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Ind AS 17 - Leases

1

Ind AS 17

Leases

Definition of lease

• Lease is an agreement whereby the

o lessor conveys to the lessee

o in return for a payment or series of payments

o the right to use an asset

o for an agreed period of time

Scope

Included

Hire purchase

contracts

Conditional

sale

agreements

Excluded

Lease agreements to explore for or

use minerals, oil, natural gas

Licensing agreements for such items as

motion picture films, video recordings,

plays, manuscripts, patents and

copyrights.

Ind AS 17 - Leases

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Asset plus services agreement

• Ind AS 17 also applies to agreements that transfer the right

to use assets that also contain substantial service elements

Example

• Entity A may enter into an agreement to rent photocopiers

from entity B. As part of that agreement, entity B agrees to

provide maintenance services in respect of the copiers. The

fact that entity B has agreed to provide maintenance

services does not change the fact that the part of the

agreement that deals with the provision of the copiers should

be treated as a lease

Finance Lease and Operating Lease

Finance Lease

• A lease that transfers substantially all the risks and

rewards incidental to ownership of an asset. Title may

or may not eventually be transferred

Operating lease

• A lease other than a finance lease – in effect it is a

lease where substantially all the risks and rewards

incidental to ownership of an asset are not transferred

Risk

Possibilities of

losses from idle

capacity

Technological

obsolescence

Variations in return

because of

changing economic

conditions

Reward

Expectation of

profitable operation

over the asset's life

Gain from the

appreciation in value

of the asset's residual

value

Risk and Reward

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Lease term

Non-cancellable period

• Period for which the lessee has contracted to lease the

asset together with any further terms for which the lessee

has the option to continue to lease the asset, with or

without further payment, when at the inception of the

lease it is reasonably certain that the lessee will exercise

the option

Non-cancellable lease

• A non-cancellable lease is defined by the standard as a

lease that is cancellable only:

o upon the occurrence of some remote contingency

o with the permission of the lessor

o if the lessee enters into a new lease for the same or an

equivalent asset with the same lessor

Break and exit clause

• If a lease contains a clean break clause, that is, where

the lessee is free to walk away from the lease

agreement after a certain time without penalty, then

the lease term for accounting purposes will normally be

the period between the commencement of the lease

and the earliest point at which the break option is

exercisable by the lessee

Beginning of the lease

Break clause ( Lessee

is free to walk)

End period of lease as

per agreement

Ind AS 17 - Leases

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Renewal clauses and lease term

• Where the terms of renewal are significantly below a fair

market rental then it is reasonable to assume that the lessee

will extend the lease

• Then the lease term would include both the minimum period

and the renewal period

• Where the rentals in the secondary period are based on a

fair market basis, then the lease term will normally exclude

the secondary period

• Transfer of ownership to the lessee

• Option to purchase asset at a price that is expected to be

sufficiently lower than the fair value

• Lease term equals to major part of the economic life of the

asset

• Present value of the minimum lease payments amounts to

at least substantially all of the fair value of the leased asset

Note: No hard line defined for ‘substantial’ – can be taken to be at

least 90%

• Specialised nature such that lessee can use only

Finance lease - indicators

Inception and commencement of the lease

• Lease classification (whether operating or finance) is made

at the inception of the lease

• The inception of the lease is the earlier of

o the date of lease agreement

o parties' commitment to the lease's principal provisions

• The commencement of the lease term is the date from

which the lessee is entitled to exercise its right to use the

leased asset

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Inception and commencement of the lease - example

• A lessee may sign an agreement to lease a car on 31 March,

but does not take delivery of the car until 30 June

• The classification of the lease and the measurement of the

related assets and liabilities will take place on 31 March,

• But the recognition in the financial statements of the lease

assets and liabilities will not take place until 30 June

Changes in lease classification

• Changes in estimates or changes in circumstances should not

result in a change in classification

• Lease renegotiation results in reclassification of operating

lease as a finance lease

Changes in lease classification

• Entity A leases a building. The original term of the lease was

for 30 years and the estimated useful and economic life of

the building at the start of the lease was 45 years

• At inception the lease was classified as an operating lease.

Now, nearing the end of the 30 years, the lease has been

renegotiated

• The new lease term is 20 years, which is equal to the revised

expected remaining economic life of the building

• Should the classification of the lease be re-assessed?

