KEY DIFFERENCES – IFRS and Indian GAAP

Presentation &

Disclosures

IAS 1 prescribes minimum structure of financial statements and contains guidance on disclosures.

There is no separate standard for disclosure. For Companies, format and disclosure requirements are set out under Schedule VI to the Companies Act.  Similarly, for banking and insurance entities, format and disclosure requirements are set out under the laws/ regulations governing those entities.

IAS 1 requires disclosure of critical judgments made by management in applying accounting policies and key sources of estimation uncertainty that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year.

No such requirement under Indian GAAP.

IAS requires disclosure of information that enables users of its financial statements to evaluate the entity’s objectives, policies and processes for managing capital.

No such requirement under Indian GAAP.

IAS 1 prohibits any items to be disclosed as extra-ordinary items.

AS 5 specifically requires disclosure of certain items as Extra-ordinary items.

IAS 1 requires a “Statement of Changes in Equity” which comprises all transactions with equity holders.

Under Indian GAAP, this is typically spread over several captions such as share capital, reserves and surplus, P&L debit balance, etc.

True &

Fair

Override

In extremely rare circumstances the true and fair override is allowed, viz., when management concludes that compliance with a requirement in an IFRS or an Interpretation of a Standard would be so misleading that it would conflict with the objective of financial statements set out in the Framework, and therefore that departure from a requirement is necessary to achieve a fair presentation.  However appropriate disclosures are required under these circumstances.

True and fair override is not permitted under Indian GAAP.  However, in terms of hierarchy, local legislations are superior to Accounting Standards.  The Accounting Standards by their very nature cannot and do not override the local regulations which govern the preparation and presentation of financial statements in the country. However, ICAI requires disclosure of such departures to be made in the financial statements.

Small and Medium Sized Enterprises

Standard is under formulation.

There is no separate standard for SMEs.  However, exemptions/ relaxations have been provided from applicability of certain specific requirements of accounting standards to SMEs.

Inventories

IAS 2 prescribes same cost formula to be used for all inventories having a similar nature and use to the entity.

AS 2 requires that the formula used in determining the cost of an item of inventory needs to be selected with a view to providing the fairest possible approximation to the cost incurred in bringing the item to its present location and condition. However, there is no stipulation for use of same cost formula in AS 2 unlike IFRS.

There are certain additional requirement in IAS 2 which are not contained in AS 2 which are as under:

1.   Purchase of inventory on deferred settlement terms – excess over normal price is to be accounted as interest over the period of financing.

2.   Measurement criteria are not applicable to commodity broker-traders.

3.   Exchange differences are not includible in inventory valuation.

4.   Detail guidance is given for inventory valuation of service providers

Even though AS 2 does not provide any guidance with respect to treatment of exchange differences in inventory valuation, the accounting practice in Indian GAAP is similar to IFRS.

AS 2 does not apply to valuation of work in progress arising in the ordinary course of business of service providers.

Cash Flow Statements

No exemption

Exemption for SMEs

Bank overdrafts that are repayable on demand and that form an integral part of an entity’s cash management are to be treated as a component of cash/cash equivalents under IAS 7.

AS 3 is silent

In case of entities whose principal activities is not financing, IAS 7 allows interest and dividend received to be classified either under Operating Activities or Investing Activities. IAS 7 allows interest paid to be classified either under Operating Activities or Financing Activities.

In case of entities whose principal activities are not financing, AS 3 mandates disclosure of interest and dividend received under Investing Activities only.  AS 3 mandates disclosure of interest paid under Financing Activities only.

IAS 7 prohibits separate disclosure of items as extraordinary items in Cash Flow Statements.

AS 3 requires disclosure of extraordinary items.

IAS 7 deals with cash flows of consolidated financial statements.

AS 3 does not deal with cash flows relating to consolidated financial statements.

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

No such requirement under AS 3.

Proposed

Dividends

IAS 10 provides that proposed dividend should not be shown as a liability when proposed or declared after the balance sheet date.

The companies are required to make provision for proposed dividend, even-though the same is declared after the balance sheet date.

Prior Period Items and Changes 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, IAS 8 requires retrospective effect to be given.  For this, IAS 8 requires (i) restatement of comparative information presented in the financial statements in the year of change, unless it is impractical to do so; and (ii) the effect of earlier years to be adjusted to the opening retained earnings. Change in method of depreciation is regarded as a change in accounting estimate and hence the effect is given prospectively.

No specific guidance given except for change in method of depreciation should be considered as change in accounting policy and is accounted retrospectively.   The effect of changes in accounting policies are reflected in the current year P&L. Any change in an accounting policy which has a material effect should be disclosed.

The definition of prior period items is broader under IAS 8 as compared to AS 5 since IAS 8 covers all the items in the financial statements including balance sheet items.

AS 5 covers only incomes and expenses in the definition of prior period items.

IAS 8 specifically provides that financial statements do not comply with IFRSs if they contain either material errors or immaterial errors made intentionally to achieve a particular presentation of an entity’s financial position, financial performance or cash flows.

No such specific requirement under AS 5.

IAS 8 requires that except when it is impractical to do so, an entity shall correct material prior period errors retrospectively in the first set of financial statements authorised for issue after their discovery by (i) restating the comparative amounts for the prior period(s) presented in which the error occurred; or (ii) 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.

