Recognition & Measurement
IFRS 9 has replaced IAS 39 and has become effective with effect from 1st Jan 2018 in all geographical regions covered by IFRS Standards. Ind AS 109 which is the equivalent of IFRS 9 is effective with effect from 1st April 2016 for listed entities.
Foreign currency denominated financial statements should be expressed in a single currency so as to enable the users of such financial statements to under-stand and analyse the financial results of the entity. The entity may also have been incorporated / registered as per the country where it operates and may be statutorily required to prepare the financial statements in such currency. Hence, foreign currency denominated transactions should be translated into the currency of the country where the entity is registered as per the requirements of the entity’s GAAP.
Ind AS 21 deals primarily with the question as to how to include foreign currency transaction and report the foreign operations in its financial statements and in order to compare with which exchange rate or rates should be used and how to report the effects of such changes in the financial statements.
Main benefit achieved by Ind AS 21 is that it reduces the risk of foreign activities being incorrectly accounted for and the functional currency being determined incorrectly. If the functional currency is not determined as per the requirements of the standard, it would result in a major impact on the financial statements of the entity. The standard also clearly specifies the methodology by which the financial statements should be translated into the presentation currency and how the exchange difference on such translation should be accounted for.
Share based payment transactions
Indian Accounting Standard Ind AS 102 deals with Share based payment trans-actions. This is one of the standards announced by MCA
IFRS 2 is the corresponding Accounting Standard issued by International Ac-counting Standards Board (IASB).
Mandatory requirements – no exceptions:
An entity has to recognise share-based payment transactions in its financial statements, including transactions with employees or other parties to be settled in cash, other assets, or equity instruments of the entity. There are no exceptions to Ind AS 102, other than for transactions to which other Ind ASs apply.
There are specific requirements for three types of transactions as given below:
1. Equity-settled share-based payment transactions: Here the entity receives goods or services as consideration for equity instruments of the entity. This includes equity shares and/or share options.
The goods or services received is measured based on the fair value of such goods or services unless the fair value cannot be estimated reliably. The corresponding value should be increased in the equity. If the fair value of the goods or services cannot be estimated reliably, then the value is ascertained based on the fair value of the equity instruments granted. If the transaction is with the employees or others providing similar services, the fair value of the equity instruments granted is measured as it is not possible to estimate the fair value of the services rendered by the employees. The fair value measurement of the equity instrument granted is always done at the grant date. For transactions with non-employees including those providing such similar services, there is a rebuttable presumption that the fair value of the goods or services received can be measured reliably. Such fair value is measured at the date on which the goods are received or the services rendered by the counter party. Where the presumption is rebutted, the fair value is determined based on the fair value of the equity instruments granted as measured at the date the goods are received by the entity or the services are rendered by the counter party.
Where the fair value is measured based on the fair value of the equity instruments granted, Ind AS 102 specifies the methodology by which such fair value should be determined. All non-vesting conditions are taken into account to estimate the fair value of the equity instruments other than the vesting conditions that are not market conditions. Vesting conditions are taken into account by adjusting the number of equity instruments in such a way that the amount recognized for goods or services rendered is based on the number of equity instruments that eventually vest. In other words, if the equity instruments granted do not vest due to the inability to satisfy the vesting conditions, no amount is recognized on a cumulative basis for such goods or services received.
Fair value to be based on market prices:
Ind AS 102 mandates that the fair value of equity instruments granted to be based on market price if available including the terms and conditions upon which those equity instruments were granted. However, where the market prices are not available, even the fair value is estimated using a prescribed valuation technique so as to determine the value of the equity instruments on the measurement date. Where the terms and conditions on an option or share grant are modified, Ind AS 102 requires that the entity should recognize as a minimum, the services received measured at the grant date of fair value of the equity instruments granted. Any modifications, cancellations or settlement of a grant of an equity instruments to modify would be recognized in the books of accounts if and only if it is beneficial to the employee which ultimately results in recognizing the expense of the employer.
- Cash-settled share-based payment transactions: Here the entity acquires goods or services by incurring liabilities to the supplier of those goods or services for amounts that are based on the price or value of the entity’s shares or other equity instruments of the entity.
