Indian Accounting Standards (Ind AS) : Roadmap for IFRS Convergent Standards
- 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 and having net worth of 500 crore INR or more.
- Companies having net worth of 500 crore INR or more other than those covered above.
- Holding, subsidiary, joint venture or associate companies of companies covered above.
- Companies whose equity and/or debt securities are listed or are in the process of being listed on any stock exchange in India or outside India and having net worth of less than rupees 500 Crore.
- Unlisted companies other than those covered in Phase I and Phase II whose net worth are more than 250 crore INR but less than 500 crore INR.
- Holding, subsidiary, joint venture or associate companies of above companies.
- It has been clarified that net worth will be determined based on the standalone accounts of the company as on 31 March 2014 or the first audited period ending after that date.
- Net worth has been defined to have the same meaning as per section 2(57) of the Companies Act, 2013. It is 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.
- It is now clear that Ind AS will apply to both consolidated and stand-alone financial statements of a company covered by the roadmap. This is helpful as companies will not have to maintain dual accounting systems.
- It is a relief that an overseas subsidiary, associate or joint venture of an Indian company is not required to prepare its stand-alone financial statements as per the Ind AS, and instead, may continue with its jurisdictional requirements. However, these entities will still have to report their Ind AS adjusted numbers for their Indian parent company to prepare consolidated Ind AS accounts.
- Insurance, banking and non-banking financial companies shall not be required to apply Ind AS either voluntarily or mandatorily. However, it appears (though not clarified), that if these entities are subsidiaries, joint venture or associates of a parent company covered by the roadmap, they will have to report Ind AS adjusted numbers for the parent company to prepare consolidated Ind AS accounts.
- The debate on two of the most significant standards, revenue recognition and financial instruments has now been settled with them being notified. Interestingly, India will be one of the first countries to mandatorily adopt these standards from 1 April 2015 while the rest of the world will follow from 2017. These two standards will have a significant effect on entities, impacting not only their financial results but also catalysing numerous organisational and business changes.
- There was hope that companies will be given an option to prepare their financial statements as per IFRS issued by the IASB (the true IFRS), which has been now ruled out.
- The rules specify that in case of conflict between Ind AS and a law, the provisions of the law shall prevail and the financial statements shall be prepared in conformity with it.
IND-AS 116 Leases
Earlier above treatment applicable only to financial lease.. Now apply to operational lease also..
IND- AS 110 Consolidation
IND-AS 113 Fair Value
IND-AS 115 Revenue Recogntion
Segmental Reporting under AS (Old)
Income Taxes - Ind-AS 12
Tax Expense in P&L
Old Practice before AS came into effect
Tax Payable method
New Practice after AS/IND-AS is applied
Tax effect accounting method
+/- Deferred Tax
+/- DeferredTax adjustmentof opening balance
What is sought to be acheived is Effective Tax Rate over a period of Time
Effective Tax Rate is not tax rate multiplied by book profit. It is a tax rate after taking away the permanent differences and then multiply with book profit.
What appears in P&L is - book profit multiplied by Effective Tax Rate over a period of Time (plus adjustment for opening balance of Deferred Tax Asset / Liability created out of previous understanding of timing differences which got changed now.)
This is one of the few standards which serve two purposes.
- serve shareholder interest by not distributing away PAT based on current tax incidence if the entity is currently enjoying some benefits
- Serves analysts by providing valuable insight into the effective tax rate for that entity which was earlier disclosed only in prospectus.
IND AS 19 vs IFRS 19
Companies Bill contains numerous provisions aligned to International Financial Reporting Standards. Under the Bill, utilisation of securities premium will be restricted to a prescribed class of companies whose financial statement complies with specified accounting standards. In meeting IFRS requirements, such companies cannot utilise the securities premium to write off preliminary expenses of the company, write off preference share or debenture issue expenses, and provide for premium payable on redemption of preference shares/ debentures. However, if the prescribed class of companies is notified immediately, the impact will be felt straightaway in Indian GAAP financial statements. As this is not the intention, the Ministry of Corporate Affairs should notify the prescribed class at a date aligned to IFRS implementation; otherwise there may be unintended consequences.