AS 5 requires prior period items to be included in the determination of net profit or loss for the current period.

Revenue Recognition

In case of revenue from rendering of services, IAS 18 allows only percentage of completion method.

AS 9 allows completed service contract method or proportionate completion method.

IAS 18 requires effective interest method to be followed for interest income recognition.

AS 9 requires interest income to be recognised on a time proportion basis.

Deals with accounting of barter transactions.

No guidance on barter transactions.

IFRS provides more detailed guidance in respect of real estate sales, financial service fees, franchise fees, licence fees, etc

Detailed guidance is available for real estate sales, dot-com companies and oil and gas producing companies.

Revenue should be measured at the fair value of the consideration received or receivable. Where the inflow of cash or cash equivalents is deferred, discounting to a present value is required to be done.

Revenue is measured by the charges made to the customers or clients for goods supplied or services rendered by them and by the charges and rewards arising from the use of resources by them.  Where the inflow of cash or cash equivalents is deferred, discounting to a present value is not permitted except in case of installment sales, where discounting would be required (see annexure to AS-9).

Fixed Assets & Depreciation

IAS-16 mandates component accounting.

AS 10 recommends but does not force component accounting.

Depreciation is based on useful life.

Depreciation is based on higher of useful life or Schedule XIV rates.  In practice most companies use Schedule XIV rates.

Major repairs and overhaul expenditure are capitalized as replacement if it satisfies recognition criteria.

Major repair and overhaul expenditure are expensed.

Under IAS 16, if subsequent costs are incurred for replacement of a part of an item of fixed assets, such costs are required to be capitalized and simultaneously the replaced part has to be de-capitalized regardless of whether the replaced part had been depreciated separately.

AS 10 provides that only that expenditure which increases the future benefits from the existing asset beyond its previously assessed standard of performance is included in the gross book value, e.g. an increase in capacity. There is no requirement as such for decapitalising the carrying amount of the replaced part under AS 10.

Estimates of useful life and residual value need to be reviewed at least at each financial year-end.

There is no need for an annual review of estimates of useful life and residual value.  An entity may review the same periodically.

IAS 16 requires an entity to choose either the cost model or the revaluation model as its accounting policy and to apply that policy to an entire class of property plant and equipment.  It requires that under revaluation model, revaluation be made with reference to the fair value of items of property plant and equipment.  It also requires that revaluations should be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the balance sheet date.

Similar to IFRS except that when revaluations do not cover all the assets of the given class, it is appropriate that the selection of the asset to be revalued be made on systematic basis. For e.g., an enterprise may revalue a whole class of assets within a unit. Also, no need to update revaluation regularly.

Depreciation on revaluation portion cannot be recouped out of revaluation reserve and will have to be charged to the P&L account.

Depreciation on revaluation portion can be recouped out of revaluation reserve.

Provision on site-restoration and dismantling is mandatory. To the extent it relates to the fixed asset, the changes are added/deducted (after discounting) from the asset in the relevant period. 

No guidance in the standard.  However, guidance note on oil and gas issued by ICAI, requires capitalization of site restoration cost. Discounting is prohibited under Indian GAAP. 

A variety of depreciation methods can be used to allocate the depreciable amount of an asset on a systematic basis over its useful life.  These methods include the straight-line method, the diminishing balance method and the units of production method. 

Permitted method of depreciation is SLM and WDV.

If payment is deferred beyond normal credit terms, the difference between the cash price equivalent and the total payment is recognised as interest over the period of credit.

No specific requirement under AS 10.

Foreign Exchange

There is no distinction being made between integral & non-integral foreign operation as per the revised IAS 21.  IAS-21 is based on the concept of functional currency and presentation currency.  It therefore provides guidance on what should be the functional currency of an entity.

AS-11 is based on the concept of integral and non-integral operations.  It therefore provides guidance on what operations are integral and what are not in respect of an enterprise.

Government Grants

In case of non-monetary assets acquired at nominal/concessional rate, IAS 20 permits accounting either at fair value or at acquisition cost.

AS 12 requires accounting at acquisition cost.

In respect of grant related to a specific fixed asset becoming refundable, IAS 20 requires retrospective re-computation of depreciation and prescribes charging off the deficit in the period in which such grant becomes refundable.

AS 12 requires enterprise to compute depreciation prospectively as a result of which the revised book value is depreciated over the residual useful life.

IAS 20 requires separate disclosure of unfulfilled conditions and other contingencies if grant has been recognised.

AS 12 has no such disclosure requirement.

Recognition of government grants in equity is not permitted. 

Government grants of the nature of promoters' contribution should be credited to capital reserve and treated as a part of shareholders' funds.

Business Combinations

Business combinations are dealt with under IFRS-3

Business combinations are dealt with under various standards such as AS-14, AS-21, AS-23, AS-27 and AS-10.

Use of pooling of interest is prohibited. IFRS 3 allows only purchase method.

AS 14 allows both Pooling of Interest Method and Purchase Method. Pooling of interest method can be applied only if specified conditions are complied.

IFRS 3 requires valuation of acquiree’s identifiable assets & liabilities at fair value.  Even contingent liabilities are fair valued.

AS 14 requires recognition at carrying value in the case of pooling of interests method.  In the case of purchase method either carrying value or fair value may be used.  Contingent liabilities are not fair valued.

