introduction to ind-as by neeraj...

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Introduction to Ind-AS

By Neeraj Sharma

[email protected]

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Agenda

Ind-AS – An Overview

Five Key Standards – GAAP Differences

Other GAAP Differences

Questions & Answers

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Ind-AS – An Overview

Set of accounting standards converged with IFRS

Includes ‘carve-outs’ which provide relaxations from specific IFRS requirements/remove policy options

Applicable in phases

Fundamental differences with current Indian GAAP include

Focus on substance over form

Present Value and Fair Value Concepts (Relevance over Reliability)

Estimates and judgments

Extensive Disclosures

Concept of Other Comprehensive Income and Total comprehensive income

Unique concept of First Time Adoption

IAS/IFRS Ind AS I GAAP

44 39 29

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Ind-AS – Roadmap

1 April 2015 1 April 2016 1 April 2017

Comparatives for the period ending

Applicable to companies

31 or thereafter31 March 2016 or thereafter

31 March 2017 or thereafter

Mandatorily applicable for following companies

● Voluntary Adoption

● Companies whose net worth is Rs. 500 crore or more

● Holding, subsidiary, joint venture or associate companies of above companies

● Companies whose equity and/or debt securities are listed or are in the process of being listed on any stock exchange in India or outside India and having net worth of less than Rs. 500 crore.

● Unlisted companies having net worth of Rs. 250 crore or more

● Holding, subsidiary, joint venture or associate companies of above companies

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Ind-AS – Listed Companies Quarterly Reporting

SEBI issued a circular on Nov 30, 2015 prescribing the formats for publishing financial under the newly issued SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

Companies adopting Ind AS for the first time will need to ensure that comparatives filed in such quarterly/annual financial results are also Ind AS compliant.

Disclosures regarding reconciliation of equity, total comprehensive income and explanation relating to changes in its accounting policies and use of exemptions etc. is required in the quarterly results for the period covered by its first Ind-AS Financial Statements

So, for June 2016 quarter, following will be required –

Financial Results - QE Jun 2015, QE Mar 2016 and QE Jun 2016

Financial Results - YE 2015-16

Segmental reporting – for above periods

Following reconciliations between IGAAP and Ind AS (equity, income statement, CF)

Equity - as at 31st Mar 2015, 30th Jun 2015 and 31st Mar 2016

Income Statement - QE Jun 2015,

Income Statement - YE 2015-16

CF – narrative explanation for YE 2015-16

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Key 5 Standards with maximum impact

Ind-AS 110 Consolidation

Ind-AS 103 Business Combinations

Ind-AS 109, Ind-AS 32 and Ind-AS 107 relating to Financial Instruments

Ind-AS 115 – Revenue from contracts with customers

Ind-AS 12 - Taxes

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GAAP Differences - Consolidation

When?

An entity that is a parent shall present consolidated financial statements. (certain exemptions provided).

Required even when the company has no subsidiary and only associate(s) and/or Joint venture(s)

Who?

When the entity has control over the relevant activities of another entity

Consider legal voting rights, BOD composition. However, also consider contractual arrangements, potential voting rights, de-facto control

Two entities consolidating same investee is not possible

How?

Economic entity approach.

CFS should be prepared using uniform accounting policies (except for associates)

Joint ventures are accounted using accounted using Equity Method

Non-controlling interest (minority interest) – Can be negative

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Example 1 : Proportionate Consolidation or Equity Method

Facts:

B Ltd. is a jointly controlled entity by A Ltd. and other investor. A Ltd. acquired its stake on 31.3.2014. The JV is a 50:50 JV. Other details are as below. (All figures are in Rs. Crores)

A Ltd. B Ltd.

FY 2014

Fixed Assets 1000 400

Current Assets 200 80

Current Liabilities & Provisions 150 60

Loans 800 320

Invt. In B Ltd. 50 -

Net Assets 250 100

FY 2015

Revenue 2000 800

Expenses 1400 560

PBT 600 240

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Stand-alone and Consolidated Balance-sheet of the A Ltd.

Stand-alone Proportionate Consolidation

Equity Method

FY 2014

Fixed Assets 1000 1200 1000

Current Assets 200 240 200

Current Liabilities & Provisions

150 180 150

Loans 800 960 800

Invt. In B Ltd. 50 - 50

Net Assets 300 300 300

FY 2015

Revenue 2000 2400 2000

Expenses 1400 1680 1400

PBT 600 720 720

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Lets see the impact

Metrics Proportionate Consolidation to Equity Accounting

PBT Same

Net Assets Same

Current Ratio Change – may be higher or lower

PBT to Sales Higher

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Example 2 : Assessing Control

Facts:

A Ltd. Holds 51% equity share capital of S Ltd and B Ltd holds remaining 49%. Other facts are mentioned below -

A Ltd and B Ltd have a shareholder agreement according to which the Board consists of 8 members, 4 of which are appointed by A Ltd. and 4 by B Ltd. Quorum – At least 2 directors, 1 appointed by A Ltd. and 1 appointed by B Ltd. All the decision of the board are passed by a simple majority of votes provided that at least 1 A Ltd. and 1 B Ltd. nominee vote in favor of the decision.

