with the stand-alone financial Statements of the company as on 31-03-2014 or the first audited financial statements for accounting period which ends after that date
Net Worth” shall have the meaning assigned to it in clause (57) of section 2 of the Companies Act,2013
| Section 2(57) | net worth” means the aggregate value of the paid-up share capital and all reserves created out of the profits and securities premium account, after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves created out of revaluation of assets, write-back of depreciation and amalgamation; |
4.0 What is the Date of conversion of INDAS?
Ans: Para-6 of INDAS-101 First-time Adoption of Indian Accounting Standards clearly indicate that “ An entity shall prepare and present an opening Ind AS Balance Sheet at the date of transition to Ind ASs. This is the starting point for its accounting in accordance with Ind Ass.
Hence the date of transition to INDAS is the beginning of earlier period for which an entity presents full comparatives information under Ind As in first Ind AS financial Statement.
Example: If entity eligible for Ind AS from 2016-17, its transition date is 01st April,2015.
5.0 Whether Subsidiary, Associates, Joint venture incorporated outside india has to prepare its financial statement as per INDAS?
Ans: If any Subsidiary, Associates or Joint venture incorporated outside India they may prepare its standalone financial statements in accordance with the requirements of the specific jurisdiction.
However, if parent company is incorporates in India and covered under the parameter of Companies (Indian Accounting Standards) Rules, 2015 should prepare its Consolidated Financial statement as per INDAS. Therefore, it indicates that parent company should take care of conversion of financial statement of its Subsidiary, join venture or Associate incorporate outside india to INDAS financial Statement for consolidation.
5.0 What is the meaning of Subsidiary, Associates in the context of above rule,2015?
Ans: Companies (Indian Accounting Standards) Rules, 2015, did not clearly prescribe the meaning of subsidiary or Associate. However, Rule-2, clause-2 of Companies (Indian Accounting Standards) Rules, 2015 mentioned that: “Words and expressions used herein and not defined in these rules but defined in the Act shall have the same meaning respectively assigned to them in the Act.” Therefore, for the purpose of definition following sections of Companies Act 2013 are being used
| Section-2(87) | Subsidiary company ”or “subsidiary”, in relation to any other company (that is to say the holding company), means a company in which the holding company – (i) controls the composition of the Board of Directors; or (ii) exercises or controls more than one-half of the total share capital either at its own or together with one or more of its subsidiary companies: |
| Section 2(6) | Associate Company’” in relation to another company, means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company.
significant influence” means control of at least 20%. of total share capital, or of business decisions under an agreement;
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From the above definition you can clearly note that the 2 sections are focus on Total Share capital for classification of Subsidiary and Associates.
However, Total Share Capital definition is not clearly mentioned in the respective section or anywhere in the companies act 2013 but the same has been defined in Rule 2 (1)(r) of Companies (Specification of definitions details) Rules, 2014.
Total Share Capital”, for the purposes of clause (6) and clause (87) of section 2, means the aggregate of the –
(a) Paid-up equity share capital; and
(b) Convertible preference share capital;
Therefore, now company should take care about both investment of equity share and convertible preference share for classification of subsidiary and Joint venture.
6.0 What are the Steps need to be taken for Transition to INDAS?
For transition to INDAS, the eligible company should carefully examine the provision contained in the notified 39 INDASs.
The relevant INDAS for transition to IndAS is INDAS-101 “First-time Adoption of Indian Accounting Standards”. INDAS 101, explain how the company will prepare its first financial statement as per INDAS. Broadly it covers following aspects
a. Mandatory Exemption (Appendix-B) which will be for prospective application of INDAS in certain areas.
b. Voluntary Exemption (Appendix-C&D) which will exempt from specific applicability of particular INDAS.
c. Presentation of Financial Statement.
7.0 What are the important areas prescribed in INDAS-101?
INDAS 101 basically provides the frame-work for preparation of first INDAS financial Statement and its interim financial report.
Bird eye view of INDAS-101
| INDAS-101: First-time Adoption of Indian Accounting Standards | |||
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| Recognition and Measurement (Para: 6 to 19) |
Presentation and disclosure (Para: 20 to 33) |
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| i. Opening Ind AS Balance Sheet | i. Comparative information | ||
| ii. Accounting policies | ii. Explanation of transition to Ind Ass | ||
| iii. Exceptions to the retrospective application of other Ind Ass
(Appendix-B) |
iii. Reconciliations | ||
| iv. Exemptions from other Ind Ass (Appendix C &D) |
iv. Designation of financial assets or financial liabilities | ||
| v. Use of fair value as deemed cost | |||
| vi. Use of deemed cost for investments in subsidiaries, joint ventures and associates | |||
| vii. Use of deemed cost for oil and gas assets | |||
| viii. Use of deemed cost for operations subject to rate regulation | |||
| ix. Use of deemed cost after severe hyperinflation | |||
| x. Interim financial reports | |||
Para-3 “ An entity’s first Ind AS financial statements are the first annual financial statements in which the entity adopts Ind ASs, in accordance with Ind Ass notified under the Companies Act, 2013 and makes an explicit and unreserved statement in those financial statements of compliance with Ind ASs.”
