The MCA had issued a notification dated 16 February 2015 announcing the Companies (Indian Accounting Standards) Rules, 2015 for applicability of Indian Accounting Standard (Ind- AS).
Ind-AS are converged IFRS and applicable in a phased manner to Indian entities. Ind AS are converged standards since India has not adopted the IFRS as it is. There are some matters on which Ind-AS will deviate from IFRS hence India has adopted converged approach.
In the first phase of implementation, it is applicable to companies which are having Networth of more than Rs 500 crs as at 31st March 2014 as per the standalone financial statements. Date of transaition to Ind AS is 1st April 2015. Once Ind-AS are adopted whether voluntarily or as per the requirement of the act, entity has to prepare financials as per Ind-As till it lasts. Hence once adopted, option is irreversible. Total 38 Ind-AS has been notified. Ind-AS 115 related to revenue has been deferred and will not be applicable for FY 2016-17.
Companies which fall under the first phase of implementation will have to prepare following financial statements.
1. Standalone and consolidated financial statements for FY 2016-17 as per Ind- AS
2. Standalone and consolidated financial statements for FY 2015-16 as per Ind- AS
3. Standalone and consolidated financial statements for FY 2015-16 as per existing AS
4. Opening balance sheet as at 1st April 2015 (Ind-As compliant, may opt certain optional exemptions).
5. Listed companies to prepare standalone and consolidated quarterly figures as per Ind AS for 2015-16 and for 2016-17 for all quarters.
6. From 2016-17 onwards Ind As compliant standalone and consolidated financials statements for life.
7. All subsidiaries, JV and associated also needs to prepare Ind AS compliant financials at least for consolidation purpose.
8. Reconciliation of equity and retained earning as at 1st April 2015 and 31st March 2016 between Ind AS and existing AS.
Now under Companies Act 2013, preparation of Consolidated Financial Statement is mandatory if it has subsidiary, associate or joint venture.
On conjoint reading of Ind-AS and Companies Act, requirement of preparing CFS by an entity can be understood as below.
An entity need not to prepare consolidated financials if all of the below mentioned conditions are met.
1. If its ultimate holding or immediate holding company is preparing CFS. If it is a wholly owned subsidiary than its holding company is preparing CFS.
2. Entity is not a listed company or not in the process of listing (may be debt, pref. or equity).
3. All its shareholders do not object to such non preparation of CFS
4. CFS of ultimate or intermediate holding company is publicly available.
If any of the condition is not met, than entity has to prepare CFS.
There are few major changes in Ind AS as compared with existing AS. These are summarized below.
Recognition and measurement related:
1. If there is any change in accounting policy in current year with retrospective effect, any errors which occurred in earlier year which discovered in current year or restatement/reclassification, in such a case impact of such changes/error can not be given in current year financial statements. Opening balance sheet of earliest comparative period is required to be prepared and effect is to be given in retained earnings and each item which is impacted needs to be restated with additional comparative information is notes to accounts..
2. If there is any revaluation of Fixed assets than loss on revaluation to be charged off in P&L while gain is to be taken in Other Comprehensive income (OCI). Revaluation should be of entire class and at regular interval such that carrying value does not differ materially from its fair value. Depreciation on revalued amount can not be recouped from revaluation reserve. It has to be charged off to P&L.
3. Gain /loss on re-measurement of defined Employee benefit plan( other than long term benefit like long term service award) is taken to OCI and not recycled to P&L. Any amendment in past service entitlement (vested or non vested) should be charged off to P&L.
4. Proposed Dividend is not an adjusting event. Hence any dividend declared after the balance sheet date will not be accounted as liability. Only in notes to accounts disclosure is required.
5. As per existing AS, Exchange gain/loss on Long term monetary items is currently amortised based on life of Monetary item or if it is related to Fixed assets it is added to Fixed Assets. But this option is now not available for any new monetary items which arise after transition date. although FX gain /loss on old items which will arise in future will continue to amortize as per existing AS.
6. Preference shares may be treated as Liability (depending upon terms like whether there is any obligation to pay cash) and accordingly dividend on preference shares will be charged off to P&L as expenses. One need to bifurcate Equity and loan component and account for accordingly. If asset qualifies, than dividend paid on preference share capital can be capitalized.
7. In consolidated financial statements loss/ gain on sale of stake in subsidiary will be accounted only when there is loss of control. if there is no loss of control on such divestment, it will be considered as equity transaction and will not impact consolidated profitability.
8. In ascertaining Deferred tax, only profit and loss approach is considered.
9. In consolidated financials, DTA/DTL will be created after considering impact of eliminations. Currently this is simply summation of DTA/DTL of all entities consolidated.
10. In exchange gain loss now there is no concept of Integral and Non integral. All exchange difference has to be charged off to P&L account except exchange difference, which arises on a monetary item which is considered net investment in foreign operation which is taken in OCI and recycled to P&L when foreign operation is divested.
11. Borrowing cost is charged based on effective interest method.
12. Any land or building which is not used for business operations and is held for capital appreciation or rental income is called Investment Property. Such assets have to be valued at cost and revaluation is not permitted. Such property needs to be shown separately in Balance sheet.