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Lease involving land & buildings

• For classifying a lease involving land and buildings, land and

buildings elements are required to be separated

• The minimum lease payments are allocated between the land

and buildings elements in proportion to their relative fair

values

• The land element of lease is normally classified as an

operating lease however, when the title of land passes to the

lessee at the end of the lease term it is classified as finance

lease

Lease involving land & buildings

• A long term lease of land should be classified on the basis of

its substance and not only based on its legal form

• In the case of long term land agreements, the risks and

rewards would be automatically transferred to the lessee,

even though the title is not transferred

• In such a case, the lease for the land should be treated as a

finance lease

• The buildings element is classified as an operating or finance

lease by applying the classification criteria specified in the

standard

Accounting for finance leases - by lessees

• Accounted in lessee's balance sheet both as an asset and

as an obligation to pay future rentals

• Amount to recognize = Lower of

– fair value of the leased asset

– the present value of the minimum lease payments

• Initial direct costs of the lessee are added to the amount

recognised as an asset

• Discount factor is the interest rate implicit in the lease

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Interest rate implicit in lease

• It is the discount rate that, at the inception of the lease that

causes the present value of

a) the minimum lease payments

+

b) the unguaranteed residual value

=

c) fair value of the leased asset + initial direct costs of the

lessor

Contingent rents

• Contingent rent is that portion of the lease payments that is

not fixed in amount but is based on the future amount of a

factor that changes other than with the passage of time

• Example:

o Percentage of future sales, amount of future use, future

price indices, future market rates of interest

• Charged to P&L as expense when incurred

Example 1 – Contingent rental payments

• A car is leased under a three year contract. The lease rentals

during the three years are fixed provided the mileage does

not exceed a maximum amount during that period

• Any mileage incurred above the maximum is subject to an

additional charge

• How should the minimum lease rentals be calculated?

Ind AS 17 - Leases

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• Entity T is a telecom company and has entered into a lease

contract with entity S for exclusive use of a submarine cable

for overseas communication

• The contract is for 10 years, which corresponds to the

economic life of the cable

• Ownership transfers at the end of the arrangement for no

additional consideration

• The lease payments are dependent on the usage of the cable


• The ceiling amount is Rs.10 lakhs per year at 100% usage and

the minimum amount (floor) is Rs.6 lakhs per year, which

corresponds to a usage of 60% or lower

• Management of entity T estimates that the average usage of

the cable will be approximately 85% and the average annual

lease payments are expected to be Rs.8,50,000

• How should the minimum lease payments be calculated?

Accounting for finance leases – by lessors

Recognised in the lessor's balance sheet as a

• receivable at an amount equal to the

• Lessor’s net investment in the lease

• Over the lease term, rentals are apportioned between a

reduction in the net investment in the lease and finance

income

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Gross and net investment

• Net Investment = Gross investment discounted at the

interest rate implicit in the lease

• Gross investment = Minimum lease payments

plus

any unguaranteed residual accruing to the lessor

Accounting for operating leases – by lessees

• Operating leases should not be capitalised

• Lease payments recognised an expense on a straight-line

basis over the lease term

– unless another systematic basis is more representative of

the time pattern of the user's benefit

• Straight-line basis applies even if the payments are not made

on such a basis

Operating lease incentives

Examples

• Contributions to relocation or start-up costs

• Assumption of liabilities such as the rentals under an old

lease which would otherwise fall to be a vacant property

• Giving rent-free period

• Reduced rental periods for an initial period of the lease

Accounting treatment: Reduction of the rental expense over

the lease term on a straight-line basis

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Operating lease incentives - example

• A retailer may lease a new store for a five-year period with a

six month rent-free period

• Although the retailer may not open the store for the first six

months due to a fit-out period, the retailer still has the

benefit of the use and enjoyment of the leased property

during that initial period, as well as for the rest of the lease

• Hence, the incentive should be spread over the five years of

the lease period from the commencement of the lease term

on a straight-line basis

Minimum lease payment

Lessor

Payments over the lease term

Residual value

Guaranteed by: Leasee, party

related to the lessee,

independent third party

Lessee

Payments over the lease term

Residual value

Guaranteed by: Leasee , party

related to the lessee

Accounting for operating leases - by lessors

• Lessor should present assets subject to operating leases in

their balance sheets according to the nature of the asset

• The asset will be recorded as property plant and equipment

or investment property

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Ind AS 21The Effects of Changes in Foreign Exchange Rates

• Globalization has resulted in expansion of international trade

• Increasingly entities buy and sell goods and services from

overseas parties/customers

• Also they extend their international reach through overseas

branches in the form of subsidiaries or associates

Globalization of markets

An entity may carry on foreign activities in two ways

1. It may have transactions in foreign currencies

2. It may have foreign operations

In addition, an entity may present its financial statements in a

foreign currency

Application of Ind AS 21

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• International transactions are often expressed and

denominated in foreign currencies

• Such transactions should be converted into the functional

currency of the entity

• The question remains at what rates should such transactions

be converted into the functional currency – historical or

closing rate

• How should the difference in foreign exchange rate be

treated

Need for this standard

• Also the foreign operation of the entity in the form of a

branch or a subsidiary may maintain the books in such foreign

currency

• These transactions cannot be summed up with the

transactions of the parent entity without converting the same

into the functional currency of the entity

• How and when should such conversion be made and at what

rate for foreign operations


• The financial statements may also be required to be

presented in another currency other than the functional

currency of the entity to the investors or prospective investors

of the entity

• While presenting the financial statements in another currency

what exchange rates should be used – historical or closing or

average

• How should the exchange difference be accounted for while

presenting in another currency


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Objectives

1. How to include foreign currency transactions and foreign

operations in the financial statements of an entity and

2. Which exchange rates to use

3. How to report the effects of such changes in exchange rates

in the financial statements

4. How to translate financial statements into a presentation

currency

Scope of Ind AS 21

• Accounting for transactions and balances in foreign currencies

• Translating the results and financial position of foreign

operations, included in the financial statements of the entity

by consolidation, proportionate consolidation or the equity

method

• Translating an entity’s results and financial position into a

presentation currency

Benefits of Ind AS 21

• Reduces the risk of foreign activities being incorrectly

accounted for and the functional currency being determined

incorrectly

• This could have a major impact on the financial statements

• Improves efficiency when dealing with foreign activities

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Outside the scope of Ind AS 21

