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Impact of IFRS on Different accounting aspects

CA Raj Thakkar 
on 23 August 2010


In Previous article I have disussed Impact of IFRS on Accounting Practise now I would like to go ahead with Impact of IFRS on Different Accounting Aspects. Here some important Items has been taken.




At cost or net realizable value whichever is lower. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Reversal (limited to the amount of the original write-down) is required for a subsequent increase in value of inventory previously written down. Inventories of producers and dealers of agricultural and forest products and minerals and mineral products and for broker-dealers’ inventories of commodities allowed at net realizable value even if above cost.

Cost formulae

As per Accounting Standards

Biological assets

A biological asset should be measured on initial recognition and at each balance sheet date at its fair value less estimated point-of-sale costs. All changes in fair value should be recognized in the income statement in the period in which they arise.

Inventories acquired on deferred settlement terms

IAS 2 specifically requires that where inventory is acquired on deferred settlement terms, the excess over the normal price is to be accounted as interest over the period of financing.

Inventories of a service provider

IAS-2 includes provisions relating to the work-in-progress of a service provider. Under IAS-2 such WIP consists primarily of the Labour and other costs of personnel directly engaged in providing the service, including supervisory personnel, and attributable overheads.  Labour and other costs relating to sales and general administrative personnel are not included but are recognized as expenses in the period in which they are incurred.  Service providers generally accumulate costs in respect of each service for which a separate selling price will be charged.  Therefore, each such service is treated as a separate item. 


Commodity broker-traders

IAS 2 does not apply to the measurement of inventories of commodity traders or brokers.  The broker-traders measure such inventories at fair value less cost to sell.


Cash Flow statement


No exemption.

 Format and content of cash flow statement

The cash flow statement may be prepared using either the direct method (cash flows derived from aggregating cash receipts and payments associated with operating activities) or the indirect method (cash flows derived from adjusting net income for transactions of a non-cash nature such as depreciation). The latter is more common in practice. The cash flow should be classified into operating, investing and financing cash flow.

Cash flow associated with extraordinary items

Separate disclosure is prohibited.  The concept of extra-ordinary items has been made redundant under IFRS.

Disclosure of Interest paid and received

Operating in case of financing entity. For other entities, interest paid should be disclosed as operating or financing.  Interest received is usually disclosed as investing cash flow.

Disclosure of dividend paid

Operating or financing

Disclosure of dividend received

Operating in case of financing entity. Operating or investing in case of other entity

Disclosure of taxes paid

Operating – unless specific identification with financing or investing activity

Hedging transactions

Cash flows from a contract that is accounted for as a hedge of an identifiable position should be classified in the same manner as the cash flows of the position being hedged.

Foreign currency transaction

Cash flows denominated in a foreign currency and cash flows of a foreign subsidiary should be translated into the parent’s reporting currency using the exchange rate at the date of the cash flow or an appropriate weighted average rate i.e. that used for income statement purposes. Under the indirect method, unrealized gains and losses for the period on cash and cash equivalents balances denominated in a foreign currency, should be reported as a reconciling item in the cash flow statement, separate from operating, investing and financing activities.

Payments by lessee relating to finance lease.     

IAS 7 requires additional disclosure of cash payments by a lessee relating to finance lease under financing activities.

Additional disclosures in CFS

IAS 7 deals with issues relating to disclosure in cash flow statement in CFS like undistributed profits of associate and minority interests, foreign exchange cash flows of foreign subsidiary.

Acquisition of subsidiaries

IAS 7 requires further disclosure on cash and cash equivalents of acquired subsidiary and all other assets acquired

Other disclosures

IAS 7 also encourages disclosure of the following items:

·     The amount of un drawn borrowing facilities that may be available for future operating activities and to settle capital commitments, indicating any restrictions on the use of the facilities

·     The aggregate amount of cash flows that represent increases in operating capacity separately from those cash flows that are required to maintain operating capacity

·     The aggregate amounts of the cash flows from operating, investing, and financing activities related to interests in joint ventures reported using proportionate consolidation

·     The amount of the cash flows arising from the operating, investing, and financing activities of each reported industry and geographical segment.          


Accounting policies, changes in accounting estimates and errors

Change in accounting policies

An entity shall account for a change in accounting policy resulting from the initial application of a Standard or an Interpretation in accordance with the specific transitional provisions, if any, in that Standard or Interpretation; and when an entity changes an accounting policy upon initial application of a Standard or an Interpretation that does not include specific transitional provisions applying to that change, or changes an accounting policy voluntarily, it shall apply the change retrospectively.  Comparative information is restated, and the amount of the adjustment relating to prior periods is adjusted against the opening balance of retained earnings of the earliest year presented.  An exemption applies when it is impracticable to change comparative information


Prior Period Items

An entity shall correct material prior period errors retrospectively in the first set of financial statements authorized for issue after their discovery by restating the comparative amounts for the prior period(s) presented in which the error occurred; or if the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities and equity for the earliest prior period presented.



