IND AS 41 First time adoption of Indian Accounting standards

IND AS 41First time adoption of Indian Accounting standards

Scope of IAS 41

Ind-AS 41 is applicable to the first set of annual Ind-AS financial statements prepared by a company. The first Ind-AS financial statements are defined as the first annual financial statements in which a company adopts Ind-AS by an “explicit and unreserved statement of compliance with Ind-AS.”

A first-time adopter will apply Ind-AS 41 in the preparation of its annual financial statements and also in each interim report for part of the period covered by its first Ind-AS financial statements.

Opening balance sheet and key dates

Two dates are key to understanding the transition rules in Ind-AS 41: reporting date and transition date. The reporting date is the end of the latest period covered by financial statements. The transition date is the beginning of the earliest period for which an entity presents its first Ind-AS financial statements. As per the ED, a company has an option to decide whether to give comparative information as per Ind-AS in its first Ind-AS financial statements. Based on this option, the ED lays the following rule for transition date:

Ø   For a company which does not give Ind-AS comparatives in its first Ind-AS financial statements, the transition date can be the beginning of financial year on or after 1 April 2011.

Ø  For a company which voluntarily gives Ind-AS comparatives in its first Ind-AS financial statements, the transition date can be the beginning of financial year on or after 1 April 2010.

Ind-AS 41 requires each company to prepare and present an opening Ind-AS balance sheet at the date of its transition to Ind-AS. This is the starting point for subsequent accounting in accordance with Ind-AS.

Application of accounting policies – general principles

A first-time adopter needs to use the same accounting policies in its opening Ind-AS balance sheet as those used in all periods presented in the first Ind-AS financial statements. The fundamental principle is to require full retrospective application of the standards in force at the reporting date, with limited exemptions and exceptions. The following steps summarize key requirements:

•           Assets and liabilities recognized under previous GAAP that do not qualify for recognition under Ind-AS need to be eliminated from the opening balance sheet. For example, share issue expenses carried forward do not meet the definition of intangible asset under Ind-AS.

•           Assets and liabilities not recognized under previous GAAP whose recognition is required under Ind-AS need to be recognized in the opening balance sheet. For example, derivatives and embedded derivatives not recorded under previous GAAP may need to be recognized.

•           Assets and liabilities need to be reclassified in accordance with Ind-AS requirements. For example, mandatorily redeemable preference shares classified as equity under previous GAAP may be considered as financial liability if the same exists as at the opening balance sheet date.

•           All assets and liabilities are measured using Ind-AS principles. For example, investment classified as at fair value through profit or loss are measured at fair value in the opening balance sheet.

The resulting differences between the carrying values under previous GAAP and carrying values under Ind-AS are recognized in the retained earnings, except for some adjustments which may affect the value of goodwill recognized under previous GAAP.

Optional exemptions and mandatory exceptions

Ind-AS 41 grants seventeen limited optional exemptions from the general requirement of full retrospective application where the cost of complying with them is likely to exceed the benefits to users of financial statements. The application of one or more of these exemptions is entirely optional, i.e., a first-time adopter can pick and choose the exemptions that it wants to apply. It is, however, prohibited to apply these exemptions by analogy to other items.

The ED also prohibits retrospective application of Ind-AS in four areas, particularly where retrospective application will require judgments by management about past conditions after the outcome of a particular transaction is already known. These exceptions relate to use of estimates, non-controlling interests, hedge accounting, and derecognition of financial assets and financial liabilities.

Differences with IFRS 1

Most of these exemptions/ exceptions are in line with IFRS 1. However, the ICAI has made few changes while adopting IFRS 1 in India.  The changes broadly are:

1.      IFRS 1 provides for various dates from which a standard could have been implemented. For example, an entity would have had to adopt the de-recgonition requirements for transactions entered after 1 January, 2004. However, for Ind-AS 41 purposes, all these dates have been changed to coincide with the transition date elected by the entity adopting this converged standards;

2.      Deletion of certain exemptions not relevant for India. For example, IFRS 1 provides certain exemptions to an entity that adopted the corridor approach for recording actuarial gain and losses arising from accounting for employee obligations. In India, since corridor approach is not elected, the resultant first time transition provision has been deleted;

3.      Adding new exemptions in Ind-AS 41. For example, paragraph D 26 has been added to provide for transitional relief while applying AS 24 (Revised 20XX) - Non-current Assets Held for Sale and Discontinued Operations. Paragraph D26 provides an entity to use the transitional date circumstances to measure such assets or operations at the lower of carrying value and fair value less cost to sell; and

4.      Under IFRS 1, equity and comprehensive income reconciliation to the previous GAAP is required for the comparative year only.  Under Ind-AS, such reconciliation is required for the comparative as well as the current year.