The acquirer shall, at the acquisition date, recognise goodwill acquired in a business combination as an asset; and initially measure that goodwill at its cost, being the excess of the cost of the business combination over the acquirer’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised.

Treatment of goodwill differs in different accounting standards. In some cases, goodwill is computed based on fair values (i.e. AS-10 and AS-14). However, in most cases goodwill is based on carrying values (i.e. AS-14, AS-21, AS-23 and AS-27). 

IFRS 3 requires goodwill to be tested for impairment. Amortisation of goodwill is not allowed.

AS 14 requires amortization of goodwill.  AS-21, AS-23 and AS-27 are silent. AS-10 also recommends amortization of goodwill. AS 28 requires goodwill to be tested for impairment.

If negative goodwill arises, IFRS 3 requires the acquirer to reassess the identification and measurement of the acquiree’s identifiable assets, liabilities and contingent liabilities and the measurement of the cost of the combination; and recognition immediately in the income statement of any negative goodwill remaining after that reassessment.

AS 14 requires negative goodwill to be credited to Capital Reserve.

IFRS 3: Acquisition accounting is based on substance. Reverse Acquisition is accounted assuming legal acquirer is the acquiree.

Acquisition accounting is based on form. AS 14 does not deal with reverse acquisition.

Under IFRS 3, provisional values can be used provided they are updated retrospectively within 12 months with actual values.

Indian GAAP contains no such similar provision, except for certain deferred tax adjustment.

Employee Benefits:

IAS 19 provides options to recognise actuarial gains and losses as follows:

·     all actuarial gains and losses can be recognised immediately in the income statement

·     all actuarial gains and losses can be recognized immediately in SORIE

·     actuarial gains and losses below the 10% of the present value of the defined benefit obligation at that date (before deducting plan assets) and fair value of plan assets at that date (referred to as “corridor”) need not be recognized and above the 10% corridor can be deferred over the remaining service period of employees or on accelerated basis.

AS 15 (revised) requires all actuarial gains and losses to be recognised immediately in the profit and loss account.

Under IAS 19, the discount rate used to discount post-employment defined benefit obligations should be determined by reference to market yields at the balance sheet date on high quality corporate bonds or, in case there is no deep market in such bonds, on the basis of market yields on Govt. bonds of a currency and term consistent with the currency and term of the post-employment benefit obligations.

AS 15 (revised) allows discount rate to be used for determining defined benefit obligation only by reference to market yields at the balance sheet date on Govt. bonds.

Under IAS 19, the liability for termination benefits has to be recognized based on constructive obligation i.e. based on the demonstrable commitment by the entity, for e.g. Announcement of a formal plan.

Termination benefits are dealt with under AS-15 (revised), which are required to be recognized based on legal obligation rather than constructive obligation i.e. only when employee accepts VRS scheme.

In IFRS there is no concept of deferral for termination benefits.

VRS expenditure can be deferred under Indian GAAP over 3-5 years. However, the expenditure cannot be carried forward to accounting periods commencing on or after 1^st April, 2010.

Borrowing Costs

IAS 23 prescribes borrowing costs to be recognised as an expense as a benchmark treatment. It, however, allows capitalisation as an allowed alternative.

On 29 March 2007, the IASB issued a revised version of IAS 23, Borrowing Costs.  The main change in the revised IAS 23 from the previous version is the removal of the option to immediately recognise as an expense of borrowing costs that relate to assets that take a substantial period of time to get ready for use or sale.  The revised standard requires mandatory capitalisation of borrowing costs to the extent that they are directly attributable to the construction, production or acquisition of a qualifying asset. The revised standard applies to borrowing costs relating to qualifying assets for which the commencement date for capitalisation is on or after 1 January 2009.  Earlier application is permitted

AS 16 mandates capitalisation of borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset.

IAS 23 requires disclosure of capitalisation rate used to determine the amount of borrowing costs.

AS 16 does not require such disclosure.

Segment Reporting

IAS 14 encourages voluntary reporting of vertically integrated activities as separate segments but does not mandate the disclosure.

AS 17 does not make any distinction between vertically integrated segment and other segments. Therefore, under AS 17 vertical segments are required to be disclosed. 

Under IAS 14, if a reportable segment ceases to meet threshold requirements, then also it remains reportable for one year if the management judges the segment to be of continuing significance.

Under AS 17, this is mandatory. Option of the judgment of management is not available.

Under IAS 14, for changes in segment accounting policies, prior period segment information is required to be restated, unless impracticable to do so.

Under AS 17, for change in segment accounting policies disclosure of the impact arising out of the change is required to be made as is the case for changes in accounting policies relating to the enterprise as a whole. 

IASB has recently issued IFRS 8, Operating Segments which would supersede IAS 14 on which AS 17 is based.  IFRS 8 would be applicable for accounting periods on or after 1 January 2009.  Earlier application is permitted

ICAI has not revised AS 17 so far to bring it in line with IFRS 8.

Related Party Disclosures

The definition of related party under IAS 24 includes post employment benefit plans (e.g. gratuity fund, pension fund) of the entity or of any other entity, which is a related party of the entity.

AS 18 does not include this relationship.

