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Any pleasure issues out of pressure. The first delivery of a just married couple is full of expectation and hope, not only for the couple graced with but also for the people around; and the actual delivery after carrying period is full of exciting and thrilling. But, the period of carrying is one of delight, experience and pleasure of achievement, though under pressure. This phenomenon relates to living figures. When India is moving to Ind AS regime for the first time in a phased chart with full of heart, it also excited accounting and auditing community into a period of sensation and responsiveness. Though it relates to book figures, it has a big 'say' on all living figures- from all shareholders to stake holders spread not only across the country but also across the globe. A day may delight whence people may settle on outer planets where also they will have the taste of Ind AS that is essentially based on internationally accepted accounting norms widely known as IFRS regime!

Adopt vs. Convergence:

Of the two ways of achieving IFRS regime- one to 'adopt' IFRSs as they are and the other to 'converge', India has taken the route of the latter for reason obvious. It is in Indian physic or genes, to think 'why we should adopt especially when we can afford to have our own children!. Therefore, ICAI has taken the route of 'convergence'. Convergence does not in any way dilute IFRSs but meets the essence without any way losing the spirit of IFRS regime. When options are available under IFRS, ICAI may elect one of the eligible options with broader taking that suits the Indian Physic considering the legal and other local requirements. Indian government and ICAI may also add some additional disclosures without any way diminishing the required disclosures under IFRSs. Most of the provisions of the various standards are ditto retained retaining the original numbers and where provisions are not detained the original numbers are retained with clarifications at the end.

Made the transition smooth:

Since India has gone through the process of establishing the presentation of financial statements nearly under international format even before heralding into Ind AS regime by introducing 'Current and Non-current concept' in the latest IGAAP layout, the journey into Ind. AS regime has been made one of smooth and pleasant, as mesmerising as a new baby crawls to move with a little wary to mature into proper delivery.

Convergence and its challenge - need periodical catch up to IFRS regime:

IAS stands for International Accounting Standards issued by the IASC, while IFRS refers to International Financial Reporting-Standards issued by the IASB. IAS standards were published between 1973 and 2001 by IASC, while IFRS standards were published and issued where after by IASB.

If there's a contradiction in the principles in the IAS with those of the IFRS, the latter will prevail since the latest. That's the dictum.

There is a discrete sense around certain countries that have opted for convergence -- a sense of fear issuing out of urgency to frequently catch up with IFRSs developments that more often than not, takes place due to the pulls and pressures from the various governments, business interests and accounting fraternities across the globe.  If our Ind. ASs are not updated in tune with developments and amendments to IFRSs, we will be driven to a piquant situation 'where we are converged in principle but lagging behind in reality!  Especially this scenario will unfold when our Standards are to be approved by NACAS and our Financial Statements are prescribed and adopted by the respective ACTS. This will be more telling in effect whence the Government of the day often embroiled in the trail for survival has called upon the frequent calls for change in Standards and Financial Statements. Over the periods, certain regulatory changes may be required concerning Companies Act, SEBI, FEMA, RBI, Income tax and what not, and if they are to be in real convergence worth the salt to cope up with international expectation, the ICAI may have to face a herculean task to iron out the differences. Time only will answer.

Ind. As and its role and reach:

IFRS is International Financial Reporting Standard. IAS is International Accounting Standard. By name, IFRS gives prominence to Financial and reporting aspects as against accounting features and phases in IAS. But, both centres on international acceptance since there are intended for international reach. Since India has opted for convergence as against adoption, its reach is limited to India with a perennial call for an update with IFRS as explained copiously in earlier paragraphs. But, Ind. AS is essentially centred on the international approach of IFRS, but with allowable departure for country centric.

Fair valuation Impact:

Regarding financial aspect, Ind. AS primarily based on international standards with permitted optional deviation.Then, why apprehend and undue fear on fair valuation considering the limited nature of the assets/ liabilities that are subject to fair valuation? Moreover, fair valuation is optional in most of the circumstances. In the case of Property, Plant and Equipment, it is only elective. It is not pushed on one's throat. An entity considering the business perspective, it goes either for it or not - if it goes for it, increases in value will be parked in Revaluation Reserve. Under Indian GAAP as on date also, this option is available. But, under IFRS, it is made more stringent making it obligatory on the entity to periodically to revalue. What is wrong in it? Not only that, there is an inherent deterrent built in IFRS mechanism where depreciation on exalted value will impact the Income Statement as compared to the Indian GAAP where stripped depreciation only influences the Income statement.  Even on disposal of re-valued assets, it will not influence the results of the year since will be transferred to straight to retained earnings under IFRS regime. In view of this, an entity may ponder over umpteen times before opting for it, in the case of depreciable assets, since it may impact bottom line adversely.

Impact on other Acts with consequential challenges:

Similarly, in the case of financial instruments, where they are held or designated for trading or in the case of Derivatives unless there is effective hedging, it is fair value through P& L account keeping in view of the purpose and tenor of the Instruments.It is but logical to recognise in the Income Statement since there are held for trade. Here, book profit/loss may get affected but under in income tax act? - A rework/reconciliation may be required. Again, there is an option to fair value through 'Other comprehensive Income' that option will be selected individually for each investment in equity instruments. The profit/loss here will initially sit majestically in 'Other Equity' until sold.Amortised cost of valuation (mostly for debt instruments) is another novelty under Ind.AS that may have wide ramifications in complying with various Acts of the land—income tax, sales tax etc.The interest element, say, on deferred sales will have to be treated as interest by stripping the sale value but the real sales value under sales tax will be the actual that's mentioned in the invoice creating a piquant situation. Isn't it? There are various situations they may arise, more often than not, that has to be faced and tackled under impacted Acts and this article cannot visualise and table them out, for reason of brevity.