The goods or services acquired is measured based on the fair value of the liability incurred. Only the liability is settled, the fair value of such liability should be remeasured at the end of each reporting period by recognizing the fair value changes in the profit and loss account. The fair value should also be recognized and accounted for at the date of settlement.
- Choice of settlement: This covers transactions in which the entity receives or acquires goods or services and the terms of the arrangement provide either the entity or the supplier of those goods or services with a choice of whether the entity settles the transaction in cash or by issuing equity instruments.
In this case, the entity is required to account for such transaction as a cash settled share based payment transaction to the extent that the entity has incurred a liability to settle in cash. The same will be accounted for as an equity settled share based payment transaction to the extent that no such liability has been incurred.
Ind AS 102 prescribes various disclosure requirements to enable users of financial statements to understand:
- the nature and extent of share-based payment arrangements that existed during the period;
- how the fair value of the goods or services received, or the fair value of the equity instruments granted, during the period was determined;
the effect of share-based payment transactions on the entity’s profit or loss for the period and on its financial position.
Kindle e-book on share based payment transactions as per Ind AS 102 (IFRS 2) is just published. The ebook is available at Amazon Kindle Store for a price of Rs.399/-.
However, the book will be available as a free download only on 16th September, 2016 for a period of 24 hours. All professional colleagues are requested to download the book and are also requested to give your esteemed feedback on the same by way of writing a review in the Amazon Kindle e-book store. The link for downloading the book is given below:
It is customary to compensate employees either through stock options or equity instruments, especially for start up entities. Also an entity may also settle a liability while purchasing goods or services through its own equity instruments. If an entity enters into a share based payment transaction then such an entity has to recognise the share based payment transactions in its financial statements including transactions with employees or other parties to be settled in cash, other assets or equity instruments of the entity. There are no exceptions to this requirement other than for transactions to which other Ind ASs apply. Ind AS 102 mainly covers equity settled share based payment transactions and transactions that contain a choice of settlement either in cash or by issue of equity instruments.
This publication covers the key features of share based payment transactions, the accounting treatment for all types of share based payment transactions and disclosures that are mandatorily required to be given. The book includes extracts from published annual reports of several listed companies following IFRS 2 which can be used as very valuable precedence for accounting and reporting as per Ind AS 102.
This book includes several illustrations and worked out examples including practical case studies. At the end of the book, several objective type questions and problems/case studies are given, the answers of which are provided in the website http://learnaccountingstandards.com/
- The exemption arises because many first-time adopters may not have all the information necessary to apply Ind AS 103 to past business combinations
- A first-time adopter has the following options:
- apply Ind AS 103 retrospectively to all past business combinations.
- apply Ind AS 103 to restate a past business combination and any later business combinations.
- not apply Ind AS 103 to any past business combinations.
Exemption only for ‘business combinations’
- Exemption applicable only to transactions that meet Ind AS 103’s definition of a business combination.
- The exemption is not applicable to acquisitions of assets including entities holding one or more assets that do not constitute a business
- Business: An integrated set of activities and assets that generally consists of a) inputs, b) processes and c) the ability to create outputs; rebuttable presumption that a group of assets in which goodwill is present is a business [Ind AS 103]
Asset purchase that is not a business
- Prior to its transition date, a first-time adopter ABC acquired a group of assets.
- Under previous GAAP, this transaction was treated as a business combination.
- However as per Ind ASs this transaction should be treated as an asset purchase and not a business combination.
- Therefore, the exemption is not available to ABC in relation to this asset purchase.
ABC restates the asset purchase, and any goodwill recognised under previous GAAP is removed in the opening statement of financial position.
However, there may be other exemptions available to ABC in relation to the asset purchase, such as treating fair value as deemed cost.
Approach when exemption is availed
These requirements deal with the following:
- classification of the business combination as an acquisition by the legal acquirer, a reverse acquisition by the legal acquiree, or uniting of interests.
- the assets and liabilities acquired or assumed in the past business combination that are included in/excluded from the opening balance sheet.
- measurement in the opening balance sheet of assets and liabilities acquired or assumed in the past business combination.
- goodwill recognised in the past business combination.
