Implementation of IND AS

DIBYENDU

India made a commitment towards the convergence of Indian accounting standards with IFRS at the G20 summit in 2009. In line with this, the Ministry of Corporate Affairs, Government of India (MCA) previously issued a roadmap for implementation of Indian Accounting Standards (Ind AS) converged with International Financial Reporting Standards (IFRS) beginning April 2011. However, this plan was suspended due to unresolved tax and other issues. n the presentation of the Union Budget 2014–15,the Honorable Minister for Finance, Corporate Affairs and Information and Broadcasting proposed the adoption of Ind AS. The Minister clarified that the respective regulators will separately notify the date of implementation for banks and insurance companies. Also, standards for tax computation would be notified separately. In accordance with the Budget statement, the MCA has notified Company (Indian Accounting Standard) Rules 2015 vide its G.S.R dated 16 February 2015. Accordingly, it has notified 39 Ind AS and has laid down an Ind AS transition road map for companies other than banking companies, insurance companies and non- banking finance companies.

INTRODUCTIONINDIAN ACCOUNTING STANDARD

Transition to Ind AS is not just an “accounting change”

Considering the potential wide-ranging effects of the transition, the implementation effort would impact functions outside of the finance department, including IT, legal, sales, marketing, human resources, investor relationsand senior management. A number of related workstreams should be considered in this effort, including: • Accounting and financial reporting • Tax • Business processes and systems • Change management, communication and training In addition, it is critical to have strong project management skillsto coordinate the roles of the various business functions and to keep the workstreams running smoothly and on schedule.

INDIAN ACCOUNTING STANDARD

Early adoption permitted from 1st April 2015, with one year comparatives. Once it is adopted, cannot be revoked. Phase I :- applicable from 1 April 2016 onward to: • Listed or unlisted companies whose net worth is >= INR 500 crores • Holding, subsidiaries, joint ventures or associates of these companies

Phase 2 :- is applicable from 1 April 2017 onward to: • Listed companies whose net worth is < INR 500 crores • Unlisted companies whose net worth is >= INR 250 crores but < INR 500 crores • Holding, subsidiaries, joint venturesor associates of these companies • Net worth for a company is to be calculated inaccordance with its stand-alone financial statements as on 31 March 2014 or the first audited financial statementsfor accounting period which ends after that date. Accordingly,if any company’s networth is more than INR 500 crore as of March 31, 2015, then itwill be covered in Phase 1 itself.

IND AS Roadmap

Significant Changes

There are many areas where IND AS has major differences from Indian GAAP

Revenue being the most important part of financial statement , heavily scrutinised by investors and all sorts regulators.• So, IND AS 115 Revenue from Contracts with Customers supersede AS 9

Revenue Recognition and AS 7 Construction Contracts.• Ind AS 115 has introduced a five-step model with a single principle forrecognizing revenue that applies to all contracts.Step 1: Identify the contract(s) with the customerStep 2: Identify the separate performance obligations in the contractStep 3: Determine the transaction priceStep 4: Allocate the transaction price to separate performance obligationsStep 5: Recognise revenue when (or as) each performance obligation is satisfied

Ind AS 115 Revenue Recognition

As per Indian GAAP revenue is recognised when there is a “transfer of risk and Rewards”.IND AS 115 says when customer obtains control on goods & services

Indian GAAP does not include mandatory guidance on accounting for financial instruments. Standards for accounting for financial instruments are used as a reference and have not been notified by the MCA. As per the existing roadmap, India will directly transition to Ind AS 109, ahead of the equivalent IFRS 9, which will be implemented in 2018. In one word this will strengthen the valuation maximum asset and liabilites will take the path of fair value approach. We will show certain significant points.

IncomeUnder Ind AS 109, interest income is recognised based on effective interest rate (EIR) method, whereas under Indian GAAP, it is recognised based on an instrument’s interest coupon.Derivative InstrumentUnder Ind AS 109, an entity should recognise all derivative instruments at fair value on the balance sheet.