• Derivative transactions in foreign currencies and balances that

are within the scope of Ind AS109

• Hedge accounting including the hedging of a net investment in

a foreign

• Presentation of cash flows arising from transactions in a

foreign currency, or with the translation of cash flows of a

foreign operation

Outside the scope of Ind AS 21

• This Standard does not also apply to long-term foreign

currency monetary items for which an entity has opted for the

exemption given in paragraph D13AA of Appendix D to Ind AS

101

• Such an entity may continue to apply the accounting policy so

opted for such long-term foreign currency monetary items

Functional Currency

• The functional currency of an entity is the currency of the

primary economic environment in which that entity operates

• The primary economic environment in which an entity

operates is normally the one in which it primarily generates

and expends cash

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How to determine Functional Currency

• The functional currency is determined separately for

individual entities

• There is no such thing as a "group functional currency"

• Ind AS 21 gives the factors, primary and additional, that to

determine the functional currency of an entity

Apply factors in Ind AS 21

• The functional currency is determined by applying the factors

in Ind AS 21

• It cannot be chosen freely by an entity

• Once determined, it is not changed unless there is a change in

those underlying circumstances

Primary Factors

1. The currency that mainly influences sales prices for goods

/services i.e., sales prices are denominated/ settled

2. The currency of the country whose competitive forces and

regulations mainly influence the pricing policy

3. The currency that mainly influences labour, material and

other costs of providing goods or services

4. The currency in which finance is generated (i.e., issuing debt

and equity instruments)

5. The currency in which receipts from customers are retained

by the entity

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Importance of Functional Currency

• Incorrectly determining the functional currency can have a

major impact on the financial statements

• If it is determined incorrectly, transactions in the correct

functional currency will be recorded as if they were foreign

currency transactions

• Exchange differences will be recognised on transactions for

which no foreign exchange difference should have arisen

Importance of Functional Currency

• Similarly, transactions that should have led to recognition of

foreign exchange differences, will not be provided for

• This may have a significant impact on both the statement of

comprehensive income and the statement of financial position

What is Foreign operation?

• Foreign operation is an entity that is a subsidiary, associate,

joint venture or branch of a reporting entity, the activities of

which are based or conducted in a country or currency other

than those of the reporting entity

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ADDITIONAL FACTORS FOR

FOREIGN OPERATIONS

Foreign operation – Functional CCY

1. Degree of autonomy

– If its activities are carried out as an extension of the

reporting entity without significant autonomy then the

currency of the reporting entity would be the functional

currency of such foreign operation

– If the foreign operation accumulates cash and incurs

expenses, generates income – all in local currency then

the local currency would be the functional currency of

such foreign operation


Degree of autonomy – Case Study

• Arvind Limited is an Indian company making mobile phones. It

has a subsidiary in Singapore – Arvind Pte Ltd. to which it sells

some of the mobile phones. Arvind Pte Ltd. is the authorised

dealer of Arvind Ltd. for the whole of South-East Asia and has

no other activity other than selling these mobile phones.

• Determine the functional currency of Arvind Pte Ltd.

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2. Percentage and frequency of transactions with reporting

entity

– If the transactions with the reporting entity are a high

proportion of its activities then the currency of the

reporting entity would be the functional currency of such

foreign operation

– Few inter-company transactions would mean the local

currency would be the functional currency of such foreign

operation


Percentage of transactions with reporting entity – Case study

• ABCD Ltd. has a subsidiary ABCD Lanka Ltd. at Sri Lanka

manufacturing cement. The subsidiary sells all of its output to

its parent company. What is the functional currency of ABVD

Lanka Ltd?


3. Effect of cash flows on the reporting entity

– If the cash flows of the foreign operation directly affect

the cash flows of the reporting entity and are available

for remittance to it then the currency of the reporting

entity would be the functional currency of such foreign

operation

– If the cash flows are mainly in local currency and do not

impact the reporting entity’s cash flows the local

currency would be the functional currency of such foreign

operation

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Effect of cash flows on the reporting entity – Case study

• Facelift Ltd. is an Indian entity having INR as it functional

currency. It sells 95% of its production through its subsidiary

situated in Dubai. Facelift Ltd. depends upon the

remittances from Dubai to fund its normal business

activities. The subsidiary at Dubai is able to remit the cash

to India readily. Determine the functional currency of the

subsidiary at Dubai.