From above para it clearly depicts that along with adoption of INDAS an entity should mandatorily provide an Explicit and Unreserved Statement in the first INDAS financial statement.
Para-10: Except as described in paragraphs 13–19 and Appendices B–D, an entity shall, in its opening Ind AS Balance Sheet:
(a) recognise all assets and liabilities whose recognition is required by Ind ASs;
(b) not recognise items as assets or liabilities if Ind ASs do not permit such recognition;
(c) reclassify items that it recognised in accordance with previous GAAP as one type of asset, liability or component of equity, but are a different type of asset, liability or component of equity in accordance with Ind ASs; and
(d) apply Ind ASs in measuring all recognised assets and liabilities.
Example;
(a) recognise all assets and liabilities whose recognition is required by Ind ASs;
Example: Derivative Financial Instrument Accounting: Now As per INDAS-109, derivative financial Instrument like Call option, interest rate swap derivatives, commodities derivatives etc. is to be accounted for.
Now Balance Sheet should Specifically Disclosed the Financial Asset & Liability. Note that INDAS-109 is meant for recognition & Measurement Criteria of Financial Instrument where as INDAS-32 is for Presentation of Financial Instrument.
(b) not recognise items as assets or liabilities if Ind ASs do not permit such recognition;
Example: Proposed Dividend: INDAS-10: Events after the Reporting Period: Para-12 – If an entity declares dividends to holders of equity instruments (as defined in Ind AS 32, Financial Instruments: Presentation) after the reporting period, the entity shall not recognise those dividends as a liability at the end of the reporting period.
The company now at the time of transition to INDAS derecognise the proposed dividend liability from its opening balance sheet and the same proposed dividend will be treated as liability in subsequent financial year when the dividend is actually paid.
(c) reclassify items that it recognised in accordance with previous GAAP as one type of asset, liability or component of equity, but are a different type of asset, liability or component of equity in accordance with Ind ASs; and
Example: As per INDAS-32: Compound financial instruments: The issuer of a non-derivative financial instrument shall evaluate the terms of the financial instrument to determine whether it contains both a liability and an equity component. Such components shall be classified separately as financial liabilities, financial assets or equity instruments
Like Convertible Bond, Convertible Preference Share. The Equity portion of Convertible Bond / Preference share should be appropriately classified as Equity and remaining portion should be classified as Financial Liability.
(d) apply Ind ASs in measuring all recognised assets and liabilities.
Example: Componentization of Asset i.e. Component accounting as per INDAS-16 need to be applied to Property, Plant & Equipment (PPE).
Earlier As per AS-19, Land lease is specifically excluded from the scope of lease and, however, as per INDAS-17, land lease is not excluded, and company has to recognize its interest in leasehold land as operating or finance lease.
EXEMPTION AS PER INDAS-101
INDAS-101 lays down the various process of transition to INDAS from current GAAP by incorporating certain exemptions. As far as accounting aspect at the time of transition to INDAS is concerned it requires retrospective accounting treatment, which is not practically very easy to adopt. Therefore, INDAS 101 provided various type of exemption while transition to INDAS.
It is to be noted that where INDAS-101 provide certain exemption towards retrospective accounting treatment and some other requirement of specified INDAS at the time of transition to INDAS, at the same time it does not provide exemptions from the presentation and disclosure requirements of other IndASs. Therefore, company should take proper initiative towards presentation area of notified INDAS.
There are two type of exemptions prescribed on IND AS-101
a. Prohibition of Retrospective application of some aspect of INDAS (Appendix-B)
b. Exemptions from some requirements of other Ind ASs.(Appendix – C & D)
| Sl.No. |
Mandatory exceptions (Appendix-B) |
| 1 | Estimates |
| 2 | derecognition of financial assets and financial liabilities |
| 3 | hedge accounting |
| 4 | non-controlling interests |
| 5 | classification and measurement of financial assets |
| 6 | impairment of financial assets |
| 7 | embedded derivatives |
| 8 | government loans |
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| Sl no | Optional exemptions (Appendix -C & D) |
| 1 | Business combinations |
| 2 | Share-based payment transactions. |
| 3 | Insurance contracts. |
| 4 | Deemed cost. |
| 5 | Leases. |
| 6 | Cumulative translation differences. |
| 7 | Long Term Foreign Currency Monetary Items |
| 7 | Investments in subsidiaries, joint ventures and associates. |
| 8 | assets and liabilities of subsidiaries, associates and joint ventures |
| 9 | compound financial instruments |
| 10 | designation of previously recognised financial instruments |
| 11 | fair value measurement of financial assets or financial liabilities at initial recognition |
| 12 | decommissioning liabilities included in the cost of property, plant and equipment |
| 13 | financial assets or intangible assets accounted for in accordance with Appendix C to Ind AS 115 Service Concession Arrangements |
| 14 | borrowing costs |
| 15 | extinguishing financial liabilities with equity instruments |
| 16 | severe hyperinflation |
| 17 | joint arrangements |
| 18 | stripping costs in the production phase of a surface mine |
| 19 | designation of contracts to buy or sell a non-financial item |
| 20 | revenue from contracts with customers |
| 21 | non-current assets held for sale and discontinued operations |
This is pertinent to note that, List of exemption mentioned in Appendix –C & D is voluntary in nature and the company should not apply these exemptions by analogy to other items .i.e. exemption is restricted to the area mentioned in the list and could not be extended to other similar area of other INDAS.
