Presentation on IFRS vs IND as- By Mohit Jain

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    IFRS vs. Indian Accounting

    Standard (Ind AS)

    Mohit Jain

    December 19, 2011

    For discussion purposes only

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    Preface

    India has chosen to converge with IFRS as opposed to adopting IFRS as this gives the

    standard setters the latitude to modify accounting standards to better reflect the local

    economic environment.

    On 25th February, 2011, the Ministry of Corporate Affairs notified 35 Accounting

    Standard that have been synced with IFRS. Although in the longer run, India intends to

    converge all its Ind-AS with IFRS, in the short run there are some significant differences

    between the two, few important one are highlighted in this presentation.

    2

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    Contents

    Section I- Carve outs from IFRS in the relevant Ind AS.

    Section II- Other major changes in Ind AS vis--vis IFRS not

    resulting in carve outs.

    Section III - IFRSs deferred by the MCA

    Section IV - List of IFRSs, IFRICs & SICs in respect of which no

    corresponding Ind AS has been formulated or issued.

    3

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    Carve outs from IFRS in

    the relevant IND AS

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    Revenue Recognition-Construction of Real Estate(Unavoidable Difference)

    IAS 18 Ind AS 18

    On the basis of principles of the IAS 18,

    IFRIC 15 on Agreement for Construction of

    Real Estate, prescribes that construction of

    real estate should be generally treated as

    sale of goods and revenue should be

    recognised only when the entity has

    transferred significant risks and rewards ofownership and has retained neither

    continuing managerial involvement nor

    effective control.

    IFRIC 15 has not been included in Ind AS 18,

    Revenue. Such agreements have been

    scoped out from Ind AS 18 and have been

    included in Ind AS 11, Construction

    Contracts (Para 3 of Ind AS 11).

    Reason behind Carve out:

    IFRIC 15, would have required the real estate developers to recognize the revenue in theirfinancial statements based on the completion method i.e., only in the last year of the

    completion of the project. In that case, the profit and loss account of the developers will not

    truly reflect the performance of the business, as during the years the real estate project

    continues, no revenue will be recognised and this would create a lot of volatility in profit or

    loss. Consequently a few countries, including India, characterised by a tremendous amount of

    construction activity have chosen not to adopt or to defer the implementation of IFRIC 15.

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    The Effects of Changes in Foreign Exchange Rates(Avoidable Difference)

    IAS 21 Ind AS 21

    IAS 21 requires recognition of exchange

    differences arising on translation ofmonetary items from foreign currency to

    functional currency directly in statement of

    comprehensive income (P/L Account).

    Ind AS 21 permits an option to recognise

    exchange differences arising on translationof certain long-term monetary items from

    foreign currency to functional currency

    directly in equity. In this situation, Ind AS 21

    requires the accumulated exchange

    differences to be amortised to profit or loss

    in an appropriate manner. (Para 29A)

    Ind AS 101 provides that on date of

    transition, such option can be exercised

    either prospectively or retrospectively.

    Reason behind Carve out:

    The overseas borrowings of the Indian Companies are denominated in foreign currencies

    unlike developed countries where borrowings are denominated in local currencies. There has

    been a significant fluctuation in the value of US dollar vis--vis rupee. Also hedging is not

    possible in India for the full period for which the loan is taken. Hence in Indian Context, it is

    not appropriate to recognise the exchange differences immediately which arise as a result of

    items which are to be paid/realized in foreign currency, after a long term nature.

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    Investment in Associates(Avoidable Difference)

    IAS 28 Ind AS 28

    IAS 28 requires that for the purpose of

    applying equity method of accounting in the

    preparation of investors financial

    statements, uniform accounting policies

    should be used. In other words, if the

    associates accounting policies are different

    from those of the investor, the investorshould change the financial statements of

    the associate by using same accounting

    policies.

    The phrase, unless impracticable to do so

    has been added in the relevant

    requirements. (Para 26)

    AS 28 requires that difference between the

    reporting period of an associate and that of

    the investor should not be more than threemonths, in any case.

    The phrase unless it is impracticable has

    been added in the relevant requirement.

    (Para 25)

    Reason behind Carve out:

    Since the investor has significant influence and not control over the associate, it may not be

    able to influence the associate to change its accounting policies or reporting period date.

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    Financial Instruments: Presentation(Unavoidable Difference)

    IAS 32 Ind AS 32

    Under IFRS, a Foreign Currency Convertible

    Bond (FCCB) is treated as a hybrid financialinstrument with liability and derivative

    (conversion option) components. While

    companies measure liability at amortized

    cost, the derivative component is measured

    as fair value through profit or loss at each

    reporting date.

    The definition of a financial liability has

    been modified in Ind AS 32 so that theconversion option, embedded in a FCCB, to

    acquire fixed number of equity shares for

    fixed amount of cash in any currency

    (functional currency or any foreign

    currency) is treated as equity and

    accordingly, is not required to be

    remeasured at fair value at every reporting

    date (Para 11).

    Reason behind Carve out:

    This carve out will help to prevent volatility for Indian Entities. Further this carve out is absed

    on the same principles for carve out made in Ind AS 21 from IFRS 21.

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    Financial Instruments: Recognition and Measurement(Unavoidable Difference)

    IAS 39 Ind AS 39

    IAS 39 requires all changes in fair values incase of financial liabilities designated at fair

    value through profit or loss upon initial

    recognition shall be recognised in profit or

    loss. IFRS 9 which will replace IAS 39

    requiries these to be recognised in other

    comprehensive income

    A proviso has been added to para 48 of IndAS 39 that in determining the fair value of

    the financial liabilities, which upon initial

    recognition are designated at fair value

    through profit or loss, any change in fair

    value consequent to changes in the entitys

    own credit risk shall be ignored.

    Reason behind Carve out:

    It is felt that recognition of gain on deterioration of own credit risk is not proper because such

    deterioration ordinarily occurs when an entity is incurring losses. Thus, if an entity is allowed

    to recognise gain on deterioration of its own credit risk, it will book gains when itsperformance is not upto the mark. In the recent financial crisis in USA, it was noted that some

    banks booked gains while they were incurring losses due to the crisis.

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    Business Combination(Unavoidable Difference)

    IFRS 3 Ind AS 103

    IFRS 3 requires bargain purchase gain arising

    on business combination to be recognisedin profit or loss.

    Bargain purchase gain is the excess of fair

    value of identifiable net assets acquired

    over the purchase consideration.

    Ind AS 103 requires that the acquirer should

    first establish whether there was indeed abargain purchase i.e. assess whether there

    are any circumstances which indicate that the

    acquirer made a bargain purchase for

    example, a distress sale such as acquisition of

    a BIFR Company, in which the seller is acting

    under compulsion. If such evidence exists theacquirer recognises the resulting gain in other

    comprehensive income and accumulates the

    same in equity as capital reserve. However, if

    no circumstances exist to classify the business

    combination as a bargain purchase, the

    excess is recognised directly in equity as

    capital reserve (Para 34 & 36A).

    Reason behind Carve out: It is felt that recognition of such gains in profit or loss would result

    into recognition of unrealised gains as the value of net assets is determined on the basis of

    fair value of net assets acquired. However, in practice, since such transactions are rare, this

    carve out is unlikely to have impact for most companies.

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    Revenue Recognition-Rate Regulated Entities(Will be unavoidable difference)

    IAS 18 Ind AS 18

    Revenue Recognistion for rate regulated