CA Kamal Garg
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 IFRSs 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 IFRSs. 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 IFRSs 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 already issued exposure drafts on all of the converged standards (Indian standards equivalent to IAS/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).
The Economic Times, Dated 24.2.2014, reported that the corporate affairs ministry is likely to notify within a month all sections and rules of the new Companies Act and start immediately thereafter the process of converging Indian accounting standards with the International Financial Reporting Standards (IFRS), which have to be implemented from April 2015 for companies with a net worth of more than Rs 1,000 crore.
“The ministry has said, ‘let the Companies Act get notified and then we will take up the convergence of IAS-IFRS’,” said K Raghu, president of the Institute of Chartered Accountants of India, the accounting regulator which had written to the corporate affairs ministry and given a revised road map for the implementation of IFRS from next April.
In the first phase, it will be implemented at companies that have a net worth of over Rs 1,000 crore. The second phase will begin from April 1, 2016 and involve both listed and unlisted companies with a net worth of over Rs 500 crore but less than Rs 1,000 crore.
“We have decided that we will roll it out in a phased manner because we, along with our members, are completely ready. We believe that this is one big change in the way accounting is done,” said Raghu.
First Year Comparatives
Companies covered in Phase I will prepare their financial statements for 2015-16 in accordance with the first set of Accounting Standards (i.e. the converged Accounting Standards) but will show previous years’ figures as per the financial statements for 2014-15, i.e., as per non-converged accounting standards. However, the Companies will have an option to add an additional column to indicate what these figures could have been if the first set of Accounting Standards (i.e., converged accounting standards) had been applied in that previous year. Companies which make this additional disclosure will, for this purpose, convert their opening balance sheet as at the date on which this previous year commences and, in that case, a further conversion of the opening balance sheet for the year for which the financial statements are prepared will not be necessary
Cut off Date
For testing the applicability for phase I, the date for determination of the criteria is the Balance Sheet as at 31st March, 2013 or the first Balance Sheet prepared thereafter when the accounting year ends on another date. In other words, as per the roadmap, in phase I, the prescribed categories of companies will convert their opening balance sheet as at 1st April, 2011 in compliance with the first set of Accounting Standards (i.e., the converged Accounting Standards or Ind-AS)
Carve-outs provided in Ind As
The Ind As have been prepared by NACAS and with its recommendation submitted to SMCA.NACAS adopted due consultative proposed of hosting the draft Ind AS insisting comments/suggestions and therefore after deliberated with industries representative in NACAS. The finally recommended Ind. AS have the following carve outs. These carve outs have been made to fill up the gap/differences in application of Accounting Principles Practices and economic conditions prevailing in India.
1. Ind. AS 21-The Effects of Changes in Foreign Exchange Rates
It requires recognition of exchange differences arising on translation of monetary items from foreign currency to functional currency directly in profit or loss. Ind. AS 21 permits an option to recognise exchange differences arising on translation of certain long-term monetary items from foreign currency to functional currency directly in equity. In this situation, Ind. AS 21 requires the accumulated exchange differences to be amortised to profit or loss in an appropriate manner.
2. Ind. AS 28- Investment in Associates
Paragraph 25 require that difference between the reporting period of an associate and that of the investor should not be more than three months, in any case. The phrase ‘unless it is impracticable’ has been added in the relevant requirement i.e., paragraph 25 of Ind. AS 28.
3. IAS 28 requires that for the purpose of applying equity method of accounting in the preparation of investor’s financial statements, uniform accounting policies should be used. In other words, if the associate’s accounting policies are different from those of the investor, the investor should change the financial statements of the associate by using same accounting policies.The phrase, ‘unless impracticable to do so’ has been added in the relevant requirements i.e., paragraph 26 of Ind. AS 28.
4. Ind. AS 32- Financial Instruments in Presentation Part. A Carve out is an exception has been included to the definition of ‘financial liability’ in paragraph 11(b)(ii), Ind. AS 32 to consider the equity conversion option embedded in a convertible bond denominated in foreign currency to acquire a fixed number of entity’s own equity instruments as an equity instrument if the exercise price is fixed in any currency. This exception is not provided in IAS 32.
5. Ind. AS 39 – Financial Instruments: Recognition and Measurement. IAS 39 requires all changes in fair values in case of financial liabilities designated at fair value through Profit and Loss at initial recognition shall be recognised in profit or loss. IFRS 9 which will replace IAS 39 requires these to be recognised in ‘other comprehensive income. A proviso has been added to paragraph 48 of Ind. AS 39 that in determining the fair value of the financial liabilities which upon initial recognition are designated at fair value through profit or loss, any change in fair value consequent to changes in the entity’s own credit risk shall be ignored.
6. Ind. AS 103, Business Combinations. IFRS 3 requires bargain purchase gain arising on business combination to be recognised in profit or loss. Ind. AS 103 requires the same to be recognised in other comprehensive income and accumulated in equity as capital reserve, unless there is no clear evidence for the underlying reason for classification of the business combination as a bargain purchase, in which case, it shall be recognised directly in equity as capital reserve.
7. Ind. AS 101, First-time Adoption of Indian Accounting Standards.
(i) Presentation of comparatives in the First-time Adoption of Indian Accounting Standards (Ind. AS) 101 (corresponding to IFRS 1)
IFRS 1 defines transitional date as beginning of the earliest period for which an entity presents full comparative information under IFRS. It is this date which is the starting point for IFRS and it is on this date the cumulative impact of transition is recorded based on assessment of conditions at that date by applying the standards retrospectively except to the extent specifically provided in this standard as optional exemptions and mandatory exceptions. Accordingly, the comparatives, i.e., the previous year figures are also presented in the first financial statements prepared under IFRS on the basis of IFRS.