4. Financing & debt servicing

– If the cash flows of the foreign operation are sufficient to

service debt obligations without assistance from the

reporting entity then the currency of the reporting entity

would be the functional currency of such foreign

operation

– If the financing and servicing of debt is out of local

currency surpluses then the local currency would be the

functional currency of such foreign operation


Financing & debt servicing – Case study

• PreSuppose Ltd. is an Indian company and recently started a

subsidiary in London. The subsidiary borrowed £100,000 from

Bank of England and yet to commence its operations. The

subsidiary depends on it parent for repayment of the loan.

• What should be the functional currency of the subsidiary?

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Where indicators are mixed

• Management uses its judgement to determine the functional

currency that most faithfully represents the economic effects

of the underlying transactions, events and conditions

• Priority is given to the primary indicators before considering

the additional indicators which are designed to provide

additional supporting evidence to determine an entity’s

functional currency

Change of Functional Currency

• An entity’s functional currency reflects the underlying

transactions, events and conditions that are relevant to it

• Accordingly, once determined, the functional currency is not

changed unless there is a change in those underlying

transactions, events and conditions

PRESENTATION CURRENCY

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Presentation Currency

• The currency in which the financial statements are presented

is defined as the presentation currency

• Unlike the functional currency, the presentation currency can

be any currency of choice

Differences

Functional Currency Presentation Currency

Application of the factors in Ind AS 21 to a set of facts and circumstances

Flexible choice.The presentation currency can be any currency of choice.

Selected currency may have a big impact on net profit for the period

Selected currency has no impact on net profit for the period

MONETARY &

NON-MONETARY ITEMS

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Monetary Items

• The essential feature of a monetary item is a right to receive

(or an obligation to deliver) a fixed or determinable number

of units of currency

• Examples:

o pensions and other employee benefits to be paid in cash

o provisions that are to be settled in cash

o cash dividends that are recognised as a liability

o Investment in debt instruments held with the objective of

collecting contractual cash flows

Non monetary Items

• The essential feature of a non-monetary item is the absence

of a right to receive (or an obligation to deliver) a fixed or

determinable number of units of currency

Non monetary Items

• Examples:

– amounts prepaid for goods and services (e.g. prepaid rent)

– goodwill & inventories

– intangible assets

– property

– plant and equipment

– provisions that are to be settled by the delivery of a non-

monetary asset

– Investment in equity instruments

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FOREIGN CURRENCY

TRANSACTIONS

A foreign currency transaction

• A foreign currency transaction is one that is denominated or

requires settlement in a foreign currency

• For example an entity may:

o buy or sell goods or services in a foreign currency

o borrow or lend funds when the amounts payable or

receivable are in a foreign currency

o acquire or dispose of assets, or incur or settle liabilities, in

a foreign currency

Foreign currency transactions

• An entity must convert foreign currency items into its

functional currency for recording in its books of account

• A foreign currency transaction is entered into directly by an

entity

• They often occur on a day-to-day basis

• They involve cash flows, and increase or decrease the net

assets of the entity

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Initial recognition

• A foreign currency transaction is one denominated or

requiring settlement in a foreign currency

• These transactions are recorded in the functional currency by

applying to the foreign currency amount the spot exchange

rate between:

o the functional currency, and

o the foreign currency

at the date of the transaction

Initial recognition (Contd.)

• For practical reasons, a rate that approximates the actual

rate at the date of the transaction is often used, for example,

an average rate for a week or a month might be used for all

transactions in each foreign currency occurring during that

period

• However, if exchange rates fluctuate significantly, the use of

the average rate for a period is inappropriate

SUBSEQUENT

MEASUREMENT

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Subsequent reporting periods

• The treatment of foreign currency items at the end of the

reporting period depends on whether the item is:

o monetary or non-monetary, and

o carried at historical cost or fair value

Measurement at subsequent periods

ItemsMeasurement

BasisExchange Rate

Monetary Items NA Closing Rate

Non-monetary Items Historical cost Exchange rate at the date of transaction

Non-monetary Items Fair value Exchange rate at thedate at which fair value was determined

The carrying amount of an item

• The carrying amount of an item is determined in conjunction

with other relevant Standards

• Example: Property, plant and equipment may be measured in

terms of fair value or historical cost in accordance with Ind AS

16 Property, Plant and Equipment

• Whether the carrying amount is determined on the basis of

historical cost or on the basis of fair value, if the amount is

determined in a foreign currency it is then translated into the

functional currency in accordance with Ind AS 21 only

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Comparison of two amounts

• The carrying amount of some items is determined by

comparing two or more amounts

Examples:

• The carrying amount of inventories is the lower of cost and

net realisable value in accordance with Ind AS 2 Inventories

• Similarly, as per Ind AS 36 Impairment of Assets, the carrying

amount of an asset for which there is an indication of

impairment is the lower of its carrying amount before

considering possible impairment losses and its recoverable

amount

Carrying amount - non-monetary assets

• When an asset is non-monetary and is measured in a foreign

currency, the carrying amount is determined by comparing:

• the cost or carrying amount, as appropriate, translated at the

exchange rate at the date when that amount was determined

(i.e., the rate at the date of the transaction for an item

measured in terms of historical cost); and

• the net realisable value or recoverable amount, as

appropriate, translated at the exchange rate at the date when

that value was determined (e.g. the closing rate at the end of

the reporting period)

Carrying amount - non-monetary assets

Important note:

• The effect of this comparison may be that an impairment loss

is recognised in the foreign currency but would not be

recognised in the functional currency, or vice versa

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Several exchange rates

• When several exchange rates are available, the rate used is

that at which the future cash flows represented by the

transaction or balance could have been settled if those cash

flows had occurred at the measurement date

• If exchangeability between two currencies is temporarily

lacking, the rate used is the first subsequent rate at which

exchanges could be made

EXAMPLES OF SUBSEQUENT

MEASUREMENT

Foreign Currency Monetary item

Example – 1:

• An entity (functional currency Euro) has an outstanding trade

payable for A$1,500 which arose from a transaction when the

spot exchange rate was Euro1 = A$1.2 and hence was initially

recorded at Euro1,250. The closing rate is Euro1 = A$1.5

At what amount should the payable be recorded at the end of

the reporting period?

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Non Monetary item – historical cost

Example – 2:

• An entity (functional currency Euro) purchased a machine for

A$12,000 when the spot exchange rate was Euro1 = A$1.2.

The closing rate is Euro1 = A$1.5.

At what amount should the machine be recorded at the end of


Non Monetary item – Fair value

Example – 3:

• An entity (functional currency Euro) owns a building. The

entity carries buildings at their revalued amounts. The

valuation of the building was done at the end of the reporting

period and the fair value was US $150,000. The building was

purchased for US $100,000 when the spot rate was Euro1 = US

$1.2. The closing rate is Euro1 = US $1.5.

At what amount should the building be recorded at the end of


Exchange differences on monetary items

Exchange differences arise from:

• the settlement of monetary items at a subsequent date to

initial recognition, and

• remeasuring an entity’s monetary items at rates different

from those at which they were initially recorded (either

during the reporting period or at the previous reporting

periods)

• Such exchange differences must be recognised as income or

expenses in the period in which they arise

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Exchange differences on monetary items

• If the transaction is settled in a different accounting period to

that of the initial recognition of the transaction, the exchange

difference to be recognised in each period is determined by

the change in exchange rates during that period

Exception to the rule

• There is one exception to this rule given by paragraph 32 of

Ind AS 21

• Exchange differences are recognised directly in other

comprehensive income in the consolidated financial

statements, if they arise on a monetary item that forms part

of a reporting entity’s net investment in a foreign operation

denominated in the functional currency of either the parent

or the foreign operation

Exception to the rule

• In the financial statements that include the foreign operation

and the reporting entity (e.g. consolidated financial

statements when the foreign operation is a subsidiary), such

exchange differences shall be recognised initially in other

comprehensive income and reclassified from equity to profit

or loss on disposal of the net investment

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Exception to the rule - Example

• An example of this may be a long-term loan to the foreign

operation without a repayment term, where management

confirms that repayment is neither planned nor likely in the

future

Non-monetary items

• When a gain or loss on a non-monetary item is recognised in

profit or loss, any exchange component of that gain or loss is

also recognised in profit or loss

• When a gain or loss on a non-monetary item is recognised

directly in other comprehensive income, any exchange

component of that gain or loss is recognised directly in other

comprehensive income (For example gain or loss on equity

securities measured at FVOCI)

Other comprehensive income

• Other Ind Ass require some gains and losses to be recognised

in other comprehensive income

• For example, Ind AS 16 requires some gains and losses arising

on a revaluation of property, plant and equipment to be

recognised in other comprehensive income

• When such an asset is measured in a foreign currency, the

revalued amount to be translated using the rate at the date

the value is determined, resulting in an exchange difference

that is also recognised in other comprehensive income

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PRESENTATION CURRENCY

Translation to presentation currency

Statement presented Items Basis for FX rate

Statement of financial position

Assets & Liabilities At the closing rate at the date of that statement of financial position

Statement of comprehensive income (Profit & Loss Account)

Income & Expenses At the exchange rate at the transaction dates (an average rate for a period may be used unless rates fluctuate significantly)

All resulting exchange differences are recognized in other comprehensive income

Exchange differences - Presentation CCY

• Exchange differences are recognised in other comprehensive

income

• These exchange differences are not recognised as income or

expenses for the period because the changes in exchange

rates have little or no direct effect on the present and future

cash flows from the entity's operations

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Exchange differences - Presentation CCY

• The cumulative amount of the exchange differences is

presented in a separate component of equity until disposal of

the foreign operation

• When the exchange differences relate to a foreign operation

that is consolidated but not wholly-owned, accumulated

exchange differences arising from translation and attributable

to non-controlling interests are allocated to, and recognised

as part of, non-controlling interests in the consolidated

statement of financial position

Comparison of AS 11 with Ind AS 21

Topic AS 11 Ind AS 21

Functional

Currency

No concept of

functional currency.

