With the applicability of Ind AS to all listed companies and unlisted with net worth more than 250 Crores w.e.f. 1.4.2018, there has been a lot of confusion with regard to measurement criteria specifically with respect to assets and liabilities which meets the definition of financial instruments as per Ind AS 32 and 109 being assets like loans and advances, debtors, bills receivable etc. and liabilities like creditors, unsecured loan or secured loan
Firstly, lets understand what we mean by financial assets and financial liabilities
If we have a contractual right to receive cash or cash equivalent or another financial asset, such assets are termed as financial asset which may be accounted in either of three categories being Amortized Cost(ACM), Fair Value through Other Comprehensive Income(FVTOCI) and Fair Value through PorL(FVTPL). E.g. Debtors, Bills Receivable, shares of a company, purchase of debentures and bonds etc.
Conversely if there is a contractual obligation to pay cash or cash equivalent or another financial asset, such liabilities are termed as financial liabilities which maybe accounted in either of two categories being ACM or FVTPL. E.g. Creditors, bills payable, debentures, redeemable preference shares, secured or unsecured loans etc.
An asset or liability may be classified under ACM if it satisfies four conditions being firstly intention to hold the instrument till its maturity, secondly maturity date is determinable, thirdly interest being calculated on principal amount and lastly principal amount to be received on maturity is known and fixed.
An asset maybe classified as FVTOCI if the instrument has no maturity date or intention is to hold the instrument as well seek better investment opportunities
An asset or liability maybe classified as FVTPL if it does not satisfy any of above mentioned criteria or it is held for trading or is a derivative instrument.
Now the biggest confusion is whether the same is to be applied w.e.f. date on which Ind AS became applicable or from the date the instrument was first recorded in books which maybe a date prior to Ind AS becoming applicable. As per Ind AS 101 ‘First time adoption of Ind AS' which is to be followed for transition for the first time from Indian GAAP (Companies AS Rules 2006) to Ind AS (Companies Indian AS Rules 2015), we need to first prepare opening balance sheet for the comparative period as per Ind AS 101 and then apply other Ind AS from following balance sheet onwards. E.g. if Ind AS becomes applicable from 1.4.2018, the opening balance sheet for the period will be for the date 1.4.2017, i.e. period ending 31.3.2017. All accounting policies to be applied under this opening balance sheet shall be in compliance with policies permitted under Ind AS and to be applied in all periods presented in first Ind AS financial statements as per Para 7
Para 11 also clearly specifies that the policy as per previous GAAP maybe different and not in concurrence with Ind AS, such adjustments need to be made to asset/ liability value and resultant difference to be adjusted to retained earnings which clearly means retrospective adjustments
Let's look at an example
Suppose company paid an interest free security deposit to its land lord for office space of Rs.100 lakhs receivable after 9yrs as on 1.4.2010. The same appears under Loans and Advances at Rs.100 lakhs under previous GAAP. Suppose Ind AS became applicable to the company dated 1.4.2018, so transition date balance sheet will be drawn on 1.4.2017. As per Ind AS 109, such deposit need to be measured at its discounted value being ACM.
Now the remaining maturity of such liability as on date of transition will be 2yrs. (maturing on 31.3.2019) and discounting rate existing as on 1.4.2010 was 10%. Then such liability need to be discounted as under:
100 lakhs * ( 1 )2 = 82.64 lakhs
1.10
Now we need to pass the following journal entry to make the adjustment
Security Deposit a/c. dr. 17.36
To Retained Earnings 17.36
(Being reduction is security deposit being made for retrospective adjustment of the interest factor)
For the comparative year 2017-18, interest expense shall be shown in P&L for comparative year as under
Interest a/c. dr. 8.26
To Security Deposit 8.26
(Being interest @ 10% on 82.64)
For the current year 2018-19, interest expense will be shown same as above being as under
Interest a/c. dr. 9.1
To Security Deposit 9.1
(Being interest @ 10% on 90.9)
However sometime it is not practicable to determine effective rate retrospectively. In such cases Ind AS 101 provides certain exemptions from retrospective application. One such exemption covered in Appendix B Para 8C relates to financial instruments which explains that fair value of such instrument on the date of transition shall be considered to be the new carrying amount of such instrument (for ACM, new amortized cost shall be determined based on effective rate existing on the date of transition)
Now let's assume that in above example, such discount rate as on 1.4.2017 is 12%, then the fair value of such security deposit shall be determined as under
100 lakhs * ( 1 )2 = 79.72 lakhs
1.12
We need to pass the following journal entry to make the adjustment
Security Deposit a/c. dr. 20.28
To Retained Earnings 20.28
(Being reduction is security deposit being made for retrospective adjustment of the interest factor)
For the comparative year 2017-18, interest expense shall be shown in P&L for comparative year as under
Interest a/c. dr. 9.56
To Security Deposit 9.56
(Being interest @ 12% on 79.72)
For the current year 2018-19, interest expense will be shown same as above being as under
Interest a/c. dr. 10.72
To Security Deposit 10.72
(Being interest @ 12% on 89.28)
The list of such exemptions in huge and we have tried to cover a small aspect of the same related to financial instruments like security deposit.
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