Classification of business combination
- Same classification of the business combination as per previous GAAP is retained.
- The first time adopter does not restate the accounting using the purchase method.
- The requirements for recognising and measuring assets and liabilities are still applicable for assets acquired in business combination.
Recognition in the opening balance sheet
Effect of availing the exemption does not mean all assets and liabilities as per previous GAAP are included in the balance sheet as it is. Some items recognised under previous GAAP is derecognised under Ind ASs and some items not recognised under previous GAAP is recognised under Ind ASs.
Items recognised under previous GAAP
The first-time adopter continues to recognise assets such as PPE and receivables that would typically have been recognised under previous GAAP and also qualify for recognition under Ind ASs.
The first-time adopter should derecognise from its opening balance sheet any item that was recognised under previous GAAP that does not qualify for recognition under Ind ASs.
Compound Financial Liabilities
As per Ind AS 32, an entity is required to split compound financial liability and equity components at inception. An entity need not reassess the equity and liability components subsequently after the first assessment. Ind AS 101 provides an exception when the liability component no longer exists, retrospective application of Ind AS 32 may not be necessary as splitting would amount to merely separating two portions of equity and really does not serve any useful purpose. The first portion is in retained earnings and represents the cumulative interest accreted on the liability component. The other portion represents the original equity component. Hence the first time adopters need not separate these two portions if the liability component is no longer outstanding at the date of transition.
Designation of previously recognised Financial Liability
A financial liability is normally designated as measured at amortized cost. However, a financial liability can be designated as a financial liability at Fair Value through Profit or Loss when it meets certain criteria i.e. it substantially eliminates or reduces amounting mismatch and such designation is made at the inception of the liability without any undue delay. In spite of this requirement as per Ind AS 101, an entity is permitted to designate any financial liability as at Fair Value through Profit or Loss at the date of transition provided the liability meets the criteria mentioned above.
Designation of previously recognised Financial Asset
An entity is allowed to designate a Financial Asset as measured at Fair Value through Profit or Loss in accordance with the facts and circumstances that exist on initial recognition. The designation is possible only if it reduces the accounting mismatch and done without any undue delay. However as per Ind AS 101, an entity may designate based on the facts and circumstances that exist at the date of transition to Ind AS.
Designation of previously recognised Equity Instrument
An entity may designate an investment in equity investment either at Fair Value through Profit or Loss or at Fair Value through other comprehensive income depending upon the facts and circumstance that exist at the date of inception of such equity investment. The entity is allowed to designate an investment in equity instrument as Fair Value through Other Comprehensive Income provided it is not held for trading purposes and such designation is made without undue delay. In spite of this requirement, an entity is permitted as per Ind AS 101 to designate an Equity Instrument as Fair Value through Other Comprehensive Income on the basis of the facts and circumstances that exist at the date of transition to Ind AS.
Fair Value of Financial Assets / Financial Liabilities at initial recognition
An entity may apply the requirements relating to fair value of financial assets and financial liabilities at initial recognition prospectively to transactions entered into on or after the date of transition to Ind ASs.
Extinguishing Financial Liabilities with Equity Instruments
A first-time adopter may apply the Appendix D of Ind AS 109 Extinguishing Financial Liabilities with Equity Instruments from the date of transition to Ind ASs.
Designation of contracts to buy or sell a non-financial item
Certain contracts to buy or sell a non-financial item can be designated at inception as measured at fair value through profit or loss.
Despite this requirement an entity is permitted to designate, at the date of transition to Ind ASs, contracts that already exist on that date as measured at fair value through profit or loss but only if they meet the other requirements for doing so and the entity designates all similar contracts.
Four ways of settlement
- Terms permit either party to settle in net in cash.
- Contract is readily convertible to cash.
- Terms not explicit but net settlement is the practice.
- Practice is to take delivery but sold within a short period with profit motive.
- All the four types of contracts are within the scope of Ind AS 109.
- (c) and (d) is out of scope if usually meant to take/give delivery of non-financial asset.
- May now be included within the scope of Ind AS 109 subject to certain conditions i.e., irrevocable and reduces accounting mismatch.
- Written options is always within the scope even if it results in taking or giving delivery of non-financial asset.