The Institute of Chartered Accountants of India recently proposed a revised IFRS roadmap, which is also endorsed by the National Advisory Committee on Accounting Standards. According to this roadmap, IFRS implementation will be staggered, beginning from April 1, 2015. Of the two main hurdles to smooth implementation of IFRS, the one with respect to Companies Bill has been removed, while the other related to tax accounting standards needs to be resolved in the coming months.
Schedule XIV of the old companies Act 1956 specified minimum rates of depreciation to be provided by a company. Unlike that, Schedule II to the 2013 Act requires systematic allocation of the depreciable amount of an asset over its useful life. The Ministry of Corporate Affairs (MCA) vide its Notification dated 26-03-2014 has appointed 1.04.2014 as the date from which Schedule II comes into force.
IFRS: IMPACT IN THE ASSET ACCOUNTING CYCLE
An asset accounting cycle is akin to our Working capital cycle. It comprises of a purchase or in house production, consumption for business or capital appreciation and final disposal. This article envisages the application of various IFRS in the asset accounting with some significant changes brought out in the new standards.
To start with a depiction to capture the important Accounting standards during the asset accounting cycle,
When asset is acquired, the accounting has to be done based on the mandates in IAS-16 or IAS-40 depending on the holding intentions of the management. IAS-40 can be called a sub sect of IAS-16 in so far as the definition of the Property, plant and Equipment (PPE) is concerned due to inclusion of the words 'for Rental or administrative purpose' within the definition of PPE. As per both these standards, the initial recognition has to be done on 'Cost' Basis. The word 'Cost' is fine tuned to make it cash equivalent or in other words, the finance charge implicit due to deferred credit terms is not included in the asset cost. This falls in line with the revised definition for 'Revenue' in IAS-18. The major inclusions for arriving at cost as prescribed in the new standard is as below,
· Inclusion of an initial estimate of future dismantling cost if there already exists an obligation at the inception. We already know that cost to bring to the current location and condition is an inevitable portion of cost whether it is inventory or fixed asset. Care is needed to include the dismantling cost only once and not again for cost of the next replaced asset under the caption' Costs to bring to the current location and condition'. This also requires a change of mindset.
· Major Inspection cost is sought to be included if it is necessary to start operation of the asset. Record Maintenance upsurges with this.
· Cost of Major spare parts is proposed to be capitalized. All along there was no clear guidance except for those spares which are used only for specific machinery and could be capitalized.
Don't these changes impact the P&L favorably? All other governances by IAS-38 on Intangible assets, IAS-17 for leased assets or IFRS-3 for takeover in Business combination remain status quo in more than one ways, except that the IFRS-3 narrows down the initial recording of assets and liabilities at 'Fair Value' basis ONLY and also mandates inclusion of any contingent consideration at Fair value basis.
Consumption and Maintenance:
Asset consumption is nothing but depreciation. In IAS-16 Depreciation is defined with a wider corridor by suitably including the words' number of production or other similar units' in the meaning of the term 'Useful life'. This implies allowing the usage of Production unit method to calculate Depreciation. In fact production unit method is more suitable for manufacturing companies since the depreciation so computed can be a best representative of 'Asset turnover Ratio'.
The other significant path breaker is allowance of depreciation till the time of actual de recognition of the asset from the books. Earlier depreciation was made to stop once the asset is retired from active use and account at Net Realizable value. In effect the entity has a choice to either classify the asset as 'Noncurrent asset held for sale' as per IFRS-5 and adopt 'fair value' basis or carry on with depreciation until realization.
One more thought provoker is the treatment prescribed for subsequent component replacements. Whenever a component is to be replaced, the replacement cost of the new component has to be added and the unamortized cost of the replaced old component has to be reduced. But tough times are ahead for the corporate world since the cost of each integral component of an asset and Inspection costs has to be maintained separately. This can be facilitated if it is an in house production. But can/will suppliers issue an Invoice setting out the price component wise? This may be a little harsh as it implies the supplier has to literally share his cost sheet with the buyer!