Presentation and disclosure

Annual financial statements

The ED requires first Ind-AS financial statements to be presented in accordance with the presentation and disclosure requirements in revised AS 1 and other standards under Ind-AS. There are no exemptions from the disclosure requirements of any standards except that it gives a first-time adopter an option of not giving comparative information as per Ind-AS.

In addition, it requires a company to explain as to how the transition to Ind-AS affected its financial position, financial performance and cash flows. To comply with this requirement, the company needs to give specific reconciliations of its equity reported under previous GAAP to that under Ind-AS and reconciliation of its total comprehensive income reported under previous GAAP to that under Ind-AS. Example 1 explains these requirements.

Use of IFRS financial statements of parent, subsidiary, associate and joint venture

Within groups, some companies (parent, subsidiaries, associates or joint ventures) may become first-time adopter earlier/ later than the rest of group. This may result in permanent differences between the IFRS figures in the financial statements of the company and those used by group for the same company. In turn, this will force the company to maintain two parallel sets of accounting records based on different dates of transition. To mitigate this difficulty, IFRS 1 contains the following exemptions/ requirements:

(a)        If a subsidiary becomes a first-time adopter later than its parent, it has an option to, in its financial statements, measure its assets and liabilities at the carrying amounts that would be included in the parent’s consolidated financial statements, based on the parent’s date of transition to IFRSs, if no adjustments were made for consolidation procedures and for the effects of the business combination in which the parent acquired the subsidiary. A similar option is also available to an associate or joint venture that becomes a first-time adopter later than a company that has significant influence or joint control over it.

(b)        If a company becomes a first-time adopter later than its subsidiary, associate or joint venture, it compulsorily needs to measure, in its consolidated financial statements, the assets and liabilities of the subsidiary (or associate or joint venture) at the same carrying amounts as in the financial statements of the subsidiary (or associate or joint venture), after adjusting for consolidation and equity accounting adjustments and for the effects of the business combination in which the entity acquired the subsidiary.

(c)        If a parent becomes a first-time adopter for its separate financial statements earlier or later than for its consolidated financial statements, it must measure its assets and liabilities at the same amounts in both financial statements, except for consolidation adjustments.

Presentation/ disclosures in the first Ind-AS financial statements

As already discussed, Indian companies will have two options with regard to comparatives: (a) present Indian GAAP comparatives only for 2010–11, or (b) present Ind-AS comparatives for 2010–11 in addition to the Indian GAAP comparatives.

(a)        Indian GAAP comparatives only for 2010–11

The adoption of this option means that the company cannot claim compliance with IFRS as issued by IASB in 2011-12 since it is not giving comparative information as per IFRS. The company may attempt compliance with IFRS in 2012-13 when it presents IFRS comparatives for 2011–12. However, this path is also not possible because the company will need to use Ind AS 41 again in 2012-13 to claim compliance with IFRS as issued by IASB; however, it may not be permissible under the proposed Ind-AS 41 structure.

(b)        Ind AS comparatives for 2010–11 in addition to Indian GAAP comparatives

A company which intends to comply with both Ind-AS and IFRS as issued by IASB in its first Ind-AS financial statements may consider this option to be more suitable.  This option is, however, not without challenges. IFRS 1.22 covers the scenario where a company presents comparative information or a historical summary in accordance with both IFRS and Indian GAAP. It requires a company to label such comparative information prominently as the Indian GAAP information, as not being prepared in accordance with IFRS, and to disclose the nature of the main adjustments that would make the Indian GAAP comparatives comply with IFRS, although quantification is not required. If all the notes (including narratives) contain Indian GAAP comparative information, labeling of such information may be very challenging.  Besides because of numerous other problems discussed elsewhere, dual statement of compliance appears to be a highly remote possibility.

