Most of us are now aware that the Ministry of Corporate Affairs has kick started the process of Globalization in accounting by notifying 35 new Accounting standards (titled Ind-AS) which are the current desi version of the IFRS. The date of implementation will soon be announced. To begin with, the Ind AS-101 which is the ignition standard for the new Indian GAAP requires the obliged company to prepare two sets of financials as of two different dates,
1. Opening Balance Sheet under Ind-AS on the date of transition. Thus a company with Net worth exceeding Rs.1000 crore or a listed company may have to prepare the opening Balance sheet as on 1.4.2011. The best part is that this Balance sheet will use the accounting policies that are in accordance with the Ind-AS that will be effective on 31.3.2012!
2. First Fully compliant Ind-AS Financial statements as on 31.3.2012 which will incorporate accounting policies in accordance with the Ind-AS in force on 31.3.2012.
Normally, our financial submissions for current year are accompanied with comparative figures of the previous year. Here too there is a simple requirement with a couple of options on presentation of comparatives, namely,
1. Submitting the financials of the previous year which were drafted under Previous GAAP as it is by way of providing comparatives, or
2. In addition to the above, also submit a memorandum of previous year figures restated under the new Ind-AS. Surely, ethical public companies will go a step ahead by using this option to gain confidence of the Investors.
Ind-AS is a major departure from the previous Indian GAAP in as many significant line items. But thankfully, Ind-AS 101 relieves us from restating several phenomenal figures both by way of mandate as well as optional exemptions. Mandates are with respect to Business Combinations that took place in past, Derecognition of Financial assets and Liabilities and Non controlling interest (earlier called ‘Minority interest’ in a consolidation). There are a host of 17 items which are optionally exempted in entirety or cherry picked at the choice of the company from restatement of previous year transactions.
Finally, any difference in restating the numbers as per the Accounting policies in line with Ind AS from the Previous GAAP will have to be adjusted against the opening Retained Earnings (quite obviously) on the transition date.
The following may be broadly some of the common major points which may be impacting the preparation of Opening Balance Sheet under Ind-AS
1. Property, Plant and Equipment (Fixed Assets):
The standard allows us to adopt the carrying amount in the previous Financials which were under the previous GAAP but requires us to measure any decommissioning liabilities that should have been included earlier in the cost of the asset and measure in parallel the Liability by using an appropriate historic risk adjusted discount rate. The exemption available here is from doing impairment testing for this additional carrying amount in the asset due to capitalization of the decommissioning liability. In fact this is a requirement as per Appendix D to Ind-AS 16.
2. Re-measurement of Assets as per new definitions:
Let us remember that as per Ind AS 1, the definition of a Current asset requires any one of the four criteria to be met for calling it as Current asset. One of them is realisation within the normal operating cycle. Normal operating cycle is the normal time elapsing between purchase or process of the asset and realisation of cash. This creates a huge possibility for assets that were treated earlier as Long term assets (under the criteria of realisation beyond 12 months) to be treated as Current assets due to the fact that the normal operating cycle is itself more than 12 months e.g. Massive Infrastructure projects. There seems to be no exemption in this regard under Ind AS 101.
3. Re-measurement of certain Financial assets and Liabilities:
Unless Impracticable to do so, Financial assets and Liabilities such as Loans and Receivables and Held to Maturity assets are required to be carried at Amortised cost by using Effective Interest rates. Effective Interest rate is nothing but the Internal Rate of Return of the Investment i.e. a rate which discounts the future cash flows to its principal amount. This disregards whatever interest rate has been set by the Loan agreements. If Impracticable, then these financial assets and Liabilities have to be measured at Fair value as on the date of Transition (e.g. 1.4.2011) and this value will be deemed to be amortised cost on that date.
4. Non Current Assets held for Sale:
Noncurrent assets which were initially valued at lower of cost and Fair value less costs to sell on the date of initial recognition should be again valued to lower of cost and Fair value less costs to sell on the date of transition.
5. Statement of Changes in Equity:
Statement of Changes in Equity is an integral component of Balance sheet as per the new Ind AS and is therefore required to be prepared presenting the components specifically required. This is a departure from the IFRS which does not make the SOCIE as part of the Balance sheet.
6. Investment Properties:
Investment properties too may be carried at the same amount as reported under the previous GAAP. But as per Ind AS-40 though recognition is on cost basis, there is a need to disclose the Fair value of the property on the date of the transition. However Ind AS 101 does not stop us from recognizing the Investment Properties at Fair value on the transition date and take them as the deemed cost going forward.
7. Cumulative Forex translation differences on Foreign operations under the previous GAAP:
It may be noted that all along we may have been parking the Foreign exchange translation differences from a Non integral foreign operation in a separate reserve as per the existing GAAP. The new Ind AS does away with the Integral and Non integral classifications. All such accumulated translation differences shall be deemed to be Zero on the transition date. Subsequently when the operations are sold, only those differences arising after the transition date will have to be considered.
8. Exchange differences in respect of Long term Monetary assets or Liabilities:
There is an irrevocable option given under paragraph 21A of Ind AS 21 whereby the company can park the exchange differences on translation of Long term monetary assets and Liabilities in equity and then transfer them to P&L account over the period of maturity of these assets or liabilities. As per Ind AS 101 this option can also be exercised retrospectively to our advantage (i.e. if there had been heavy exchange losses in the past). If not then the accumulated exchange differences in respect of those items are deemed to be zero on the date of transition.
To sum up, some of the common ground works necessary before preparation of opening Ind AS will be,
· Estimating the operating cycle for each division or business segment.
· Estimating the effective Interest rates for each Loan transaction or HTM investments.
· Estimating the Fair value of Investment Properties
· Re-estimating the Fair value less costs to sell for Noncurrent assets held for sale as on date of transition and compare again with the carrying amount.
As a preparatory measure the Schedule VI too has been amended along the lines to accommodate most of the new features and also made effective from financial years commencing on or after 1.4.2011. We can expect to avoid chaos like the one which went on between Foreign exchange difference treatment under erstwhile AS-3 and the Old Schedule VI. This is because, the Schedule is mechanised to get automatically amended accordingly for every change in the requirements as per law and the Accounting standards.
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