Question: Should A Ltd consolidate S Ltd in its Consolidated Financial Statements under Indian GAAP? What happens under Ind-AS?

GAAP Will S Ltd be consolidated by A Ltd?

Method

I-GAAP

Ind-AS

Yes

No

Full Consolidation

Equity, as it is a Jointly Controlled Entity

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Example 3 : De-facto Control

Facts:

A Ltd. acquires 48 per cent of the voting rights of B Ltd. The remaining voting rights are held by thousands of shareholders, none individually holding more than 1 per cent of the voting rights. None of the shareholders has any arrangements to consult any of the others or make collective decisions. Many shareholders, each with <5% of votes. General representation at general meetings <30% for many years.

Question:

Does A Ltd exercises control over B Ltd?

Answer:

Based on the facts, on the basis of the absolute size of its holding and the relative size of the other shareholdings, A Ltd can conclude that it has a sufficiently dominant voting interest to meet the power criterion.

If A Ltd can demonstrate that it directs the relevant activities of the Company, it may have to consolidate B Ltd.

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GAAP Differences - Taxes

Area Indian GAAP Ind-AS

Approach P&L Approach BS Approach – Calculation of Tax Bases of each Balance-sheet item

Recognition of DTA – in situations of existence of tax losses

Requires virtual certainty supported by convincing evidence

Recognized to the extent it is probable that future taxable income will be available to offset losses

Unrealized Intra-group profits Deferred taxes not recognized Recognized at the buyer’s tax rate

Revalued Assets Revaluation treated as permanent difference

Deferred taxes are recognized on revalued portion

Undistributed earnings of subsidiary, JV, associate, branches

Deferred taxes not recognized Deferred tax liability recognized

Disclosures No additional disclosures with respect to tax rate reco, unrecognized DTA and DTL

Additional disclosures are required to be given

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Example 1: Deferred Taxes

Indian GAAP Ind-AS

Accounting Standard (AS) 22 Taxes on

income does not permit creation of deferred tax on

the excess depreciation charged on the revalued

portion. It is not considered as a timing difference,

but a permanent one. The underlying reason is

that, under the income statement approach, a

deferred tax liability is not created on the date of

revaluation (since it does not have an effect on the

income statement).

In above case Deferred Tax liability will be

recognized on timing difference of Rs. 5 (Rs. 80 -

Rs. 75).

Ind-AS 12 Income Taxes requires that

measurement of the deferred tax liability or

deferred tax asset shall reflect the tax

consequences of recovering the carrying amount of

the depreciable asset, regardless of the basis of

measuring the carrying amount of that asset.

In above case Deferred Tax liability will be

recognized on temporary difference of Rs. 45 (Rs.

120 - Rs. 75).

The tax impact, however, will be recorded in

equity following the related movement of

revaluation as Revaluation Reserve in Equity.

For example, Company A buys an asset worth Rs.100 on 1st April, 2010. The useful life of the asset is five years and the tax laws allow it to be depreciated over four years. One year later, on 31st March, 2011, the Company revalues the asset to Rs.120.

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GAAP Differences - Revenue


Standards Two separate standards – AS 7 and AS 9

One comprehensive standard –Ind-AS 115*In case Ind-AS 115 is deferred, Ind-AS 11 and Ind-AS 18 will become applicable

Model No fair value concept Revenue is measured at fair value of the consideration received/receivable. If significant financing component exists, discounting is done using imputed interest rate and adjusted to revenue.

Model under Ind-AS 115 Simple revenue recognition model

5-step Control Model. Could have impact on timing and Measurement.Concepts like Variable Consideration, Multiple Element Arrangements, transfer of assets from customers are different

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Example 3: Multiple element arrangements - Revenue

Indian GAAP Ind-AS

There is no specific guidance under Indian GAAP

with respect to accounting for multiple element

arrangements. In the above scenario company may

record the entire revenue of Rs.15,00,000 for the

year ended March 31, 2014 and make a provision

for installation cost or alternatively, the company

may recognize the entire revenue in the year in

which the installation is made i.e. the year ending

March 31, 2015.