Subsequent Measurement of a PPE can be using 'Revaluation Model' whereas for an Investment Property what is permitted is 'Fair Value' Model. There are two differences between these two models,
1. Depreciation is permitted after revaluation, whereas not permissible under Fair value Model. Inherently a Fair value measurement is more frequent than 'Revaluation', since the latter once adopted will need revaluation only at an interval of 3-5 years (as per standard) unless there is more fluctuation in market values.
2. Any Revaluation surplus is stashed in the 'Other Comprehensive Income' whereas changes to Fair value are routed through P&L. The logic exhibited is, once fair value is adopted there is an association with the market which is a synonym of 'short term' where the related changes will impact the current period and hence debited/credited to P&L.
Other incidences such as Impairment testing, accounting for Government grants, foreign currency fluctuations and amortization of intangibles are governed in the same manner except for few minor changes.
Holding till Disposal stage:
Subject to the conditions specified in the IFRS-5 being satisfied, the management can account a Noncurrent asset held for sale on 'Fair value' basis. On Common sense basis there is no possibility/need for depreciation during this stage. The essence of our current AS-24(Discontinuing operations) is visible in this new standard. All changes to Fair value are effected through P&L.
There are no major changes in this area. All gain/loss are debited/credited to Income statement.
On the whole there has been an attempt to bring in more discipline and accuracy in Asset accounting. Though there are bound to be practical difficulties in initial stages, with the advent of new technology and sophisticated ERP software anything can be made easier.
arising in the course of the ordinary activities of an enterprise from the sale
of goods, from the rendering of services, and from the use by others
of enterprise resources yielding interest, royalties and dividends
Excludes work-in-progress of service providers
Includes work-in-progress of service providers
Deferred payments are not dealt with separately
Element of interest if any inthe purchase of inventories to be recognized separately
Excludes selling & distribution costs as elements of cost
Excludes only selling costs
Does not deal with reversal of write-down of inventories
Includes details of reversal of write-down
Schedule III of the Companies Act, 2013 contains a format for preparation and presentation of financial statements. .
Except for addition of general instructions for preparation of Consolidated Financial Statements (CFS), the format of financial statements given in the Companies Act, 2013 is the same as the revised Schedule VI notified under the Companies Act, 1956.
It maybe noted the required changes as per IFRS and other improvements were already made in the revised Schedule VI and hence no further changes are required to be made while moving from Revised Schedule VI to new Schedule III
What is a Joint Venture:
A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity, which is subject to joint control.
Two Important Words:
1. Joint control is the contractually agreed sharing of control over an economic activity.
2. There is no definition for the contractual arrangement. It may be evidenced in a number of ways, for example by a contract between the venturers or minutes of discussions between the venturers. In some cases, the arrangement is incorporated in the articles or other by-laws of the joint venture. Whatever its form, the contractual arrangement is normally in writing and deals with such matters as:
(a) the activity, duration and reporting obligations of the joint venture;
(b) the appointment of the board of directors or equivalent governing body of the joint venture and the voting rights of the venturers;
(c) capital contributions by the venturers; and
(d) the sharing by the venturers of the output, income, expenses or results of the joint venture.
The existence of a contractual arrangement distinguishes interests which involve joint control from investments in associates in which the investor has significant influence (see Accounting Standard (AS) 23, Accounting for Investments in Associates in Consolidated Financial Statements). Activities which have no contractual arrangement to establish joint control are not joint ventures for the purposes of this Statement (AS 27).
Jointly Controlled Entity:
A jointly controlled entity is a joint venture which involves the establishment of a corporation, partnership or other entity in which each venturer has an interest. The entity operates in the same way as other enterprises, except that a contractual arrangement between the venturers establishes joint control over the economic activity of the entity.
Though the financials of almost all companies have been impacted by the new accounting standard, there is a more notable change in the reporting done by entities in real estate, IT and hospitality.
As per Reg 33 of the LODR, every company shall submit quarterly, year to date and annual financial results to the stock exchange (SE) in the manner as prescribed under the clause.
Further, the company has an option to submit either audited financial results with audit report or un-audited financial results subject to limited review by statutory auditors quarterly and year to date financial results to the SE within 45 days of end of each quarter (Other than last quarter).
For the last quarter alone the company has an option to submit its audited financial results (both standalone and consolidated) for the entire financial year within 60 days from the end of the financial year.