Presentation of Indian GAAP comparatives

Presentation of Indian GAAP comparative in the first Ind-AS financial statements is required as per clarification from the MCA.  This is a huge challenge as the IFRS format for the income statement and balance sheet are significantly different from the Schedule VI formats. Furthermore, the IFRS disclosure requirements are more extensive than those of the Companies Act and Indian GAAP. It is therefore difficult to see how the Indian GAAP and Ind-AS financial statements could be presented in the same document, without amending the presentation of Indian GAAP numbers significantly. The following are few examples of practical difficulties that are likely to arise.

•           Investment properties, classified under the head “investments” in schedule VI balance sheet, will be presented separately on the face of Ind-AS balance sheet

•           Bank loan, disclosed as a single amount under the head “secured loan” in schedule VI balance sheet, will be broken up in current and non-current components. These components will also include interest accrued on the loan which may have been disclosed under separate “Current liabilities and provision” head in schedule VI balance sheet.

•           Redeemable preference shares, classified as share capital in schedule VI balance sheet, are likely to be presented as a liability in Ind-AS balance sheet.

•           The headings such as “Current assets, loans and advances” and “Current liabilities and provision” include both financial and non-financial items in schedule VI balance sheet. The application of Ind-AS will require financial and non-financial assets and financial and non-financial liabilities to be disclosed separately on the face of balance sheet.

If a company intends to present both Indian GAAP and Ind-AS comparatives in the same set of financial statements, it appears that the only possibility to achieve the same is to redraw the Indian GAAP financial statements based on Ind-AS presentation requirements. This may require new measurements and collection of additional financial information. For example, a company that presented entire bank loan as part of “secured loan” in Indian GAAP balance sheet may need to recalculate current and non-current portions and disclose two portions separately.  It will also have to check both for Indian GAAP purposes as well as Ind-AS if any debt covenants were violated that made the non-current loan a current loan.

Previous GAAP

The ED defines “previous GAAP” as “the basis of accounting that a first-time adopter used immediately before adopting Ind-AS.” From the definition given, it appears that there is no mandatory requirement to use only “Indian GAAP” as previous GAAP. Rather, a company, which is presenting financial statements as per more than one GAAP, can choose either of them as previous GAAP.  For example, we believe that a company preparing financial statements in accordance with Indian GAAP and IFRS as issued by IASB, may use either of these as a starting point to prepare Ind-AS financial statements.  Since it is an important matter, we await a clarification from ICAI/ regulators.

IND AS 41First time adoption of Indian Accounting standards

Scope of IAS 41

Ind-AS 41 is applicable to the first set of annual Ind-AS financial statements prepared by a company. The first Ind-AS financial statements are defined as the first annual financial statements in which a company adopts Ind-AS by an “explicit and unreserved statement of compliance with Ind-AS.”

A first-time adopter will apply Ind-AS 41 in the preparation of its annual financial statements and also in each interim report for part of the period covered by its first Ind-AS financial statements.

Opening balance sheet and key dates

Two dates are key to understanding the transition rules in Ind-AS 41: reporting date and transition date. The reporting date is the end of the latest period covered by financial statements. The transition date is the beginning of the earliest period for which an entity presents its first Ind-AS financial statements. As per the ED, a company has an option to decide whether to give comparative information as per Ind-AS in its first Ind-AS financial statements. Based on this option, the ED lays the following rule for transition date:

Ø   For a company which does not give Ind-AS comparatives in its first Ind-AS financial statements, the transition date can be the beginning of financial year on or after 1 April 2011.

Ø  For a company which voluntarily gives Ind-AS comparatives in its first Ind-AS financial statements, the transition date can be the beginning of financial year on or after 1 April 2010.

Ind-AS 41 requires each company to prepare and present an opening Ind-AS balance sheet at the date of its transition to Ind-AS. This is the starting point for subsequent accounting in accordance with Ind-AS.

Application of accounting policies – general principles

A first-time adopter needs to use the same accounting policies in its opening Ind-AS balance sheet as those used in all periods presented in the first Ind-AS financial statements. The fundamental principle is to require full retrospective application of the standards in force at the reporting date, with limited exemptions and exceptions. The following steps summarize key requirements:

•           Assets and liabilities recognized under previous GAAP that do not qualify for recognition under Ind-AS need to be eliminated from the opening balance sheet. For example, share issue expenses carried forward do not meet the definition of intangible asset under Ind-AS.

•           Assets and liabilities not recognized under previous GAAP whose recognition is required under Ind-AS need to be recognized in the opening balance sheet. For example, derivatives and embedded derivatives not recorded under previous GAAP may need to be recognized.

