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Ind-AS: This Is Not IFRS!

Published on Mon, Feb 23,2015 | 14:31, Updated at Fri, Feb 27 at 17:33Source : 

By: Ashish Gupta, Chartered Accountant

Indian Government has moved swiftly to fulfil the commitment made by the Hon’ble finance minister in July 2014. After months of active and engaging deliberation, the Ministry of Corporate Affairs (MCA) has come out with the Companies (Indian Accounting Standards) Rules, 2015, which mandates certain classes of companies to prepare financial statements as per IFRS converged Indian Accounting Standards (Ind AS).
MCA provides an option to all companies who are under the bracket of Ind AS parameter of reporting under Ind AS for accounting periods beginning on or after 1 April 2015. Companies with a net worth  (based on standalone financial of the company) of INR 500 crores or more as of 31 March 2014 need to adopt Ind AS for financial years beginning from 1 April 2016 (referred as Phase I) with comparative information for the year ending 31 March 2016. All other listed companies (not covered above, irrespective of their net worth) and companies with a net worth of INR 250 crores or more (referred as Phase II)  will transition to Ind AS a year later i.e. from financial years beginning 1 April 2017. Ind AS would be applicable to an entity’s consolidated as well as separate financial statements. Companies need to assess a situation on how to deal with the tax report for income tax till the tax accounting standard gets finalised, since now stand alone is also under Ind AS for covered companies.
Between the time MCA had placed Ind AS on its website back in 2010-11 and the current notification, there have been substantial changes to IFRS. As many as 7 (IFRS 9, 10, 11, 12, 13, 14 and 15) new standards have been issued by the International Accounting Standards Board (IASB) and 3 standards ( IAS 19, 27 and 28) have been significantly rewritten, in addition to several amendments to various standards. 3 standards (IAS 18, 11 and 39) have been dropped owing to issue of their replacements. MCA, in collaboration with the Institute of Chartered Accountants of India (ICAI) and National Advisory Committee on Accounting Standards (NACAS), has done a commendable job, by keeping the Indian context and cost consideration in mind, to include most of these changes in the currently notified Ind AS.

Ind-AS though a close convergence, have some significant departures from IFRS. These departures are commonly known as carve-outs and carve-ins. In this note, I have attempted to highlight a few critical ones for your reference::
     Accounting for foreign exchange differences (Para 46A): IFRS requires all foreign currency exchange gains and losses on restatement or settlement to be accounted for in profit and loss account, however, Ind-AS has a particular carve-out, wherein, accounting policy choice is provided to a company that has applied para 46A of existing AS 11, to continue with the accounting policy for the long term foreign currency monetary assets/liabilities existing as of the transition date. However, for new long term monetary assets and liabilities, any gains or losses will be accounted for in the profit and loss account.

     Carrying value of property, plant and equipment: companies are allowed to use their Indian GAAP (Previous GAAP) transition date carrying values as the starting point for reporting under Ind AS. This additional option has been a point of detailed discussion and scrutiny since it would cause the numbers between Ind AS and IFRS to differ substantially, on first time adoption as well as for on-going reporting.

Service concession arrangements: Intangible assets recognised for service concession arrangements in respect of toll roads under IGAAP up to the period ending immediately before the beginning of the first Ind AS reporting period can be amortised as per the policy adopted under IGAAP.

• Straight lining of leases: for assets given or taken on operating lease, where the lease payments are escalated based on the prevailing general inflation rates, the increases in lease payments need not be straight lined over the lease term. A departure from IFRS and even current accounting standards. To assess the increase in lease due to inflation is very judgemental  given that inflation may not be same at all the states of India and company having operation across locations and even internationally, high level of judgement would be require to justify that increase in lease is purely due to inflation index.

• Accounting for common control transactions: Ind AS provide additional guidance for accounting of acquisition  of entities under ‘common control’, commonly used by companies to re-structure their group. The said additional guidance prescribes the use of ‘pooling of interest’ method wherein all assets and liabilities of the acquiree shall be taken over at their book values and any difference between net assets acquired and consideration paid is transferred to reserves. More importantly, guidance, requires companies to present their re-structured group financial statements, as if the restructuring happened at the beginning of the earliest period reported.

• Accounting for bargain gain: for business combinations where the consideration paid is less than the fair value of net assets, IFRS requires the gain to be taken to profit and loss whereas Ind AS requires the same to be recognised in other comprehensive income and accumulated in equity as a capital reserve. 

Investment entity exemption: under IFRS 10, and entity that qualifies as an investment entity need not prepare consolidated financial statements subject to certain conditions. The said guidance requires the investment entity measure all its investments, including investment property, at fair value. Since Ind AS does not allow the fair valuation option for investment properties, Ind AS 110 (which corresponds to IFRS 10) does not require investment entities to measure investment properties at fair value.

Accounting in separate financial statements: In the separate financial statements, IFRS allows equity accounting to measure investments in subsidiaries, joint ventures and associate. Ind AS considers the same as a ‘conceptual inconsistency’ does not provide the option.

• Accounting for FCCBs/similar instrument: IFRS considers claasification of  foreign currency convertible bonds (FCCBs) into financial liability with an embedded derivative, however Ind AS considers even a fixed foreign currency portion as equity and thus FCCB would be accounted as equity and  liability under Ind AS.
Presentation of financial statements:
       o The statement of profit and loss needs to be presented as a single statement. Unlike IFRS, there is no option to present a separate statement for income and other comprehensive income.
       o In the statement of profit and loss, expenses need to be classified by their nature. Entities do not have the option to classify the same by function.

IFRS requires that long term loans are to be reclassified as current if the entity no longer has the ability to defer the repayment beyond 12 months due to breach of any covenants. However, as an additional relaxation under Ind AS, long term loan arrangement need not be classified as current on account of breach of a material provision, for which the lender has agreed to waive before the approval of financial statements for issue. Though Ind-AS go a long way in aligning financial reporting of companies in India to their global peers, it is pertinent to note that they are not IFRS as issued by IASB, which in a way curtails ability of companies to list in oversees market using Ind-AS statements, where IFRS is mandatory. MCA’s decision to notify Ind AS 109 and Ind AS 115 is a commendable step; where in Indian companies shall adopt these standards before global mandatory applicable date. Though it might save cost and time from moving to existing standards under IFRS and then to move again with globally to another standard, but at the same time it may create challenges to adopt such standards given that Indian companies would not have past practice from global.

i Net-worth means paid-up share capital plus all reserves created out of the profits and securities premium account, less accumulated losses, deferred expenditure and miscellaneous expenditure not written off. Does not include revaluation reserves, write-back of depreciation and capital reserve on amalgamation.


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