8.0 What are the exemptions for Deemed Cost?
Ans: Appendix-D of INDAS-101 mentioned that, Company May elect to measure its Property, Plant and Equipment (PPE), Investment Property & Intangible assets at following options as deemed cost as on the date of transition to INDAS
a. At its Fair value.
b. Previous GAAP revaluation Amount.
c. Carrying Amount as recognised in the financial statements as at the date of transition to Ind ASs
9.0 What is the meaning of Carrying Amount ? In this context what will be the transition value, Original Amount or Net Amount?
Ans: In the context of Carrying amount specified in Appendix –D for transition to INDAS, it should be the Net Amount after Depreciation as on the date of Transition to INDAS.
10.0 A company intends to book it’s all assets at its carrying amount as on the date of Transition to INDAS. Is it possible?
Ans: It is clearly mentioned in Appendix-D, of INDAS-101 that “An entity shall not apply these exemptions by analogy to other items.” i.e. exemption is restricted to the area mentioned in the list and could not be extended to other similar area of other INDAS. Further, similar contention also mentioned in Para-D7 of the appendix-D. Therefore, Carrying amount of , Plant and Equipment (PPE), Investment Property & Intangible assets only are eligible to be treated as deemed cost as on the date of transition.
11.0 What are the Exemptions for Long Term Foreign Currency Monetary Items?
Ans: Para- D13AA of INDAS-101: A first-time adopter may continue the policy adopted for accounting for exchange differences arising from translation of long-term 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.
The company which is availing the benefit of Para-46 & 46A of Accounting Standard-11 “ The effect of Change in Foreign Exchange Rate” i.e. exchange difference relating to translation of foreign currency monetary item relating to depreciable asset can be added / deduct from the cost of asset or it can be accumulated n “Foreign Currency Monetary Item Translation Difference Account” can avail the benefit upto the beginning of of First IND AS Financial Year.
Example: If one company is company is eligible for transition to INDAS from Financial Year 2016-2017. Company can capitalise or accumulate the exchange difference upto 31-03-2016. Any exchange difference arises after 01-04-2016 will be treated in Statement of Profit & Loss as per IND AS-21 “The Effect of Change in Foreign Exchange Rates”.
12.0 How Comparative information’s are to be present as per INDAS?
As per INDAS-101 An entity’s first INDAS 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.
Suppose, xyz ltd need to apply INDAS from FY: 2016-17, its first INDAS financial Statement should contain
a. Balance Sheet as on 01-04-2015, 31-03-2016 and 31-03-2017
b. Statement of Profit &Loss : For the period 31-03-2016 and 31-03-2017
c. Statement of cash flow : for the period 31-03-2016 and 31-03-2017
d. Statement of Changes in Equity For the period: 31-03-2016 and 31-03-2017
e. Related note including comparative information for all statement presented
f. Additionally as per the requirement of para-3 of INDAS 101, explicit & unreserved statement should be furnished,
13.0 How a user will understand the impact of transition to INDAS on First INDAS financial Statement?
As per INDAS-101 a reconciliation statement should be presented along with financial statement . Reconciliation Statement shall include:
a) reconciliations of its equity reported in accordance with previous GAAP to its equity in accordance with INDASs for both of the following dates:
i. the date of transition to INDASs; and
ii. the end of the latest period presented in the entity’s most recent annual financial statements in accordance with previous GAAP.
b) a reconciliation to its total comprehensive income in accordance with Ind ASs for the latest period in the entity’s most recent annual financial statements. The starting point for that reconciliation shall be total comprehensive income in accordance with previous GAAP for the same period or, if an entity did not report such a total, profit or loss under previous GAAP.
Example: If one company is eligible for Applicable of INDAS from FY: 2016-2017, its date of transition to INDAS is 01st April,2015. Reconciliation statement as per para 24 shall be
a. Equity as per Previous GAAP as on 01-04-2015 and after due adjustment the balance amount of equity as per INDAS as on 31-03-2016.
b. A reconciliation of its Total Comprehensive income as per INDAS as on 31-03-2016 with previously reported Income as per previous GAAP. Point to be noted that as per Existing Accounting Standards and companies act 2013 there is no concept of Total comprehensive income, therefore Statement of profit & loss should be used for previous year.
Conclusion
This is a small step to briefly explain an overview of INDAS on FAQ basis. Now both Company as well as auditor need to have more cautious about both Accounting and presentation aspect of INDAS. Time has already come to redesign our financial Statement with international standard framework.
Name: CA Debasis Sahoo
Email: cadebaissahoo@gmail.com & dsahoo@powergridindia.com
Author is working in Power Sector company of Public Sector Enterprises