•           Assets and liabilities need to be reclassified in accordance with Ind-AS requirements. For example, mandatorily redeemable preference shares classified as equity under previous GAAP may be considered as financial liability if the same exists as at the opening balance sheet date.

•           All assets and liabilities are measured using Ind-AS principles. For example, investment classified as at fair value through profit or loss are measured at fair value in the opening balance sheet.

The resulting differences between the carrying values under previous GAAP and carrying values under Ind-AS are recognized in the retained earnings, except for some adjustments which may affect the value of goodwill recognized under previous GAAP.

Optional exemptions and mandatory exceptions

Ind-AS 41 grants seventeen limited optional exemptions from the general requirement of full retrospective application where the cost of complying with them is likely to exceed the benefits to users of financial statements. The application of one or more of these exemptions is entirely optional, i.e., a first-time adopter can pick and choose the exemptions that it wants to apply. It is, however, prohibited to apply these exemptions by analogy to other items.

The ED also prohibits retrospective application of Ind-AS in four areas, particularly where retrospective application will require judgments by management about past conditions after the outcome of a particular transaction is already known. These exceptions relate to use of estimates, non-controlling interests, hedge accounting, and derecognition of financial assets and financial liabilities.

Differences with IFRS 1

Most of these exemptions/ exceptions are in line with IFRS 1. However, the ICAI has made few changes while adopting IFRS 1 in India.  The changes broadly are:

1.      IFRS 1 provides for various dates from which a standard could have been implemented. For example, an entity would have had to adopt the de-recgonition requirements for transactions entered after 1 January, 2004. However, for Ind-AS 41 purposes, all these dates have been changed to coincide with the transition date elected by the entity adopting this converged standards;

2.      Deletion of certain exemptions not relevant for India. For example, IFRS 1 provides certain exemptions to an entity that adopted the corridor approach for recording actuarial gain and losses arising from accounting for employee obligations. In India, since corridor approach is not elected, the resultant first time transition provision has been deleted;

3.      Adding new exemptions in Ind-AS 41. For example, paragraph D 26 has been added to provide for transitional relief while applying AS 24 (Revised 20XX) - Non-current Assets Held for Sale and Discontinued Operations. Paragraph D26 provides an entity to use the transitional date circumstances to measure such assets or operations at the lower of carrying value and fair value less cost to sell; and

4.      Under IFRS 1, equity and comprehensive income reconciliation to the previous GAAP is required for the comparative year only.  Under Ind-AS, such reconciliation is required for the comparative as well as the current year.

Presentation and disclosure

Annual financial statements

The ED requires first Ind-AS financial statements to be presented in accordance with the presentation and disclosure requirements in revised AS 1 and other standards under Ind-AS. There are no exemptions from the disclosure requirements of any standards except that it gives a first-time adopter an option of not giving comparative information as per Ind-AS.

In addition, it requires a company to explain as to how the transition to Ind-AS affected its financial position, financial performance and cash flows. To comply with this requirement, the company needs to give specific reconciliations of its equity reported under previous GAAP to that under Ind-AS and reconciliation of its total comprehensive income reported under previous GAAP to that under Ind-AS. Example 1 explains these requirements.

Use of IFRS financial statements of parent, subsidiary, associate and joint venture

Within groups, some companies (parent, subsidiaries, associates or joint ventures) may become first-time adopter earlier/ later than the rest of group. This may result in permanent differences between the IFRS figures in the financial statements of the company and those used by group for the same company. In turn, this will force the company to maintain two parallel sets of accounting records based on different dates of transition. To mitigate this difficulty, IFRS 1 contains the following exemptions/ requirements:

(a)        If a subsidiary becomes a first-time adopter later than its parent, it has an option to, in its financial statements, measure its assets and liabilities at the carrying amounts that would be included in the parent’s consolidated financial statements, based on the parent’s date of transition to IFRSs, if no adjustments were made for consolidation procedures and for the effects of the business combination in which the parent acquired the subsidiary. A similar option is also available to an associate or joint venture that becomes a first-time adopter later than a company that has significant influence or joint control over it.

(b)        If a company becomes a first-time adopter later than its subsidiary, associate or joint venture, it compulsorily needs to measure, in its consolidated financial statements, the assets and liabilities of the subsidiary (or associate or joint venture) at the same carrying amounts as in the financial statements of the subsidiary (or associate or joint venture), after adjusting for consolidation and equity accounting adjustments and for the effects of the business combination in which the entity acquired the subsidiary.