The definition of Key Management Personnel (KMPs) under IAS 24 includes any director whether executive or otherwise i.e. Non-executive directors are also related parties. Further, under IAS 24, if any person has indirect authority and responsibility for planning, directing and controlling the activities of the entity, he will be treated as a KMP.

AS 18 read with ASI-18 excludes non-executive directors from the definition of key management personnel (KMPs). 

The definition of related party under IAS 24 includes close members of the families of KMPs as related party as well as of persons who exercise control or significant influence.

AS 18 covers relatives of KMPs. The relatives include only defined relationships.

IAS 24 requires compensation to KMPs to be disclosed category-wise including share-based payments.

AS 18 read with ASI 23 requires disclosure of remuneration paid to KMPs but does not mandate break-up of compensation cost to be disclosed.

IAS 24 mandates that no disclosure should be made to the effect that related party transactions were made on arm’s length basis unless terms of the related party transaction can be substantiated.

AS 18 contains no such stipulations

No concession is provided under IAS 24 where disclosure of information would conflict with the duties of confidentiality in terms of statute or regulating authority.

AS 18 provides exemption from disclosure in such cases.

Under IAS 24, the definition of “control” is restrictive as it requires power to govern the financial and operating policies of the management of the entity.

Under AS 18, the definition is wider as it refers to power to govern the financial and/or operating policies of the management.

IAS 24 requires disclosure of terms and conditions of outstanding items pertaining to related parties.

No such disclosure requirement is contained in AS 18.

IAS 24 does not prescribe a rebuttable presumption of significant influence.

AS 18 prescribe a rebuttable presumption of significant influence if 20% or more of the voting power is held by any party.

No exemption.

Transactions between state controlled enterprises are not required to be disclosed under AS-18.

10% materiality provision does not exist.

For the purposes of giving aggregated disclosures rather than detailed disclosures the 10% materiality rule would apply.

Leases

Under IAS 17 it has been clarified that in composite leases, elements of a lease of land and buildings need to be considered separately. The land element is normally an operating lease unless title passes to the lessee at the end of the lease term. The buildings element is classified as an operating or finance lease by applying the classification criteria.

AS 19, Leases” does not deal with lease agreements to use lands (and therefore composite leases). Leasehold land is classified as fixed asset and is amortised over the period of lease.

The definition of residual value is not included in IAS 17. IAS 17 does not prohibit upward revision in value of un-guaranteed residual value during the lease term.

AS 19 defines residual value. AS 19 permits only downward revision in value of un-guaranteed residual value during the lease term.

IAS 17 specifically excludes lease accounting for investment property and biological assets.

There is no such exclusion under AS 19.

In case of sale and lease back which results in finance lease, IAS 17 requires excess of sale proceeds over the carrying amount to be deferred and amortised over the lease term.

AS 19 requires excess or deficiency both to be deferred and amortised over the lease term in proportion to the depreciation of the leased asset.

IAS 17 does not require any separate disclosure for assets acquired under finance lease segregated from assets owned.

Schedule VI mandates separate disclosure of leaseholds.

IAS 17 prescribes initial direct cost incurred  in originating a new lease by other than manufacturer or dealer lessors to be included in lease receivable amount in case of finance lease and in the carrying amount of the asset in case of operating lease and does not mandate any accounting policy related disclosure.

AS 19 requires initial direct cost incurred by lessor to be either charged off at the time of incurrence or to be amortised over the lease period and requires disclosure for accounting policy relating thereto in  the financial statements of the lessor.

IAS 17 requires assets given on operating leases to be presented in the balance sheet according to the nature of the asset.

AS 19 requires assets given on operating lease to be presented in the balance sheet under Fixed Assets.

IAS 17, read with IFRIC 4, requires an entity to determine whether an arrangement, comprising a transaction or a series of related transactions, that does not take the legal form of a lease but conveys a right to use an asset in return for a payment or series of payments is a lease.  As per IFRIC 4, such determination shall be based on the substance of the arrangement.

There is no such requirement under Indian GAAP.

Earnings per share

IAS 33 shall be applied by entities whose ordinary shares or potential ordinary shares are publicly traded and by entities that are in the process of issuing ordinary shares or potential ordinary shares in public markets.

Every company who are required to give information under Part IV of schedule VI is required to disclose and calculate earning per share in accordance with AS-20. In other words, all companies are required to disclose EPS.  However, small and medium-sized companies (SMCs) have been exempted from disclosure of Diluted EPS.

IAS 33 requires separate disclosure of basic and diluted EPS for continuing operations and discontinued operations.

AS 20 does not require any such separate computation or disclosure.

IAS 33 prescribes that contracts that require an entity to repurchase its own shares, such as written put options and forward purchase contracts, are reflected in the calculation of diluted earnings per share if the effect is dilutive. 

AS 20 is silent on this aspect.

IAS 33 requires effects of changes in accounting policy and errors to be given retrospective effect for computing EPS, which means EPS to be adjusted for prior periods presented.

Since under Indian GAAP retrospective restatement is not permitted for changes in accounting policies and prior period items, the effect of these items are felt in the EPS of current period.

IAS 33 does not require disclosure of EPS with and without extra-ordinary item.

AS 20 requires EPS/diluted EPS with and without extra-ordinary items to be disclosed separately.

IAS 33 does not deal with the treatment of application money held pending allotment. Guidance given in Indian GAAP can also be applied in IFRS.