In the above example company is providing

discount of Rs.1,00,000 to the customer on

purchase of equipment along with services. Hence

the said discount will be allocated to equipment

and services proportionately i.e. Rs. 87,500 and

Rs. 12,500 respectively.

As the company has satisfies its obligation with

respect to delivery of machine before March 2014,

it will recognized the revenue of Rs.13,12,500 for

the financial year ended on March 31, 2014 and

Rs.1,87,500 will be recognized in the April 2014

i.e. in the next financial year after providing

installation service to the customer.

On March 1, 2014, Company enters into a contract with a customer to provide, deliver and install manufacturing equipment for a single invoice of Rs. 15,00,000, due on delivery. Company delivers the equipment in March’14 and installs it during April’14. Title to the equipment passes to the customer at delivery. The customer has an option to purchase machinery with or without installation services. The market value of equipment and installation services is Rs. 14,00,000 and Rs.2,00,000 respectively.

How much revenue is recognised for the year ended March 31, 2014 as per IFRS and Indian GAAP?

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GAAP Differences – Business Combinations


Methods Pooling of Interest – In case of merger between two entities – BookValues are usedPurchase Method – BV or FV –Choice is available

Business combinations between entities under common control are accounted using pooling of interest methodAll other business combinations using the acquisition method – ONLY FV USED

Goodwill Excess of consideration paid over assets and liabilities acquired is accounted as Goodwill.

Excess of consideration paid over fair value of identifiable assets and liabilities is recorded as GoodwillThis may result in more intangibles like customer lists etc.

Goodwill - Subsequent Measurement

Amortized over a period not exceeding 5 years

Not amortized, but tested for impairment annually

Contingent Consideration

Recognized only if payment is probable and a reliable estimate can be made

Recognized at acquisition date FV.

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March 2009 March 2008

Goodwill on consolidation - IGAAP 3,719 566

Goodwill – IFRS 535 403

Rs. In Crores

TATA MOTORS LIMITED

Source : Tata Motors Annual Report March 2009

Acquisition of JLR in June 2008

Example 5: Business Combination under Ind-AS 103

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GAAP Differences – Fixed Assets


Componentisation

No componentization required. Where cost of a part of the asset is significant to total cost of the asset and useful life of that part is different from the useful life of the remaining asset, useful life of that significant part shall be determined separately.

Significant components of PPE are required to be depreciate separately, if they have significantly different useful life.

Investment Property

No such concept. Land & building held with an intention to earn rental or for capital appreciation or surplus land & building with no intended use will be classified as Investment property.

Overhaul Major overhaul expenditure is charged to P&L.

Major overhaul expenditure to be capitalized.

Asset Retirement Obligation

Provision of Asset retirement obligation and environmental obligation is not required.

Provision is recognized for Asset retirement obligations and environmental obligation.

Change in method of depn

Treated as change in accounting policy and retrospectively accounted

Treated as change in accounting estimate and accounted prospectively

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GAAP Differences – Others


First time adoption standard

No such standard in I-GAAP. Ind-AS 101 specifies how an entity should convert its previous GAAP opening balance-sheet to Ind-AS Balance-sheet.The standard provides certain exemptions (for cost effectiveness) and exceptions (to avoid abuse).

Industry-specific standards

No such standards in I-GAAP. Ind-AS includes various industryrelated standards such as Agriculture, Investment Property, Exploration and evaluation of mineral resources, Investment Entities, Service concession arrangements etc.

Dividends Dividends proposed after BS date but before approval in AGM are recorded in the FS of the FY for which they have been proposed

Recorded in the year in which declared

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Leases No concept of embedded leases. Arrangements not in the legal form of lease but fulfilment of which is dependent on specific asset and which convey right to use the asset are accounted as leases. (Classic example of substance over form)

Leasehold Land Classified as Tangible Fixed Assets Leasehold land need to be assessed whether finance or operating based on the guidance given in Ind-AS 17.Leasehold land classified as operating leases are disclosed as Prepayments under Loans and Advances.

Actuarial Gains/Losses

Recorded in P&L Recorded in OCI and never recycled back to P&L.

Govt Grants Grants in the nature of Promoter’s Contribution are classified as Capital Reserves under Equity

No such classification.

Functional Currency

Foreign operations are classified as Integral or Non-Integral, depending on which the conversion gains/losses are recognized in P&L or in Reserves

Concept of functional currency. All conversion gains/losses are recognized and accumulated in Currency Translation Reserve.

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Long-term Provisions

No discounting is considered Such provisions are discounted, if the effect of discounting is material.

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QUESTIONS ?

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Thank You

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