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As the title itself suggests our point of discussion will be revolving around the first time adoption of Indian Accounting Standards, practical aspects, major impact areas, and approach for implementation.

After a number of years of deferment the Ministry of Corporate Affairs finally notified thirty nine accounting standards under the Section 133 of the Companies Act 2013 and the Companies (Indian Accounting Standard) Rules, 2015 and subsequent amendments thereof. Applicability of the same has been defined under various phases whereas applicability to Banking Companies, Insurance Companies and NBFCs have been initially deferred for a couple of years with a prohibition of early adoption.

Phase wise implementation

Understanding the complication in the first time adoption and transitional issues, the applicability of Ind AS has been made mandatory in a phased manner based on the net worth and listing criteria of the Company.

Phase I

Companies with net worth of five hundred crore rupees and more as on 31st March 2014 or 31st March 2015 either listed or unlisted along with their holding companies, subsidiaries, joint ventures and associates are necessarily required to prepare their financial statements as per Ind AS from the financial year 2016-17 with Ind AS complied comparative figures for previous year. Companies which announces their quarterly results also needs to prepare and present Ind AS complied quarterly results from this financial year.

Phase II

All listed companies not covered under Phase I and unlisted Companies with net worth of two hundred fifty crore rupees but less than five hundred crore rupees as on 31st March 2014, 31st March 2015 or 31st March 2016 along with their holding companies, subsidiaries, joint ventures and associates are necessarily required to prepare their financial statements as per Ind AS from the financial year 2017-18 with Ind AS complied comparative figures for previous year.

Phase III

Companies not covered in either of the phase I or phase II will be mandatorily required to comply with Ind AS requirement from the Financial Year 2018-19.

Practical Aspects

Though transitional working on first time adoption covered under Phase I is completed in case of some of the big corporates and in process for rest of others, still there are Companies still unknown to the concept of Ind AS and the mandatorily requirements. The implementation issues and complications of new provisions have provided for a lot of practice areas for the professionals whereas there are still various issues to be clarified by the institutional bodies as and when discovered.

New Terminologies: IND AS vis-à-vis Indian GAAP

  1. Fair Values Calculation
  2. Transaction Price
  3. Other Comprehensive Income
  4. Hyperinflationary Economies
  5. Amortized Cost
  6. Effective Interest Rates Calculation
  7. Statement of Changes in Equity (SOCIE)

Major Carve Outs: IFRS V/s IND AS

Carve out are majorly the differences between the International Financial Reporting Standards and the Indian Accounting Standards due to convergence. These carve outs are introduced in order nullify the major impacts due to adoption of Common generally accepted accounting principles. Some of the majorly identified carve outs areas and impacted sectors are:

  • IND AS 17 Leases : Infrastructure, Power, Manufacturing and any capital intensive sector
  • IND AS 106 Exploration and evaluation of Mineral Resources : Oil and natural Gas and metals and mining
  • IND AS 18 Revenue/Agreement for construction of Real Estate : Real estate sector
  • IND AS 41 Agriculture : Life science, pharmaceuticals and agriculture
  • IND AS 20 Accounting for government grants  and disclosure of government assistance : All capital intensive entities
  • IND AS 40 Investment Property : All capital intensive entities
  • IND AS 21 The effect of changes in foreign exchange rates : All sectors
  • IND AS 28 Investment in associates : All sectors
  • IND AS 16 Property Plant and Equipment : All sectors
  • IND AS 103 Business Combinations : All sectors

Exemptions on First Time Adoptions

  • Optional Exemption provided to the first time adopter for using the carrying values of PPE, Intangible assets and investment property as on the date of transition as deemed cost under IND AS.
  • Transitional relief while applying IND AS 105 - Non-Current Asset held for sale and discontinued operation. An entity may use the transitional date circumstances to measure such assets or operations at lower of carrying value or fair value less cost of sell.
  • Transitional relief to use transition date facts and circumstances for lease arrangements which includes both land and building elements to assess the classification of each element as finance or operating lease.
  • Exemption for non-retrospective effect of IND AS 103 i.e., Business Combinations.
  • Exemption has been provided to continue the policy adopted for accounting for exchange differences arising from translation of Long Term foreign currency monetary items recognized in the financial statements for the period ending immediately before beginning of the first IND AS financial reporting period as per the previous GAAP.