Under AS 20, application money held pending allotment or any advance share application money as at the balance sheet date should be included in the computation of diluted EPS.

IAS 33 requires disclosure of anti-dilutive instruments even though they are ignored for the purpose of computing dilutive EPS.

AS 20 does not mandate such disclosure.

IAS 33 does not require disclosure of face value of share.

Disclosure of face value is required under AS 20.

Consolidated Financial Statements

Under IAS 27, it is mandatory to prepare CFS except by the parent which satisfies certain conditions. An entity should prepare separate financial statements in addition to CFS only if local regulations so require.

Under AS 21, it is not mandatory to prepare CFS. However, listed companies are mandatorily required by the terms of listing agreement of SEBI to prepare and present CFS. The enterprises are required to prepare separate financial statements as per statute.

Under IAS 27, CFS includes all subsidiaries.

Under AS 21, a subsidiary can be excluded from consolidation if (1) the control over subsidiary is likely to be temporary; (2) the subsidiary operates under severe long term restrictions significantly impairing its ability to transfer funds to parent.

Under IAS 27 while determining whether entity has power to govern financial and operating policies of another entity, potential voting rights currently exercisable should be considered.

AS 21 is silent. As per ASI-18, potential voting rights are not considered for determining significant influence in the case of an associate.  An analogy can be drawn from this accounting that they are not to be considered for determining control as well, in the case of a subsidiary.

Under IAS 27, the definition of “control” requires power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

Control means the ownership, directly or indirectly through subsidiary(ies), of more than one-half of the voting power of an enterprise; or control over composition of board of directors in the case of a company or of the composition of the corresponding governing body in case of any other enterprise for obtaining economic benefits over its activities.

Use of uniform accounting policies for like transactions while preparing CFS is mandatory under IAS 27.

AS 21 gives exemption from following uniform accounting policies if the same is not practicable. In such case that fact should be disclosed together with the proportions of the items in the CFS to which the different accounting policies have been applied.

Under IAS 27, minority interest has to be disclosed within equity but separate from parent shareholders equity.

Under AS 21, minority interest has to be separately disclosed from liability and equity of parent shareholder.

Under IFRS-3, goodwill/capital reserve on consolidation is computed on fair values of assets / liabilities.

Under AS 21, goodwill/capital reserve on consolidation is computed on the basis of carrying value of assets/liabilities.

Under IAS 27, maximum three months’ time gap is permitted between balance sheet dates of financial statements of a subsidiary and parent.

Under AS 21, maximum six months time gap is allowed.

IAS 27 prescribes that deferred tax adjustment as per IAS 12 should be made in respect of timing difference arising out of elimination of intra-group transactions.

No deferred tax is to be created on elimination of intra-group transactions.

Acquisition accounting requires drawing up of financial statements as on the date of acquisition for computing parent’s portion of equity in a subsidiary.

Under AS 21, for computing parent’s portion of equity in a subsidiary at the date on which investment is made, the financial statements of immediately preceding period can be used as a basis of consolidation if it is impracticable to draw financial statement of the subsidiary as on the date of investment. Adjustments are made to these financial statements for the effects of significant transactions or other events that occur between the date of such financial statements and the date of investment in the subsidiary.

SIC-12 requires consolidation of SPEs when certain criteria are met.

No such guidance under AS-21. Under IFRS, an entity could be consolidated even if the controlling entity does not hold a single share in the controlled entity.  Instances of consolidation, under such circumstances are rare under Indian GAAP.

IAS 27 requires that a parent’s investment in a subsidiary be accounted for in the parent’s separate financial statements (a) at cost, or (b) as available-for-sale financial assets as described in IAS 39.

Under AS 21, in a parent’s separate financial statements, investments in subsidiary should be accounted for in accordance with AS 13, Accounting for Investments, which is at cost as adjusted for any diminution other than temporary in value of those investments.

Accounting for Taxes on Income

IAS 12 is based on Balance Sheet Liability Approach or the temporary difference approach.

AS 22 is based on income statement approach or the timing difference approach.

Deferred taxes are also recognised on temporary differences such as

a)   Revaluation of fixed assets

b)   Business combinations

c)   Consolidation adjustments

d)   Undistributed profits

Deferred taxes are not determined on such differences since these are not timing differences.

When an entity has a history of recent losses, deferred tax asset is recognised if there is convincing evidence of future taxable profits.

In the case of unabsorbed depreciation or carry forward of losses under tax laws, all deferred tax assets are recognised only to the extent that there is virtual certainty supported by convincing evidence that sufficient future taxable income will be available against which such deferred tax assets can be realised.

Fringe benefit tax (FBT) is included as part of the related expense which gave rise to FBT.

FBT is included as a part of tax expenses. It is disclosed as a separate line item under the head “tax expense” on the face of the P&L. 

Accounting for Associate in Consolidated Financial Statements

Equity accounting applied except when:

·     investments in associate held for sale is accounted in accordance with IFRS 5

·     the reporting entity is also a parent and is exempt from preparing CFS under IAS 27

·     where reporting entity is not a parent, and (a) the investor is a wholly owned subsidiary itself or a partially owned subsidiary, and its other owners, including those not entitled to vote, have been informed about and do not object to the investor not applying the equity method (b) the investors debt/equity are not publicly traded (c) the investor is not planning a public issue of any of its securities (d) the ultimate or immediate parent of the investor produces CFS available for public and comply with IFRS.