Foreign currency is a

currency other than the

reporting currency.

Functional currency is the

currency of the primary

economic environment in which

the entity operates. Foreign

currency is a currency other

than the functional currency

Presentation

currency

No concept of

presentation currency

Presentation currency is the

currency in which the financial

statements are presented



Treatment

of

exchange

differences

A limited period irrevocable

option for corporate entities to

capitalise exchange differences

on long term foreign currency

monetary items incurred for

acquisition of depreciable capital

assets and to amortise exchange

differences on other long-term

foreign currency monetary items

over the life of such items till a

specified period.

For long term foreign

currency monetary items

recognized in the financial

statements for the period

ending immediately before

the beginning of the first Ind

AS financial reporting period

as per previous GAAP, the

entity may continue the

policy adopted for treatment

of exchange difference.

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Net

investment

in a non-

integral

foreign

operation

Exchange differences on monetary

items forming part of net investment

in a non-integral foreign operation are

recognized in 'Foreign Currency

Translation Reserve'. This is

recognized as income or expense at

the time of disposal of that operation.

Same as above



Treatment in

consolidated

financial

statements -

Integral

foreign

operations

Monetary assets are translated at

closing rate. Non-monetary items

are translated at historical rate if

they are valued at cost. Non-

monetary items carried at fair

value are reported using

exchange rates that existed when

the values were determined.

Income and expense items are

translated at historical/average

rates. Exchange differences are

shown in income statement.

Monetary assets are translated at

closing rate. Non-monetary items

are translated at historical rate if

they are valued at cost. Non-

monetary items carried at fair value

are reported using exchange rates

that existed when the values were

determined. Income and expense

items are translated at

historical/average rates. Exchange

differences are shown in income

statement.



Treatment

in

consolidate

d financial

statements

- Non-

integral

foreign

operations

Closing rate method is

followed - all assets and

liabilities are to be translated

at closing rate while P&L

items are translated at

historical/average rates. The

resulting exchange

difference is taken to reserve

and is recycled to P&L on

the disposal of the non-

integral foreign operation.

Assets and liabilities should be

translated from functional currency

to presentation currency at the

closing rate; income and expenses

at historical/averages rates for the

period; exchange differences are

recognized in other comprehensive

income and accumulated in a

separate component of equity.

These are reclassified from equity

to profit or loss when the gain or

loss on disposal is recognized.

7/24/2015

24



Disposal

of foreign

operations

Disposal does not

depend on whether

control over a foreign

operation is lost or not.

Even if control is lost,

only proportionate

amount of the reserve

is recycled to P&L.

Disposal depends on whether

control is lost or not. If control

is lost, the exchange

difference attributable to the

parent is reclassified to P&L

from Foreign Currency

Translation Reserve in other

comprehensive income.



Treatment of

derivatives

AS 11 is applicable to

exchange differences on all

forward exchange contracts

that are hedging instruments

for existing assets and liailties.

Not applicable for those

contracts that hedge firm

commitments or highly

probable forecast transactions.

Foreign currency derivatives

not within the scope of Ind AS

109 (some derivatives

embedded in other contracts)

are within the scope of Ind AS

21. Ind AS 21 is also applicable

when an entity translates from

functional currency to

presentation currency.



Foreign

exchange

contracts:

Trading or

speculative

in nature

The premium or discount on the

contract is ignored and at each

balance sheet date the value of

the contract is marked to market

and the gain or loss on the

contract is recognized.

Accounted for as derivative

and valued at fair value

7/24/2015

25



Foreign

exchange

contracts:

Not for

trading or

speculative

in nature

The premium or discount on the

contract is amortized as expense or

income over the life of the contract.

Exchange differences recognized in

P&L in the reporting period in which

the exchange rates change.

Accounted for as derivative

and valued at fair value

Change in

functional

currency

Change in reporting currency is not

covered by AS 11. Disclosure

required for any change.

Change in functional

currency is exceptional

and applied prospectively.

Disclosures needed.

R. Venkata Subramani http://accountingforinvestments.com

Thank you

Ind AS 37 - Provisions, Contingent Liabilities

and Contingent Assets

1

Ind AS 37

Provisions, Contingent

Liabilities and Contingent

Assets

Objective

• Ensures that appropriate recognition criteria and

measurement bases are applied to provisions, contingent

liabilities and contingent assets

• Sufficient information is disclosed in the notes to the

financial statements to enable users to understand their

nature, timing and amount

Provisions

• Before Ind AS 37, no accounting standard dealing with

provisions

• Companies used to make large provisions when large profits

are generated

• Such provisions were then used in future years when the

underlying profits were not as good

• Effectively provisions were used for profit smoothing and not

for the real purpose for which it is intended



2

Provision is a liability

• Ind AS 37 views a provision as a liability

• A provision is a liability of uncertain timing or amount

• A liability is a present obligation of the entity arising from

past events, the settlement of which is expected to result in

an outflow from the entity of resources embodying economic

benefits

Provision vs. liability

• The standard distinguishes provisions from other liabilities

such as trade creditors and accruals

• This is on the basis that for a provision there is uncertainty

about the timing or amount of the future expenditure

• Uncertainly is also present in the case of certain accruals

but the uncertainty is generally much less for liabilities than

for provisions

Recognition

• A provision should be recognised as a liability in the

financial statements when:

o An entity has a present obligation (legal or constructive)

as a result of a past event

o It is probable that an outflow of resources embodying

economic benefits will be required to settle the

obligation

o A reliable estimate can be made of the amount of the

obligation



3

Legal obligation

• A legal obligation is an obligation is an obligation that

derives from

– A contract (through its explicit or implicit terms)

– Legislation or

– Other operation of law

Constructive obligation

• Ind AS 37 defines a constructive obligation as

• An obligation that derives from an entity’s actions where:

– By an established pattern of past practice, published

policies or a sufficiently specific current statement the

entity has indicated to other parties that it will accept

certain responsibilities; and

– As result, the entity has created a valid expectation on

the part of those other parties that it will discharge those

responsibilities

Constructive obligation - example

• An oil company may have a established practice of always

making good any environmental damage caused by drilling,

even though it is not legally obliged to do so.

• In this way, it has created a valid expectation that it will do

this and it will have to recognise the constructive obligation

and make a corresponding provision each time it drills a new

well



4

Constructive obligation - example

• X Ltd is engaged in the manufacture of fertilisers. Effluents

from the plant have polluted a river near the plant.

Residents of the locality agitated against the pollution. X Ltd

agreed to their demands and to reduce pollutions discharge

and to install an Effluent treatment plant. After 1 year, not

ETP has been installed and there is no legislation mandating

such an installation.

• X Ltd has created a valid expectation on the part of the

public that it will discharge its responsibilities

Probable transfer of resources

• A transfer of resources embodying economic benefits is

regarded as ‘probable’ if the event is more likely that not to

occur

• This appears to indicate a probability of more than 50%.

• However, the standard makes it clear that where there is a

number of similar obligations the probability should be

based on considering the population as a whole, rather than

one single item

Example: Transfer of resources

• If a company has entered into a warranty obligation then the

probability of transfer of resources embodying economic

benefits may well be extremely small in respect of one

specific item

• However, when considering the population as a whole the

probability of some transfer of resources is quite likely to be

much higher

• If there is a greater than 50% probability of some transfer of

economic benefits then a provision should be made for the

expected amount



5

Measurement of provisions

• The amount recognised as provision should be the best

estimate of the expenditure required to settle the present

obligation at the end of the reporting period

• Estimates determined by the judgement of the management

supplemented by the experience of similar transactions

• Allowance is made for uncertainty

• Where provision involves a large population of items,

obligation is estimated by weighting all possible outcomes

by their associated probabilities, ie expected value

• Where provision involves a single item, such as the outcome

of a legal case, provision is made in full for the most likely

outcome

Time value of money

• Where the effect of the time value of money is material, the

amount of a provision should be the present value of the

expenditure required to settle the obligation

• An appropriate discount rate should be used

• The discount rate should be a pre-tax rate that reflects

current market assessments of the time value of money

• The discount rates(s) should not reflect risks for which

future cash flow estimates have been adjusted

Future events / disposal of assets

Future events:

• Future events which are reasonably expected to occur (e.g.

new legislation, changes in technology) may affect the

amount required to settle the entity’s obligation and should

be considered

Expected disposal of assets:

• Gains from the expected disposal of assets should not be

considered in measuring a provision



6

Reimbursements

• Some or all of the expenditure needed to settle a provision

may be expected to be recovered from a third party

• Then reimbursement should be recognised only when it is

virtually certain that reimbursement will be received if the

entity settles the obligation

• Reimbursement should be treated as a separate asset, and

the amount recognised should not be greater than the

provision itself

• The provision and the amount recognised for reimbursement

may be netted off in profit or loss

Changes in provisions

• Provisions should be reviewed at the end of each reporting

period and adjusted to reflect the current best estimate

• If it is no longer probable that a transfer of resources will be

required to settle the obligation, the provision should be

reversed

Onerous contracts

• An onerous contract is a contract entered into with another

party under which the unavoidable costs of fulfilling the

terms of the contract exceed any revenues expected to be

received from contract and where the entity would have to

compensate the party if it did not fulfil the terms of the

contract

• For onerous contracts, the present obligation under the

contract should be recognised and measured as a provision

• An example might be vacant leasehold property. The entity

holding the lease is under an obligation to maintain the

property but receives no income or benefit from it



7

Examples of provisions

Warranties:

• These are argued to be genuine provisions as on past

experience it is probable, i.e., more likely than not, that

some claims will emerge

• The provision must be estimated, however, on the basis of

the class as a whole and not on individual claims

• In this case there is a clear legal obligation


Major repairs:

• Companies usually provide for expenditure on a major

overhaul to be accrued gradually over the intervening years

between overhauls.