Concept of Financial Instruments:-

Introduction of Ind AS has also covered the concept of Financial Instruments under the IND AS 107: Financial Instrument Disclosure, IND AS 109: Financial Instruments Recognition and Measurement and Ind AS 32 Financial Instruments: Presentation though the concept was also there under the existing Indian GAAP under Accounting Standards 30, 31 and 32 though the same were never made mandatorily applicable on any class of companies.

Financial Instrument has been defined as any contract that give rise to Financial Assets for one entity and a financial liability for another entity with the condition specified therein related to the realization of financial assets and payment of financial liability. Cash and equity instruments have been specifically included in the definition of financial assets. As per the definition criteria’s Trade payables and trade receivable realizable and payable in the form of cash or other financial asset will be treated as financial assets whereas advance received from customers and advance given to creditors will not be treated as financial instruments.

Financial Assets have been broadly classified based on the measurement criteria into three types i.e., Financial assets measured at amortized cost, financial assets measured at fair value through profit and loss and financial assets measured at fair value through other comprehensive income. Similarly financial liabilities are classified into two type i.e., financial liability measured at amortized cost and financial liabilities measured at fair value through profit and loss. For ease of understanding we can say that stock or commodity, prepaid expenses and fixed assets can never form part of financial assets as well as advance from customers and statutory dues can never form part of financial liabilities.

In order to classify the financial assets or liabilities every entity needs to go for two types of tests i.e., Business model test which states whether the assets will be just held by the company in order to collect contractual cash flows till maturity or the business model is such that the assets can be held till maturity or sell in between. Second test is Cash flow test which states that the whether the assets gives rise to cash flow which are solely payment of interest and principal as in case of government bonds.

Financial instruments except those classified to be measured at fair value through profit or loss to be initially recognized at fair value (market value) plus transaction cost whereas financial assets through profit and loss are initially recognized at fair value (transaction price and the difference goes directly to profit or loss.   

Concept of Other comprehensive income

Other comprehensive income are those revenues, expenses, gains and losses that are excluded from amount of profit for the period in the statement of profit and loss. This means that they are to be separately listed after the profit for the period in statement of profit and loss. Revenue, expenses, gains and losses are appear in the other comprehensive income when they have not been realized. The concept of other comprehensive income has been introduced in order to separate the unrealized revenue, expenses, gains and losses from realized profits. Other comprehensive income is basically divided into two parts i.e., Items that will not be reclassified to profit or loss like change in revaluation surplus, actuarial gains or losses on remeasurment of defined benefit plans like gratuity, leave encashment, postretirement benefit plans, equity instruments through other comprehensive income etc. and items that will be reclassified to profit or loss exchange differences in translating the financial statements of a foreign operation, debts instruments through other comprehensive income, the effective portion of gains and loss on hedging instruments in a cash flow hedge etc.       

Statement of Changes in Equity

Statement of Changes in Equity (SOCIE) is now a part of financial statements of any entity preparing its financial statement as per Indian Accounting Standards (Ind AS). The statement of changes in equity includes the following information’s:

  • Total Comprehensive Income for the period
  • The effects on each component of equity of retrospective application or retrospective restatement in accordance with Ind AS 8
  • For each component of equity, reconciliation between the opening and closing balances, separately disclosing each change.

Concept of Embedded Derivatives and Hedge accounting

An embedded derivative is a component of a hybrid contract that also includes a non-derivative host—with the effect that some of the cash flows of the combined instrument vary in a way similar to a standalone derivative. An embedded derivative causes some or all of the cash flows that otherwise would be required by the contract to be modified according to a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract. A derivative that is attached to a financial instrument but is contractually transferable independently of that instrument, or has a different counterparty, is not an embedded derivative, but a separate financial instrument.