Equity accounting is not applied when:

·     the investment is acquired and held with a view to its subsequent disposal in the near future, or

·     the associate operates under severe long term restrictions which significantly impair its ability to transfer funds to the investor.

Under IAS 28, potential voting rights currently exercisable are to be considered in assessing significant influence.

Under ASI 18 potential voting rights are not considered for determining voting power in assessing significant influence.

As per IAS 28, difference between balance sheet date of investor and associate can not be more than three months.

Under AS 23, no period is specified. Only consistency is mandated.

In case uniform accounting policies are not followed by investor & investee, necessary adjustments have to be made while preparing consolidated financial statements of investor.

Under AS 23, if it is not practicable to make such adjustments, exemption is given; but appropriate disclosures are made.

The investor must account for the difference, on acquisition of the investment, between the cost of the acquisition and investor’s share of identifiable assets, liabilities and contingent liabilities in accordance with IFRS 3 as goodwill or negative goodwill. As per IFRS 3, values of identifiable assets and liabilities are determined based on fair value.

AS 23 prescribes goodwill determination based on book values rather than fair values of the investee.

Under IFRS, an entity cannot be subsidiary of two entities.

As per ASI 24, in a rare situation, when an enterprise is controlled by two enterprises as per the definition of ‘control’ under AS 21, the first mentioned enterprise will be considered as subsidiary of both the controlling enterprises within the meaning of AS 21 and, therefore, both the enterprises should consolidate the financial statements of that enterprise as per the requirements of AS 21.

In separate financial statements, investments are carried at cost or in accordance with IAS 39.

In separate financial statements, investments are carried at cost less impairment.

Interim Financial Reporting

IAS 34 does not mandate which entities should be required to publish interim financial reports, how frequently, or how soon after the end of an interim period.

SEBI requires listed companies to publish their interim financial results on quarterly basis.

If an entity publishes a set of condensed financial statements in its interim financial report, those condensed statements shall include, at a minimum, each of the headings and subtotals that were included in its most recent annual financial statements and the selected explanatory notes as required by this Standard.

Clause 41 of the listing agreement prescribes specific format in which all listed companies should publish their quarterly results.

Under IAS 34, Interim Financial Report includes Statement showing changes in Equity.

No such disclosure is required under AS 25, since the concept of SOCIE does not prevail under Indian GAAP.

A change in accounting policy, other than one for which the transition is specified by a new Standard or Interpretation, shall be reflected by

·     restating the financial statements of prior interim periods of the current financial year and the comparable interim periods of any prior financial years that will be restated in the annual financial statements in accordance with IAS 8; or 

·     when it is impracticable to determine the cumulative effect at the beginning of the financial year of applying a new accounting policy to all prior periods, adjusting the financial statements of prior interim periods of the current financial year, and comparable interim periods of prior financial years to apply the new accounting policy prospectively from the earliest date practicable.

In the case of listed companies SEBI clause 41 would apply, which requires retroactive restatement not only for all interim periods of the current year but also previous year. However, the actual accounting for changes in accounting policies would be based on AS 5. 

In the case of unlisted companies, AS-25 requires retroactive restatement only for all interim periods of the current year.

Under IAS 34, separate guidance is available for treatment of Provision for Leave encashment and Interim Period Manufacturing Cost Variances.

AS 25 does not address these issues specifically.

Intangible Assets

An entity shall assess whether the useful life of an intangible asset is finite or indefinite and, if finite, the length of, or number of production or similar units that would constitute useful life.

Under AS 26, there is a rebuttable presumption that the useful life of intangible assets will not exceed 10 years.

Under IAS 38, intangible assets having “indefinite useful life” cannot be amortized. Indefinite useful life means where, based on analysis, there is no foreseeable limit to the period over which the asset is expected to generate net cash inflow for the entity. Indefinite is not equal to infinite. Such assets should be tested for impairment at each balance sheet date and separately disclosed.

There is no concept of indefinite useful life in AS 26.  Theoretically, even for such assets, amortisation would be mandatory, though the threshold period could exceed beyond 10 years.

An intangible asset with an indefinite useful life and which is not yet available for use should be tested for impairment annually and whenever there is an indication that the intangible asset may be impaired.

AS 26 requires test of impairment to be applied even if there is no indication of that asset being impaired for following assets:

-      Intangible asset not yet available for use

-      Intangible asset amortised over the period exceeding 10 years

Under IAS 38, if intangible asset is ‘held for sale’ then amortisation should be stopped.

There is no such stipulation under AS 26.

In accordance with IFRS 3 Business Combinations, if an intangible asset is acquired in a business combination, the cost of that intangible asset is its fair value at the acquisition date.

If an intangible asset is acquired in an amalgamation in the nature of purchase, the same should be accounted at cost or fair value if the cost/fair value can be reliably measured. Intangible assets acquired in an amalgamation in the nature of merger, or acquisition of a subsidiary are recorded at book values, which means that if the intangible asset was not recognized by the acquiree, the acquirer would not be able to record the same.

Under IAS 38, revaluation model is allowed for accounting for an intangible asset provided active market exists.