Ind AS 109 Financial Instrument

IND AS 109 7

InvestmentAll investments (including unquoted equity shares) generally measured at fair value at each reporting period.

Financial AssetsInitial recognition of all financial assets and financial liabilities at fair value (security deposits, employee loans, sales tax deferral, etc.).Impairment Ind AS 109 requires a provision for impairment to be recognized at inception. The measurement basis depends on whether there has been a significant increase in credit risk since initial recognition. Thus, under Ind AS, a day one impairment loss is recognized even if the entity does not expect any default in repayment.

Ind AS 109 has introduced a new “expected credit loss model” for the impairment of financial assets. It applies to financial assets that are not measured at FVTPL(Fair Value Vhrough Profit & Loss), including loans, lease and trade receivables, debt securities, contract assets under Ind AS 115 and specified financial guarantees and loan commitments issued.

IND AS 102 Share Base Payment

Ind AS 102, Share-based Payment,provides an extensive guidance on share-based payments. Currently, under Indian GAAP, there is a Guidance Note on Accounting for Employee Share-based Payments issued by the ICAI. Following are some of the critical GAAP differences between Indian GAAP and Ind AS:• Mandatory use of fair value and resultant increase in employee compensation costs• Accelerated costs for options with graded vesting• Consolidation of trusts dealing with employee share-based payment plans.

Accounting for group ESOPs Under Ind AS, employee share-based payments should be accounted for using the fair value method. In contrast, Indian GAAP permits an option of using either the intrinsic value method or the fair value method.

IND AS 19 vs Indian GAAP AS 15

Actuarial gains and losses on defined benefit obligations

Upon Ind AS adoption, actuarial gains and losses on defined benefit obligations will now be recognised in other comprehensive income in equity and will no longer get recycled into profit or loss. Under Indian GAAP, these amounts are recognised in the income statement. This will reduce any volatility in reported profit or loss upon Ind AS adoption.

IND AS 16 vs Indian GAAP AS 10 (Fixed Asset)

Fixed Asset :- 1. Ind AS 16 Property, Plant and Equipment mandates component accounting, whereas AS 10 recommends, but does not require it. However, the Companies Act will require companies following AS 10 to apply component accounting mandatorily from financial years commencing 1 April 2015.

Fixed Asset

2. Major repairs and overhaul expenditure are capitalized under Ind AS 16 as replacement costs, if they satisfy the recognition criteria. In most cases, Indian GAAP requires these to be charged off to the profit and loss account as incurred.

3. Ind AS 16 requires estimates of useful lives, depreciation method and residual values to be reviewed at least at the end of each financial year. Indian GAAP does not mandate an annual review of these, but recommends periodic review of useful lives.

4. Ind AS 16 requires estimates of useful lives, depreciation method and residual values to be reviewed at least at the end of each financial year. Indian GAAP does not mandate an annual review of these, but recommends periodic review of useful lives.

5. Any change in depreciation method is treated as an accounting policy change under Indian GAAP whereas it is treated as a change in estimate under Ind AS.

Fixed Asset

6.Under Indian GAAP, an entity has an option to recognize unrealized exchange differences on translation of certain long-term monetary assets/liabilities as adjustment to cost of an asset. Such an amount shall be depreciated over the balance useful life of the asset. Under Ind AS, all foreign exchange differences shall generally be charged to profit and loss account. However, the transitional relief under Ind AS allows companies to continue with the capitalization of foreign exchange differences for long term monetary items that were recognized under Indian GAAP.

7.Component accounting Under Ind AS16, a component of an item of property, plant and equipment with a cost that is significant in relation to total cost of the item, shall be separately depreciated. Hence, entities need to divide the cost of an asset into significant parts if their useful life is different, and depreciate them separately.