An entity is required to take into account the following while considering the accounting policies as per Ind AS 101:
- Use the same accounting policies in its opening Ind AS Balance Sheet and throughout all periods presented in its first Ind AS financial statements
- Accounting policies to comply with each Ind AS effective at the end of its first Ind AS reporting period
- May apply a new Ind AS that is not yet mandatory if that Ind AS permits early application
- Not apply different versions of Ind ASs that were effective at earlier dates
Changes in accounting policies
- Ind AS 8 does not apply to the changes in accounting policies an entity makes when it adopts Ind ASs or to changes in those policies until after it presents its first Ind AS financial statements.
- Ind AS 8’s requirements about changes in accounting policies do not apply in an entity’s first Ind AS financial statements.
Accounting policies changes during the year
If an entity
- changes its accounting policies during the period covered by its first Ind AS financial statements or
- changes its use of the exemptions contained in this Ind AS
it shall explain the changes between its first Ind AS interim financial report and its first Ind AS financial statements, and it shall update the reconciliations.
Two categories of adjustments – Mandatory & Optional
Two categories of adjustments to the principle that an entity’s opening Ind AS Balance Sheet shall comply with each Ind AS
a) Prohibit retrospective application of some aspects of other Ind ASs [Mandatory exceptions]
- derecognition of financial assets and financial liabilities
- hedge accounting
- non-controlling interests
- classification and measurement of financial assets
- impairment of financial assets
- embedded derivatives and
- government loans
b) Grant exemptions from some requirements of other Ind ASs [Optional exemptions]
- share-based payment transactions
- insurance contracts
- deemed cost
- cumulative translation differences
- investments in subsidiaries, joint ventures and associates
- assets and liabilities of subsidiaries, associates and joint ventures
- compound financial instruments
- designation of previously recognised financial instruments
- fair value measurement of financial assets or financial liabilities at initial recognition
- decommissioning liabilities included in the cost of property, plant and equipment
- financial assets or intangible assets accounted for in accordance with Appendix C to Ind AS 115 Service Concession Arrangements
- borrowing costs
- extinguishing financial liabilities with equity instruments
- severe hyperinflation
- joint arrangements
- stripping costs in the production phase of a surface mine
- designation of contracts to buy or sell a non-financial item
- revenue from contracts with customers and
- non-current assets held for sale and discontinued operations
In its opening Ind AS Balance Sheet, an entity shall
- recognise all assets and liabilities whose recognition is required by Ind ASs
- derecognise items as assets or liabilities if Ind ASs do not permit such recognition
- reclassify items that it recognised as per previous GAAP as one type of asset, liability or component of equity, but are a different type of asset, liability or component of equity as per Ind ASs
- remeasure all recognised assets and liabilities as per Ind ASs
- Embedded derivatives not identified so far
- All derivatives at fair value
- Impairment loss allowance on financial guarantee contracts
- Deferred costs that do not meet the Ind AS definition of an asset.
- Restructuring provisions where there is no legal or constructive obligation.
- General provisions or reserves where there is no legal or constructive obligation.
- Receivables for revenue where the risks and rewards of ownership have not been transferred to the buyer or the service has not been provided.
- Deferred tax assets where it is not probable there will be sufficient profits in future periods to recover the asset.
- Amounts classified as equity under the previous GAAP that would meet the definition of a liability in Ind AS.
- Assets and liabilities shown net under previous GAAP that cannot be offset under Ind AS.
- Assets and liabilities that are not classified into those amounts that are current and those that are non-current in accordance with Ind AS.
- Investments that must be classified in accordance with Ind AS 109.
- Deferred taxes in accordance with Ind AS 12.
- Provisions in accordance with Ind AS 37.
- Effect of business combinations.
- Changes in accounting policies requiring retrospective adjustments.
- Accounting errors requiring adjustment in earlier years.
- Use of functional currency which is different than the recording currency.
- Deferred Tax impact on consolidation.
- Fair Value measurements.
- PPE and intangible assets where the depreciation or amortisation period under previous GAAP does not comply with Ind AS.
- Capitalisation of borrowing costs and exchange differences.
- Intangible assets having indefinite useful life.