13. Definition of control is wider in consolidation.
a) Even without equity stake one entity can be consolidated If entity has defacto control over another entity sinceother shareholding is widespread.
b) Intention of holding the investment or long term restriction is not material for consolidation.
c) If investor is exposed or has right to variable returns and has the ability to affect those returns through its power over the investee, it has the control.
d) KMP or majority of Board of directors are related party of the entity
e) Investor can nominate maximum numbers of the persons on the board.
f) It has contractual arrangement with other shareholders.
g) Relevant activities are controlled by investor.
h) Entity has veto power
1. Time gap in reporting date should not be more than 3 months for consolidation and all accounting policy adopted by all entities which are consolidated has to be uniform.
2. In segment currently there are two criteria primary and secondary. In Ind-AS as now there is only one basis.
3. Life of an intangible asset can be infinite.
4. Wherever interest component is there in revenue, it has to be separated and accounted in interest income. Like deferred payment credit sales.
5. Dismantling cost in case of Fixed assets has to be capitalized after discounting the same. Component accounting is also required.
6. On has to see the substance of transaction rather than legal color. This equally applies in lease transactions.
7. In case of fixed assets, review of use life, method of depreciation, residual value is required every year. Impairment testing is done when there is any indication.
8. If there is any interest free deposit in lease arrangement, than lease rent is split between interest and lease rent and accounted accordingly.
9. In case of J.V., proportionate consolidation method is not permitted. Equity method has to be adopted.
10. if interest free loan is given to subsidiary and subsidiary uses the same for buying capital asset, in such a case in group financials, interest in loan can be capitalized if assets meet definition.
11. If shares are issued to employees, instead of intrinsic value method, fair value of shares method is adopted for accounting for the cost.
12. Requirement of virtual certainty is not there in case of carried forward losses and unabsorbed depreciation, rather there should be reasonable certainty.
13. Financial assets can be measured in one of the following ways which meet certain criteria.
a. At amortised cost : When an instrument is a debt instrument from issuer’s perspective and held by holder primarily for collection of cash flow till maturity where repayments solely represents payment of principal and interest.
b. FVTOCI( with recycling to P&L): This may apply to debt as well as equity instrument. If business model of entity is achieved both by holding till maturity as well as by selling the asset and instrument pass contractual cash flow test, in such a case instrument can be measured at FVTOCI( with recycling to P&L). if Debt instrument which is neither measured at amortised cost nor at FVTOCI( with recycling to P&L), than it should be measured at FVTPL.
c. FVTPL: If instrument is held primarily for trading purpose and contractual cash flow test fails.
d. FVTOCI( with no recycling to P&L): if an equity instrument fails the contractual cash flow test and not held for trading, than entity has the option either to value at FVTPL or at FVTOCI( with no recycling to P&L). this option can not be reversed.
Disclosure related changes:
1. Profit and loss account to be prepared in two parts. One showing profit/loss for the year and second showing Other Comprehensive income(OCI). Total of both is called Total comprehensive income (TCI). TCI of parent and MI to be shown separately.
2. OCI includes items like FX gain/loss on net investment in foreign operation, gain on revaluation of fixed assets, gain or loss on measurement of employees defined benefit plans, financials assets measured at Fair value through OCI.
3. Minority interest(MI) is shown within equity and even negative MI can be shown.
4. There has to express and unreserved statement in financials statement of compliance of all Ind- AS. Even the IND-AS which has been issued but not yet effective, impact on financial statements if any has to be disclosed.
5. Current tax asset/liability ( Advance tax, TDS less provisions) has to be shown as a separate line item in Balance sheet
6. Entity has to disclose critical management judgment and estimates made in preparation of financials statements.
7. Reconciliation of equity and OCI is required to be provided with existing AS.
8. EPS is required to be shown for parent. EPS from continuing and discontinuing operation is required to be shown separately. Options outstanding to employees need to be considered for calculation of no of shares. Incase of conversion option, instrument needs to be spitted and for dilutive EPS, interest component to be factored in calculations of earnings.
9. Reconciliation of deferred tax with book profit is required.
10. Disclosure of Extra ordinary items is not permitted. if any item is of abnormal nature, exceptional items can be shown.
11. When there is loss of control on stake sale of subsidiary, inflow is considered as investment activity, if there is no loss of control, it is considered as finance activity.
12. If there is any breach of major loan covenant after balance sheet date but same is ratified/accepted by lender, than such loan is not considered as current liability.
13. Revaluation of PPE should be done on regular basis although fair value should not materially differ.
14. Employee benefit plans are related party and needs to be considered in RPT disclosures and consolidated. All directors are considered as Related party, whether independent or not. Entity needs to disclose whether all RPT are at arms length price or not.
15. If a company ceases to trading, going concern is not valid.
16. Disclose shares held by group companies even if less than 5%.
17. Profit attributable to MI should be shown as allocation of P&L.
18. Assets and liabilities classified as held for sale has to be shown separately.
19. Quarterly results to Stock Exchanges are not interim financials as per Ind-AS 34.
Above are few major changes broadly explained in layman’s language based on my understanding of the Ind-AS. One needs to study and understand the Ind AS requirement from original text of Ind-AS before applying to any practical situation.