Definition of prior period items

The definition of prior period items is much broader under IAS 8 as compared to AS 5 since IAS 8 covers all the items in financial statements. As per IAS 8 prior period items are defined as:

Prior period errors are omissions from, and misstatements in, the entity's financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that was available when financial statements for those periods were authorized for issue; and could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements.

Change in accounting estimate

Changes in accounting estimates are accounted for prospectively in the income statement when identified. .Change in method of depreciation is regarded as a change in accounting estimate and hence the effect is given prospectively.

Additional disclosure

IAS 8 requires disclosure of an impending change in accounting policy when an entity has yet to implement a new Standard or Interpretation that has been issued but not yet come into effect.  In addition, it requires disclosure of known or reasonably estimable information relevant to assessing the possible impact that application of the new Standard or Interpretation will have on the entity's financial statements in the period of initial application

Events occurring after Balance-sheet date

Authorization date for issue of financial statements

The date of authorization for issue of financial statements should be specifically mentioned in the financial statements itself as required by IAS 10

Proposed dividend

If dividends to holders of equity instruments are proposed or declared after the balance sheet date, an entity should not recognize those dividends as a liability at the balance sheet date. Proposed dividend is a non-adjusting event.  Entity to disclose the amount of dividends that were proposed or declared after the balance sheet date but before the financial statements were authorized for issue. 

Income Taxes


IAS 12 Income Taxes requires entities to account for taxation using the balance sheet liability method, which focuses on temporary differences in accounting for the expected future tax consequences of events.  Temporary differences are differences between the tax bases of assets or liabilities and their book values that will result in taxable or tax deductible amounts in future years. The taxation recognized in income comprises the current tax and the change in deferred tax assets and liabilities of the entity except to the extent that tax arises from transaction or event which is recognized, in the same or the different period directly in equity or a business combination


No deferred tax in respect of:

·     Non deductible goodwill

·     Initial recognition of an asset/liability other than in a business combination and affects neither accounting profit nor taxable profit at the time of the transaction


Recognition of Deferred tax assets

Deferred tax assets should be recognized to the extent that it is probable that future taxable profits will be available to offset the deductible temporary differences or carry forward of unused tax losses and unused tax credits. To the extent that it is no longer probable that sufficient taxable profit will be available, the carrying amount of a deferred tax asset should be reduced.  When realization is based on future taxable profits, those need to be demonstrated with convincing evidence.  However, unlike Indian GAAP, taxable profits need not be determined with virtual certainty. When an entity has a history of tax losses, the entity recognizes a DTA only to the extent that the entity has sufficient taxable temporary differences or there is convincing other evidence that sufficient taxable profits will be available.

Recognition of deferred tax on Investment made in subsidiaries, branches, associates and joint ventures (undistributed profits)

An entity should recognize a deferred tax liability for all taxable temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint ventures, except to the extent that the parent, investor or venture is able to control the timing of the reversal of the temporary difference; and it is probable that the temporary difference will not reverse in the foreseeable future.

Recognition of deferred tax on items taken directly to equity

Deferred tax should be charged or credited directly to equity if the tax relates to items that are credited or charged, in the same or a different period, directly to equity. E.g. Revaluation of PPE

Deferred tax arising on business combination

Deferred tax is provided on difference between fair value of assets recorded in books and tax base of those assets unless tax base is also stepped up to fair value.

Deferred tax asset on previously unrecognized tax losses of acquirer is recognized on acquisition if recognition criteria are met, and the credit is taken to the income statement.

Deferred tax asset on carry forward tax losses of acquire is recognized on acquisition if recognition criteria are met, and the credit is taken to goodwill

Recognition of deferred tax on elimination of intra-group transactions

Deferred tax should be recognized on temporary differences that arise from the elimination of profits and losses resulting from intra-group transactions. 

Recognition of deferred tax on foreign non-monetary assets / liabilities when the tax reporting currency is not the functional currency

Deferred tax is recognized on the temporary difference which arise when the non-monetary assets and liabilities of an entity are measured in its functional currency but the taxable profit or tax loss (and, hence, the tax base of its non-monetary assets and liabilities) is determined in a different currency

Presentation and Disclosure

Deferred tax assets and liabilities should be presented as separate line items in the balance sheet.  Offset of DTA and DTL is permitted only when the entity has a legally enforceable right to offset current tax assets and current tax liabilities and tax is levied by the same tax authority, which allows tax netting. If an entity presents a classified balance sheet, it should not report deferred tax assets and liabilities as current assets and liabilities.

Reconciliation of actual and expected tax expense is required. The same is computed by applying the applicable tax rates to accounting profit, disclosing also the basis on which the applicable tax rates are computed.


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