- Financial assets and liabilities that are measured in accordance with the requirements of Ind AS 109.
- The accounting policies that an entity uses in its opening Ind AS Balance Sheet may differ from those that it used for the same date using its previous GAAP.
- The resulting adjustments arise from events and transactions before the date of transition to Ind ASs.
- Those adjustments are recognised directly in retained earnings at the date of transition to Ind ASs.
When an entity following accounting standards (AS) as per iGAAP gets transitioned into Ind AS, there would be some challenges faced by the entity. The initial issue is to have a proper starting point for preparation of the accounts as per Ind AS. The entity that wants to adopt Ind AS, should prepare an opening balance sheet that is consistent with Ind ASs.
The objective of Ind AS 101 is to ensure that the first Ind AS financial statements and interim financial reports contain high quality information and is transparent for the users and comparable over all the periods that are presented.
The standard also provides guidance to prepare the opening balance sheet so as to get a suitable starting point for accounting as per Indian Accounting Standards (Ind ASs). In all of these, the objective is that the high quality information should be generated at a cost that does not exceed the benefits.
Overview of Ind AS 101
- IFRS 1 defines previous GAAP as the basis of accounting that a first-time adopter used immediately before adopting IFRS.
- However, Ind AS 101 defines previous GAAP as the basis of accounting that a first-time adopter used for its reporting requirement in India immediately before adopting Ind AS.
- The change makes it mandatory for Indian entities to consider the financial statements prepared in accordance with existing notified Indian accounting standards as was applicable to them as previous GAAP when it transitions to Ind ASs.
Ind AS 101 applies to entities during its first Ind AS financial statements and also during each interim financial report under Ind AS 101.
- Ind AS 101 is applicable for the first time adoption of Ind AS only and does not apply to changes in accounting policies made by an entity that already applies Ind AS.
- Ind AS 101 is different from transition adjustment that is provided in each standard. When a new accounting standard is introduced, the standard provides as to how the issues relating to transitioning the standards from existing GAAP to
- Ind AS is mentioned in the respective standards. The transition adjustments will not be applicable to entities in India, as the entire set of 39 accounting standards are applicable with effect from the date on which it is set to be mandatorily applicable by the Ministry of Corporate Affairs.
- When an Ind AS is applicable, ipso facto it is applicable with effect from the date of inception of the entity and not from the date on which the standard becomes mandatorily applicable. In order to avoid the hardship caused to the entities
- while applying the same on a retrospective basis, every accounting standard contains a section known as ‘transition adjustments’ which specifies the way in which the entity can avail certain exceptions and exemptions from the rigors of implementing the standard on a retrospective basis.
The site Learn Indian Accounting Standards offers several courses on Indian Accounting Standards (Ind ASs). Each course typically covers one Indian Accounting Standard. Certain complex Ind ASs are covered by more than one course. For every detailed course, an overview course is also available. Overview courses are generally free.
Browse through the list of courses offered. If you are interested in pursuing any course, then first create an account by providing your name, email id and other particulars asked for. You will then receive a confirmation mail on that email id. Click on the link that is mentioned in the email so as to get your account activated. You will also receive mails from us informing you of any new course that are added to this website.Learn Ind AS
Each course consists of several lessons. Each lesson explains several key concepts. After explaining each concept, a multiple choice question is given to the student. The student can proceed to the next concept in the same lesson, only if the correct answer is selected. Or else, the student will have to go through the concepts again and take the multiple choice question once again. This ensures that the student does not complete the lesson without understanding all the concepts that are taught by the teacher. Only after completion of a lesson the student will be able to proceed to the subsequent lesson. After completing successfully all the lessons, a final quiz will be administered to the student containing questions from all the lessons covered in the course.
Some courses include assignments which the student is expected to complete and submit online to the teacher. The student has to secure the stipulated percentage overall in order to complete a particular course. There are also other learning activities such as ‘match the following’, ‘fill-up the blanks’’, ‘crossword puzzles’ and so on, which may or may not be included for evaluating the marks obtained by the student.
After obtaining the minimum percentage required for the course completion, the student can download and print the course completion certificate.
R. Venkata Subramani
ECL / CECL
IFRS / US GAAP / Ind AS
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