(c)        If a parent becomes a first-time adopter for its separate financial statements earlier or later than for its consolidated financial statements, it must measure its assets and liabilities at the same amounts in both financial statements, except for consolidation adjustments.

Presentation/ disclosures in the first Ind-AS financial statements

As already discussed, Indian companies will have two options with regard to comparatives: (a) present Indian GAAP comparatives only for 2010–11, or (b) present Ind-AS comparatives for 2010–11 in addition to the Indian GAAP comparatives.

(a)        Indian GAAP comparatives only for 2010–11

The adoption of this option means that the company cannot claim compliance with IFRS as issued by IASB in 2011-12 since it is not giving comparative information as per IFRS. The company may attempt compliance with IFRS in 2012-13 when it presents IFRS comparatives for 2011–12. However, this path is also not possible because the company will need to use Ind AS 41 again in 2012-13 to claim compliance with IFRS as issued by IASB; however, it may not be permissible under the proposed Ind-AS 41 structure.

(b)        Ind AS comparatives for 2010–11 in addition to Indian GAAP comparatives

A company which intends to comply with both Ind-AS and IFRS as issued by IASB in its first Ind-AS financial statements may consider this option to be more suitable.  This option is, however, not without challenges. IFRS 1.22 covers the scenario where a company presents comparative information or a historical summary in accordance with both IFRS and Indian GAAP. It requires a company to label such comparative information prominently as the Indian GAAP information, as not being prepared in accordance with IFRS, and to disclose the nature of the main adjustments that would make the Indian GAAP comparatives comply with IFRS, although quantification is not required. If all the notes (including narratives) contain Indian GAAP comparative information, labeling of such information may be very challenging.  Besides because of numerous other problems discussed elsewhere, dual statement of compliance appears to be a highly remote possibility.

Presentation of Indian GAAP comparatives

Presentation of Indian GAAP comparative in the first Ind-AS financial statements is required as per clarification from the MCA.  This is a huge challenge as the IFRS format for the income statement and balance sheet are significantly different from the Schedule VI formats. Furthermore, the IFRS disclosure requirements are more extensive than those of the Companies Act and Indian GAAP. It is therefore difficult to see how the Indian GAAP and Ind-AS financial statements could be presented in the same document, without amending the presentation of Indian GAAP numbers significantly. The following are few examples of practical difficulties that are likely to arise.

•           Investment properties, classified under the head “investments” in schedule VI balance sheet, will be presented separately on the face of Ind-AS balance sheet

•           Bank loan, disclosed as a single amount under the head “secured loan” in schedule VI balance sheet, will be broken up in current and non-current components. These components will also include interest accrued on the loan which may have been disclosed under separate “Current liabilities and provision” head in schedule VI balance sheet.

•           Redeemable preference shares, classified as share capital in schedule VI balance sheet, are likely to be presented as a liability in Ind-AS balance sheet.

•           The headings such as “Current assets, loans and advances” and “Current liabilities and provision” include both financial and non-financial items in schedule VI balance sheet. The application of Ind-AS will require financial and non-financial assets and financial and non-financial liabilities to be disclosed separately on the face of balance sheet.

If a company intends to present both Indian GAAP and Ind-AS comparatives in the same set of financial statements, it appears that the only possibility to achieve the same is to redraw the Indian GAAP financial statements based on Ind-AS presentation requirements. This may require new measurements and collection of additional financial information. For example, a company that presented entire bank loan as part of “secured loan” in Indian GAAP balance sheet may need to recalculate current and non-current portions and disclose two portions separately.  It will also have to check both for Indian GAAP purposes as well as Ind-AS if any debt covenants were violated that made the non-current loan a current loan.

Previous GAAP

The ED defines “previous GAAP” as “the basis of accounting that a first-time adopter used immediately before adopting Ind-AS.” From the definition given, it appears that there is no mandatory requirement to use only “Indian GAAP” as previous GAAP. Rather, a company, which is presenting financial statements as per more than one GAAP, can choose either of them as previous GAAP.  For example, we believe that a company preparing financial statements in accordance with Indian GAAP and IFRS as issued by IASB, may use either of these as a starting point to prepare Ind-AS financial statements.  Since it is an important matter, we await a clarification from ICAI/ regulators.

Thanks & Best Regards

Amit Daga