The objective of hedge accounting is to represent, in the financial statements, the effect of an entity’s risk management activities that use financial instruments to manage exposures arising from particular risks that could affect profit or loss (or other comprehensive income, in the case of investments in equity instruments for which an entity has elected to present changes in fair value in other comprehensive income). This approach aims to convey the context of hedging instruments for which hedge accounting is applied in order to allow insight into their purpose and effect.

Major Impact Areas due to transition

Goodwill and Intangible Assets:

Intangible assets and deferred tax asset/liabilities in relation to business combinations which were included within Goodwill under IGAAP, have to recognized separately under Ind-AS with corresponding adjustments to retained earnings and other comprehensive income for giving effect of amortization expenses and exchange gains and losses.

Deferred Taxes:

Deferred taxes are recognized for future tax consequences of temporary differences between the carrying value of assets and liabilities in books and their respective tax base i.e., balance sheet approach. Deferred tax adjustments related to business combination or other effects on transition from Indian GAAP and Ind AS to be considered.

Exchange difference due to translation of foreign currency monetary items:

Exchanges difference on translation of foreign Assets and Liabilities from functional currency to presentation currency at the closing rate at the date of the statement of financial position to be recognized in other comprehensive income and accumulated in a separate component of equity. These are to be reclassified from equity to profit or loss when the gain or loss on disposal is recognized.

Dividend and Corporate Dividend Tax:

Provision for Dividend and provision for corporate dividend tax to be recognized in the year in which it is declared and not in which it is proposed. At the time of transition, the proposed dividend as well as CDT need to be added back in the retained earnings as well as provision to be subtracted with similar amounts whereas the same will be reversed in subsequent year while preparing statement of financial position as on the transition date as well the reporting date of the comparative period whereas the same to be followed in subsequent years.

Actuarial Gains/losses on Defined Benefit plans:

Actuarial gains and losses representing changes in the present value of the defined benefit obligation resulting from experience adjustment and effect of changes in actuarial assumptions are to be recognized in other comprehensive income and not reclassified to profit or loss in a subsequent period.

Prior Period Items:

Material Prior Period errors are to be corrected retrospectively by restating the comparative amount for prior period presented in which the error occurred or if the error occurred before the earliest period presented by restating the opening statement of financial position.

Presentation of Excise duty:

Under Ind AS excise duty will be no longer netted off from revenue but to be shown as a part of expenses. Ultimately this will increase the topline amount of the entity but the profit will remain same.

Financial Instruments:

Financial assets like investments, deposits etc. as well as financial liabilities like long term borrowings, preference shares etc. to be measured at amortized cost or fair value based on business model tests and cash flow test and accordingly may or not be required to be carried at a value different to the value it is recognized under Indian GAAP.

Revenue Standards: Ind AS 18 V/s Ind AS 115

IFRS 115 on Revenue have been deferred by the International Accounting Standard Board (IASB) till 2018 though the same has been notified by MCA last year. Until the same is made applicable companies are following provisions of Ind AS 18. Earlier where revenue was recognized under the current Indian GAAP at the charges made to the customers the same is required to be measured at fair value of consideration under IND AS. In contrast to current Indian GAAP wherein only trade discount and volume rebates were netted off from the revenue, cash discounts and other sales incentives are also required to be factored in calculation of transaction price in case of Indian GAAP. These aspect of revenue is definitely going to hit the topline in case of many companies.

Approach for practical implementation

Each and every entity requires a number of steps to be followed at the time of transition from Indian GAAP to Ind AS i.e., first time adoption of Ind AS. An entities needs to first of all assess the impact areas based on the financial statements as on the transition date in its particular case though the financial effect may not be calculated at the same time. Based on the assessment of impact areas changes needs to be made in the accounting policies to be followed under Ind AS complied financial statements. Accordingly the working needs to be done to be prepare the first Ind AS complied statement of financial position as on the date of transition since the statement of profit and loss for that period need not to be prepared. This exercise will include reclassification of Balance Sheet items and figures. The next steps comes up prepare financials for the comparative periods i.e., quarterly or half yearly results of the comparative period in case of entities where quarterly results needs to be published and financial statements at the end of the comparative period in every case. Afterwards similar practice will be followed in the reporting period itself. Changes in the ERP or other accounting software’s to be done as per the applicability to the entity.

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