Ind. AS 101, requires an entity to provide comparatives as per the existing notified Accounting Standards. It is provided that, in addition to aforesaid comparatives, an entity may also provide comparatives as per Ind. AS on a memorandum basis.
(ii) Presentation of reconciliation
IFRS 1 requires reconciliations for opening equity, total comprehensive income, cash flow statement and closing equity for the comparative period to explain the transition to IFRS from previous GAAP.
Ind. AS 101 provides an option to provide a comparative period financial statements on memorandum basis. Where the entities do not exercise this option and, therefore, do not provide comparatives, they need not provide reconciliation for total comprehensive income, cash flow statement and closing equity in the first year of transition but are expected to disclose significant differences pertaining to total comprehensive income. Entities that provide comparatives would have to provide reconciliations which are similar to IFRS.
(iii) Cost of Non-current Assets Held for Sale and Discontinued Operations on the date of transition on First-time Adoption of Indian Accounting Standards (Ind. AS)
Ind. AS 101 provides transitional relief that while applying Ind. AS 105 – Non-current Assets Held for Sale and Discontinued Operations, an entity may use the transitional date circumstances to measure such assets or operations at the lower of carrying value and fair value less cost to sell.
(iv) Foreign currency gains/losses on translation of long-term monetary items.
Ind. AS 101 provides that on the date of transition, if there are long-term monetary assets or long-term monetary liabilities mentioned in paragraph 29A of Ind. AS 21, an entity may exercise the option mentioned in that paragraph regarding spreading over the unrealised Gains/Losses over the life of Assets/Liabilities either retrospectively or prospectively. If this option is exercised prospectively, the accumulated exchange differences in respect of those items are deemed to be zero on the date of transition.
(v) Financial instruments existing on transition date
Ind. AS 101 provides that the financial instruments carried at amortised cost should be measured in accordance with Ind. AS 39 from the date of recognition of financial instruments unless it is impracticable (as defined in Ind. AS 8) for an entity to apply retrospectively the effective interest method or the impairment requirements of Ind. AS 39. If it is impracticable to do so then the fair value of the financial asset at the date of transition to Ind.-ASs shall be the new amortised cost of that financial asset at the date of transition to Ind. ASs. Ind. AS 101 provides another exemption that financial instruments measured at fair value shall be measured at fair value as on the date of transition to Ind. AS.
(vi) Definition of previous GAAP under Ind. AS 101 First-time Adoption of Indian Accounting Standards
IFRS 1 defines previous GAAP as the basis of accounting that a first-time adopter used immediately before adopting IFRS.
Ind. AS 101 defines previous GAAP as the basis of accounting that a first-time adopter used immediately before adopting Ind. ASs for its reporting requirements in India. For instance, for companies preparing their financial statements in accordance with the existing Accounting Standards notified under the Companies (Accounting Standards) Rules, 2006 shall consider those financial statements as previous GAAP financial statements.
(vii) Cost of Property, Plant and Equipment (PPE), Intangible Assets, Investment Property, on the date of transition of First-time Adoption of Indian Accounting Standards.
Ind. AS 101 provides an entity an option to use carrying values of all assets as on the date of transition in accordance with previous GAAP as an acceptable starting point under Ind. AS.
8. Ind. AS 18-Revenue
On the basis of principles of the IAS 18, IFRIC 15 on Agreement for Construction of Real Estate, prescribes that construction of real estate should be treated as sale of goods and revenue should be recognised when the entity has transferred significant risks and rewards of ownership and has retained neither continuing managerial involvement nor effective control.
IFRIC 15 has not been included in Ind. AS 18, Revenue. Such agreements have been scoped out from Ind. AS 18 and have been included in Ind. AS 11, Construction Contracts.
A footnote has been added in paragraph 1 to Ind. AS 18, Revenue, that for rate regulated entities, this standard shall stand modified, where and to the extent the recognition and measurement of revenue of such entities is affected by recognition and measurement of regulatory assets/liabilities as per the Guidance Note on the subject being issued by the Institute of Chartered Accountants of India.
10. Indian Accounting Standard on Agriculture (Corresponding to IAS 41)
IAS 41, Agriculture, requires measurement of biological assets, viz. , living animals and plants at fair value and recognizing gains and losses arising on such measurement in profit or loss, unless ascertainment of fair value is unreliable.
It has been decided to revise the Standard and not to issue the standard as it is.
11. Ind. As – 19 Employee Benefits vis-a-vis IFRSs/IASs restricting options.
According to Ind. AS 19 the rate to be used to discount post-employment benefit obligation shall be determined by reference to the market yields on Government bonds, whereas under IAS 19, the Government bonds can be used only where there is no deep market of high quality corporate bonds. To illustrate treatment of gratuity subject to ceiling under Indian Gratuity Rules, an example has been added in Ind. AS 19 IAS 19 permits various options for treatment of actuarial gains and losses for post-employment defined benefit plans whereas Ind. AS 19 requires recognition of the same in other comprehensive income, both for post-employment defined benefit plans and other long-term employment benefit plans. The actuarial gains recognised in other comprehensive income should be recognised immediately in retained earnings and should not be reclassified to profit or loss in a subsequent period.
(The above article is contributed by CA Kamal Garg having professional and academic interests in IFRS, Accounts, Auditing and Corporate Laws arenas. He can be approached at email@example.com)