Fixed Asset

Revaluation of fixed assets Indian entities, which have selectively revalued fixed assets or intend to revalue the fixed assets, will have to determine whether they want to continue with the revaluation model or not. This decision is crucial for an entity if it wants to continue with the revaluation model. It will have to: o Adopt the revaluation model for the entire class of assets that cannot be restricted to some selective location o Update such revaluation on regular basis o Take a depreciation charge in the income statement based on revalued amounts.

1. AS 22 Accounting for Taxes on Income is based on the income statement liability method, which focuses on timing differences. Ind AS 12 Income Taxes is based on the balance sheet liability method, which focuses on temporary differences. One example of the temporary vs. timing difference approach is revaluation of fixed assets. Under Indian GAAP, no deferred tax is recognized on upward revaluation of fixed assets where such revaluation is credited directly to revaluation reserve. Under Ind AS, companies will recognize deferred tax on revaluation.

Income Tax IND AS 12 vs Indian GAAP AS 22

1. Impact on an organization and its processes Ind AS 12 implementation requires accounting personnel to work effectively with the tax department to:

• Monitor and calculate tax bases of assets and liabilities • Monitor tax losses and tax credits of all components in the group • Assess recoverability of deferred tax assets • Determine possible offsets between deferred tax assets and liabilities • Monitor changes in tax rates and collect applicable tax rates to determine the amount of deferred tax in the event of asset disposal • Understand implications of double tax treaty, where there are foreign operations • Prepare more detailed disclosures — tax reconciliation

Income Tax IND AS 12 vs Indian GAAP AS 22

1. Definition of related party according to Ind AS 24 is more enhanced than AS 18. Under Ind AS 24, KMP of holding company, associate or joint venture of a member of a group of which the other entity is a member, another joint venture of the same third party, one entity is a joint venture of a third entity and the other entity is an associate of the third entity, post-employment benefit plan for the benefit of employees of either the company or an entity related to the company results in related party relationship.

2. According to Ind AS 24, an entity discloses that the terms of related party transactions are equivalent to those that prevail in arm’s length transactions, only if such terms can be substantiated. AS 18 has no such stipulation on substantiation of related party transactions when the same is disclosed to be on arm’s length

3. Ind AS 24 requires disclosure of key management personnel’s compensation in total and for certain specified categories, such as short-term employee benefits and post-employment benefits. AS 18 does not have such requirement.

Related Party Transaction IND AS 24 vs Indian GAAP AS 18

Ind AS17 deals specifically with land leases. Land leases are classified as finance or operating leases based on the general criteria laid down in the standard. When a lease includes both land and building elements, an entity assesses the classification of each element as a finance lease or an operating lease separately. Under Indian GAAP, no accounting standard deals with land leases. According to an Expert Advisory Committee (EAC) opinion, long-term land lease may be treated as finance lease.

Leases IND AS 17 vs Indian GAAP

Ind AS 17 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. Under Appendix C of Ind AS 17, Determining whether an Arrangement contains a Lease, such determination shall be based on the substance of the arrangement, e.g., power purchase agreements and outsourcing contracts may have the substance of lease. Indian GAAP does not provide any guidance for such arrangements.

Leases IND AS 17 vs Indian GAAP

a) Ind AS 21 is based on functional currency approach whereas existing AS 11 is not.

b) The existing AS 11 is based on integral foreign operations and non-integral foreign operations approach for accounting for a foreign operation, whereas Ind AS 21 is based on the functional currency approach. However, in Ind AS 21 the factors to be considered in determining an entity’s functional currency are similar to the indicators in existing AS 11 to determine the foreign operations as non-integral foreign operations. As a result, despite the difference in the term, there are no substantive differences in respect of accounting of a foreign operation.

c) As per Ind AS 21, presentation currency can be different from local currency and it gives detailed guidance on this, whereas the existing AS 11 does not explicitly state so.

Ind AS 21 vs AS 11 (Foreign Exchange)