• Now this is no longer possible as this may be a mere

intention to carry out repairs, not an obligation

• The entity may also sell the asset in the meantime


Self insurance:

• Some entities create a provision for self insurance based on

the expected cost of making good fire damage etc., instead

of paying premiums to an insurance company.

• As per Ind AS 37 this provision is no longer justifiable as the

entity has no obligation until a fire or accident occurs

• No obligation exists until that time



8


Environmental contamination:

• If the entity has an environmental policy such that other

parties would expect the entity to clean up any

contamination or

• If the entity has violated existing environmental legislation

then a provision for environmental damage must be made


Decommissioning or abandonment costs:

• Some initial purchases may require a legal obligation to

decommission the site at the end of its life.

• Prior to Ind AS 37 most entities set up the provision

gradually over the life of the asset so that no one year

would be unduly burdened with the cost

• Ind AS 37, however, insists that a legal obligation exists on

the initial expenditure and therefore a liability exists

immediately


Decommissioning or abandonment costs:

• This would appear to result in a large charge to profit and

loss in the first year of operation

• However, the standard takes the view that the cost of

purchasing the asset in the first place includes the costs of

putting it right again

• Thus all the costs of decommissioning should be capitalised



9

Provisions for restructuring

Ind AS 37 defines a restructuring as:

• A program that is planned and is controlled by management

and materially changes one of two things

– The scope of a business undertaken by an entity

– The manner in which that business is conducted


The following examples of events may fall under the definition

of restructuring

• The sale or termination of a line of business

• The closure of business locations in a country or region or

the relocation of business activities from one country region

of another

• Changes in management structure, for example, the

elimination of a layer of management

• Fundamental reorganisations that have a material effect on

the nature and focus of the entity’s operations


The question is whether or not an entity has an obligation –

legal or constructive – at the end of the reporting period.

• An entity must have a detailed formal plan for the

restructuring

• It must have raised a valid expectation in those affected

that it will carry out the restructuring by starting to

implement that plan or announcing its main features to

those affected by it



10


• A mere management decision is not normally sufficient.

• Management decisions may sometimes trigger recognition,

but only if earlier events such as negotiations with employee

representatives and other interested parties have been

concluded subject only to management approval

• Where the restructuring involves the sale of an operation

then Ind AS 37 states that no obligation arises until the

entity has entered into a binding sale agreement

• This is because until this has occurred the entity will be able

to change its mind and withdraw from the sale even if its

intentions have been announced publicity

Costs included in restructuring provision

• Restructuring provision should include only the direct

expenditures arising from the restructuring, which are those

that are both:

– Necessarily entailed by the restructuring; and

– Not associated with the ongoing activities of the entity

• The following costs should specifically not be included

within a restructuring provision

– Retraining or relocating continuing staff

– Marketing

– Investment in new systems and distribution networks

Start

Present obligation

as a result of an

obligating event?

Probable outflow?

Reliable estimate?

Possible

obligation?

Remote

Provide Disclose contingent

liability

Do nothing

Yes

Yes

Yes

No

No

No

Yes

No (rare)

No

Yes



11

Contingent liability - definition

• A possible obligation that arises from past events and whose

existence will be confirmed only by the occurrence or non-

occurrence of one or more uncertain future events not

wholly within the control of the entity; or

• A present obligation that arises from past events but is not

recognised because:

– It is not probable that an outflow of resources embodying

economic benefits will be required to settle the

obligation; or

– The amount of the obligation cannot be measured with

sufficient reliability

Treatment of contingent liability

• Contingent liabilities should not be recognised in financial

statements but they should be disclosed

• The required disclosures are:

– A brief description of the nature of the contingent

liability

– An estimate of its financial effect

– An indication of the uncertainties that exist

– The possibility of any reimbursement

Contingent assets - definition

• A possible asset that arises from past events and whose

existence will be confirmed by the occurrence or non-

occurrence of one or more uncertain future events not

wholly within control of the entity

• A contingent asset must not be recognised

• Only when the realisation of the related economic benefits

is virtually certain should recognition take place

• At the point, the asset is no longer a contingent asset



12

Contingent assets - example

A company is engaged in a legal dispute. The outcome is not

yet known. A number of possibilities arise:

• It expects to have to pay about $100,000:

– A provision is recognised

• Possible damages are Rs.10,00,000 but it is not expected to

have to pay them:

– A contingent liability is disclosed

• The company expects to have to pay damages but is unable

to estimate the amount:

– A contingent liability is disclosed

Contingent assets - example

• The company expects to receive damages of Rs.50,00,000

and this is virtually certain:

– An asset is recognised

• The company expect to probably receive damages of Rs.

25,00,000:

– A contingent asset is disclosed

• The company thinks it may receive damages, but it is not

probable:

– No disclosure

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