Presentation of Financial statements:

As has been spelt out earlier, there is no much deviation between Schedule III that relates to Financial Statements coming under IGAAP and Schedule III - Division 2 that charts the lay out for Financial statements prepared under Ind. ASs. But, there are noticeable differences in presentation warranted by Ind. AS regime-standards. This article is not to deal with various compliances required under Ind. ASs but to picture out so as to depict, in nutshell, the major presentation variances under Ind AS Schedule III.

Balance Sheet:

It starts with 'Assets' as against 'Equity and Liabilities' under IGAAP. What could be the reason? Assets are the application, initiator and creator of any business. Equity and liabilities are resources that are raised to finance the deployment of assets that are the root as well the route for establishing and running the business. Therefore, in all fairness, it should be at the helm of the balance sheet.

Under Ind AS, the phrase 'fixed assets' is not used.

'Loans and advances' are presented under one group both under Non- current and Current Account classifications in Schedule III of IGAAP dispensation. But, under In Schedule III - Division 2 relating to Ind.AS presentation, 'Loans are separately presented as distinct from 'Advances' under the above said two classifications for reason obvious that is, 'Loans' have finance character and 'Advances' are adjustable.

Investments in financial instruments are presented under 'Financial Assets', in Schedule III - Division-2 since coming under the domain of Ind. AS on Financial Instruments, as against under Investment in Financial Instruments under earlier dispensation as regulated by the separate AS on Investments.

Equity and Liabilities:

  • 'Other Equity' a new phenomenon is introduced that inter alia includes and covers Share Application Money not refundable, Equity Component of  Financial Liability, Revaluation Resave,  Other Comprehensive Income (OCI)separately for the one reversible to P&L and the other reversible back to other Equity on compliance and others.
  • Ind AS does not use the phrase 'long term', but only use the term 'non-current liabilities'.
  • Ind AS does not use the phrase 'Short-term', but only current liabilities. 

Statement of Profit and Loss:

  • It is in two compartments one to ascertain the P/L and the other relates to OCI-in two divisions-one that is reversible back to P/L account; and the other that is reversible back from one equity to the other on compliance. Together it will be total Comprehensive Income. It is newness under Ind. AS compliant P&L.
  • Revenue is gross of Excise Duty.
  • Extraordinary items are a taboo and given goodbye.
  • Exceptional items are in place where required.
  • Prior period items are given ta-ta. Instead, previous year accounts are reinstated where required and possible
  • and so on

Cash flow statement:

A reconciliation is to be given where overdrafts are involved which are payable on demand. Overdraft is shown as deduction in reconciliation. 

Disclosures:

Under Ind AS, disclosure requirements are a lot in terms of various standards.  One may have to refer respective applicable Ind. ASs. For brevity, are not dealt with here.  For the first time adoption, a number of discretionary exemptions are available to take a call in each case. Mandatory exceptions are to be taken care of and complied with. The necessary declaration for the first time adoption should be in place. Reconciliations between IGAAP Balance Sheet and In- AS Balance Sheet and Total Comprehensive Income should be given for two years along with explanatory notes (at the year transition). Similarly, reconciliation statements are to be given regularly where required, say for example income tax computation.

For the year transition, three years of Balance Sheets as at and two years of P/L for the year ended are to be presented along with Notes for three years for Balance Sheet and two years for P& L

Conclusion:                                                                                                                                        

Challenges to confront:

The accounting of interest under amortized cost may create some hitches in facing Income tax department with respect to interest and related TDS since the treatment is dissimilar in Income tax that is concerned with interest earned, paid or accrual basis. Preference shares and Convertible Debentures may also pose similar problems from their side on account of different accounting treatment under Ind AS based on the type of component- Equity/ liability. Sales and purchases on credit without interest clause may cause, in fact, drive book figures dancing to the tunes of amortized cost requirements, the companies may have to come up with proper and up to date reconciliations to deal with sales tax/ vat and other related assessments. Trial period is waiting to face head-on. The GST implementation which is on the anvil and in horizon may converge into it various indirect tax regimes that will simplify the tax regime but, its implication and repercussions on accounting treatment has to be gauged and studied so as to make it amenable to AS/ Ind. AS and requirements.

Prospects ahead:                         

Converging into IFRS would throw open Indian corporate to International money/ capital markets. This exposure and consequential knowledge of Financial Statements prepared in rhythm with International Financial Standards help in taking a business/ corporate call from across the globe. Convergence into IFRS will open flood gate of opportunities for the Indian Accounting Professionals at large, especially when India is gifted/talented with English, a language that is the lingua -Franca that will place the Indian accounting Faculties in an enviable and privileged position for anyone to applaud. Ind AS with its wings spread across to cover other entities in the phased manner as chartered out will shower rich experience  that will throw open  immense  opportunity in leaps and bounds across the globe Indian accounting professionals


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Category Audit, Other Articles by - P.R. Sethuraman 



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