AS 26 does not permit revaluation model.

Financial Reporting of Interests in Joint Ventures

IAS 31 prescribes proportionate consolidation method for recognising interest in a jointly controlled entity in CFS. It, however, also allows the use of equity method of accounting as an alternate to proportionate consolidation.  Equity method prescribed in IAS 31 is similar to that prescribed in IAS 28. However, proportionate method of accounting is the more recommended.

AS 27 permits only proportionate consolidation method.

Exceptions to proportionate consolidation or equity accounting:

·     investments in JCE held for sale is accounted in accordance with IFRS 5

·     the reporting entity is also a parent and is exempt from preparing CFS under IAS 27

·     where reporting entity is not a parent, and (a) the investor is a wholly owned subsidiary itself or a partially owned subsidiary, and its other owners, including those not entitled to vote, have been informed about and do not object to the investor not applying the equity method (b) the investors debt/equity are not publicly traded (c) the investor is not planning a public issue of any of its securities (d) the ultimate or immediate parent of the investor produces CFS available for public and comply with IFRS.

Exceptions to proportionate consolidation:

• JCE is acquired and held exclusively with a view to its subsequent disposal in the near future
• Operates under severe long term restrictions which significantly impair its ability to transfer fund to the investor.

Accounting for subsidiary where joint control is established through contractual agreement should be done as joint venture, i.e., either proportionate consolidation or equity accounting as the case may be.

Accounting for subsidiary where joint control is established through contractual agreement should be done as subsidiary – i.e., full consolidation.

In separate financial statements, JCE are accounted at cost or in accordance with IAS 39.

In separate financial statements, JCE are accounted at cost less impairment.

Impairment of Assets

Impairment losses on goodwill are not subsequently reversed.

Impairment losses on goodwill are subsequently reversed only if the external event that caused impairment of goodwill no longer exists and is not expected to recur.

For the purpose of impairment testing, goodwill acquired in a business combination shall, from the acquisition date, be allocated to each of the acquirer’s cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units or groups of units.  Each unit or group of units to which the goodwill is so allocated shall represent the lowest level within the entity at which the goodwill is monitored for internal management purposes; and not be larger than a segment based on either the entity’s primary or the entity’s secondary reporting format determined in accordance with IAS 14 Segment Reporting. 

Goodwill is allocated to CGU based on bottom-up approach, i.e. identify whether allocated to a particular CGU on consistent and reasonable basis and then, compare the recoverable amount of the cash-generating unit under review to its carrying amount and recognize impairment loss. However, if none of the carrying amount of goodwill can be allocated on a reasonable and consistent basis to the cash-generating unit under review; and if, in performing the 'bottom-up' test, the enterprise could not allocate the carrying amount of goodwill on a reasonable and consistent basis to the cash-generating unit under review, the enterprise should also perform a 'top-down' test, that is, the enterprise should identify the smallest cash-generating unit that includes the cash-generating unit under review and to which the carrying amount of goodwill can be allocated on a reasonable and consistent basis (the 'larger' cash-generating unit); and then, compare the recoverable amount of the larger cash-generating unit to its carrying amount and recognize impairment loss.

In testing a CGU for impairment, an entity shall identify all the corporate assets that relate to the CGU under review. If a portion of the carrying amount of a corporate asset:

(a) can be allocated on a reasonable and consistent basis to that CGU, the entity shall compare the carrying amount of the CGU, including the portion of the carrying amount of the corporate asset allocated to the CGU, with its recoverable amount.

(b) cannot be allocated on a reasonable and consistent basis to that CGU, the entity shall:

(i) compare the carrying amount of the CGU, excluding the corporate asset, with its recoverable amount and recognise any impairment loss;

(ii) identify the smallest group of CGUs that includes the CGU under review and to which a portion of the carrying amount of the corporate asset can be allocated on a reasonable and consistent basis; and

(iii) compare the carrying amount of that group of CGUs, including the portion of the carrying amount of the corporate asset allocated to that group of CGUs, with the recoverable amount of the group of CGUs.

As regards corporate assets, both bottom-up and top-down approach is required to be followed.

Under IFRS non-current assets held for sale are measured at lower of carrying amount and fair value less cost to sell. 

Non-current assets held for sale are valued at lower of cost and NRV.

Provisions, Contingent Assets and Contingent Liabilities

IAS 37 requires discounting of provisions where the effect of the time value of money is material.

AS 29 prohibits discounting.

IAS 37 requires provisioning on the basis of constructive obligation on restructuring costs.

AS 29 requires recognition based on legal obligation.

IAS 37 requires disclosure of contingent assets in financial statements where an inflow of economic benefits is probable.

AS 29 prohibits it.

IAS 37 provides certain basis and statistical methods to be followed for arriving at the best estimate of the expenditure for which provision is recognised.

AS 29 does not contain any such guidance and relies on judgment of management.

Financial Instruments

IAS 32 and 39 deal with financial instruments and entity’s own equity in detail including matters relating to hedging.

No equivalent standard.  AS-13 deals with investment in a limited manner.  Foreign exchange hedging is covered by AS-11. ICAI has issued exposure drafts of proposed accounting standards of financial instruments which are based on IAS 32 and 39.

The issuer of a financial instrument shall classify the instrument, or its component parts, on initial recognition as a financial liability, a financial asset or an equity instrument in accordance with the substance of the contractual arrangement and the definitions of a financial liability, a financial asset and an equity instrument.

No specific standard on financial instrument.  Classification based on form rather than substance.  Preference shares are treated as capital, even though in many case in substance it may be a liability.

Compound financial instruments are subjected to split accounting whereby liability and equity component is recorded separately.

No split accounting is done.

If an entity reacquires its own equity instruments, those instruments (‘treasury shares’) shall be deducted from equity.  No gain or loss shall be recognised in profit or loss on the purchase, sale, issue or cancellation of an entity’s own equity instruments.

When an entity’s own shares are repurchased, the shares are cancelled and shown as a deduction from shareholders’ equity (they cannot be held as treasury stock and cannot be re-issued). If the buy back is funded through free reserves, amount equivalent to buy-back should be credited to Capital Redemption Reserve. No guidance available for accounting for premium payable on buy-back. Various alternatives available – adjusting the same against securities premium, etc.

Financial asset is classified in four categories: financial asset at fair value through profit and loss (which includes held for trading), held to maturity, loans and receivables and available for sale.

AS 13 classifies investment into long-term and current investment. 

Initial measurement of held-to-maturity financial assets (HTM) is at fair value plus transaction cost. Subsequent measurement is at amortised cost using effective interest method.

As per AS-13, HTM investments are recognised at cost and interest is based on time proportion basis.

Initial measurement of loans and receivables is at fair value plus transaction cost. Subsequent measurement is at amortised cost using effective interest method.

Loans and receivables are stated at cost. Interest income on loans is recognised based on time-proportion basis as per the rates mentioned in the loan agreement.

Reclassifications between categories are relatively uncommon under IFRS and are prohibited into and out of the fair value through profit or loss category.

Where long-term investments are reclassified as current investments, transfers are made at the lower of cost and carrying amount at the date of transfer. Where investments are reclassified from current to long-term, transfers are made at the lower of cost and fair value at the date of transfer.

IFRS requires changes in value of AFS debt securities, identified as reversals of previous impairment, to be recognised in the income statement.  IFRS prohibits reversal of impairment of AFS equity securities.

On long term investments, diminution other than temporary is provided for.  AS-13 does not however lay down impairment indicators.  The diminution is adjusted for increase/decrease, with the effect being taken to the income statement.

An entity shall derecognise a financial asset when, (a) the contractual rights to the cash flows from the financial asset expire; or (b) when the entity has transferred substantially all risks and rewards from the financial assets; or (c) when the entity has (1) neither transferred substantially all, nor retained substantially all, the risks and rewards from the financial asset but (2) at the same time has assumed an obligation to pay those cash flows to one or more entities.

Guidance Note on Accounting for Securitisation requires derecognition of financial asset if the originator loses control of the contractual rights that comprise the securitised assets.

Derivatives are initially recognised at fair value. After initial recognition, an entity shall measure derivatives that are at their fair values, without any deduction for transaction costs. Changes in fair value are recognised in income statement unless it satisfies hedge criteria. Embedded derivatives need to be separated and fair valued. IAS 39 prescribes detailed guidance on hedge accounting. 

No specific standard on financial instruments. Accounting for forward contracts is based on AS 11. Premium on forward exchange contract entered for hedging purposes is recognized over the period of the contract. Exchange gain or loss is recognized in the period in which it incurs. Forward exchange contract entered for speculation purposes are marked to market with changes in fair value recognized in profit and loss contract. 

Share based Payments

IFRS-2 covers share based payments both for employees and non-employees.  An entity shall recognise the goods or services received or acquired in a share-based payment transaction when it obtains the goods or as the services are received.   The entity shall recognise a corresponding increase in equity if the goods or services were received in an equity-settled share-based payment transaction, or a liability if the goods or services were acquired in a cash-settled share-based payment transaction. When the goods or services received or acquired in a share-based payment transaction do not qualify for recognition as assets, they shall be recognised as expenses. Share based payments needs to be accounted as per fair value method.

The ICAI guidance note deals with only employee share based payments.  According to it, ESOP/ESPP can be accounted for either through intrinsic value method or fair value method.  When intrinsic method is applied, disclosures would be made in the notes to account relating to the fair value.

Investment Property

IAS 40 deals with accounting for various aspects of investment property in a comprehensive manner.

AS 13 deals with Investment Property in a limited manner.  It requires the same to be treated in the same manner as long-term investment.

Agriculture

IAS 41 deal with accounting treatment and disclosures related to agricultural activity.

No such standard.

Non-current Assets Held for Sale and Discontinued Operations

IFRS 5 sets out requirements for the classification, measurement and presentation of non-current assets held for sale and discontinued operations. 

AS 24 sets out certain disclosure requirements for discontinuing operations.  This Standard is based on old IAS 35 which has been superseded by IFRS 5.

Additional Standards under IFRS

Under IFRS, there are specific Standards on the following subjects:

IFRS 1, First-time Adoption of International Financial Reporting Standards

IFRS 4, Insurance Contracts

IFRS 7, Financial Instruments: Diosclosures

IAS 26, Accounting and Reporting by Retirement Benefit Plans

IAS 29, Financial Reporting in Hyper-inflationary Economies

There are no Standards/ Pronouncements on these subjects.