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Is there any difference between the accounting treatment for equity instruments and debt instruments classified as Fair Value Through Other Comprehensive Income (FVOCI)? The answer is ‘yes’. Frequently participants in my class ask me the underlying reason for such a difference in the accounting treatment when both these types of financial assets are classified as FVOCI.
The classification criteria for equity instruments and debt instruments are entirely different. Equity instruments can be classified as either Fair Value Through Profit or Loss (FVTPL) or FVOCI. The investor can exercise the choice without undue delay, provided the equity instruments are not meant for trading purposes. There are no other criteria. The important point to note is that the classification is based on the choice exercised by the investor and is not governed by any criteria specified in the standard other than that it should not be meant for trading purposes. The choice however is irrevocable. The unrealised profits or losses from equity instruments that are classified as FVOCI are presented in the other comprehensive income.
Let us examine the reason as to why someone would want to classify an investment in equity investments as FVOCI asset. The predominant reason is to ensure that the fluctuations in the fair value of the equity investments do not affect the profit and loss account. Nevertheless, the unrealised profit on such investments belong to the stakeholders and hence should be reflected as part of the net worth of the shareholders. That is why the unrealised profits are taken to the other comprehensive income reflecting the same as reserves.
If the predominant reason for such a classification is to avoid the volatility in the profit and loss account, then the very purpose of granting such a choice to the investor would be defeated if the requirements where to insist on such profits or losses to be considered in the profit and loss account when such investments are liquidated. In other words, it would be illogical to say that the unrealized profits should be considered in the other comprehensive income, but the realized profits should be considered in profit and loss account. And hence there is no requirement for the realized profits to be routed through the profit and loss account. This is the reason as to why the unrealised profits or losses that are parked in the other comprehensive income is not ploughed back to the profit and loss account even after such investments are liquidated by the investor.
For a debt instrument, the classification into FVOCI is predominantly driven by the set of criteria that are specified in the standard. There is no choice that is granted to the investor as in the case of equity investments.
A debt instrument would be classified as Amortized cost asset if it satisfies SPPI test. Further the Business Model Objective should be to hold the asset for collecting contractual cash flows only. An entity should assess whether contractual cash flows are Solely Payments of Principal and Interest (SPPI) on the principal amount outstanding for the currency in which the financial asset is denominated.
If the SPPI test is passed and the business model objective is to collect contractual cash flows and also to sell the same, then the classification is FVOCI. Debt instruments classified as FVOCI, are likely to be sold at any time by the investor. Since it can be sold at any time, the balance sheet should show the fair value of such investment in debt security. The unrealized profit or loss belongs to the shareholders of the company and hence should be reflected in the reserves of the company and more specifically the other comprehensive income.
However, since the debt instrument may or may not be sold, the realisation of profits/loss on such investment is not assured till the time the liquidation happens. And when such a liquidation event happens then the profits/losses are crystalized and should be shown in the profit and loss account.
This is the reason why the unrealized profits/losses are taken to the other comprehensive income initially and when the liquidation happens, the same is ploughed back to the profit and loss account.
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.
- 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.
The estimates considered as per Ind ASs at the date of transition should be consistent with the estimates made for the same date as per the previous GAAP. While preparing the financial statements, an entity is required to make estimates depending upon the requirements of the concerned accounting standards wherever such estimates are required to be made. When estimates are required to be made as per Ind AS, it should be ensured that such estimates are consistent with the estimates made as per the previous GAAP.
Receipt of additional information
When the entity receives information after the date of transition to Ind AS about estimates that it had made under previous GAAP, the receipt of that information should be treated in the same way as non-adjusting even after the reporting period as specified in Ind ASs with events after the reporting period. In other words, the impact of the new information received should be reflected in the current year accounts and should not be adjusted against the opening balance sheet.
- Date of transition: 1 April 2015; new information received on 15 July 2015 requires the revision of an estimate made as per previous GAAP at 31 March 2015.
- New information in not reflected in its opening Ind AS Balance Sheet.
- Unless the estimates need adjustment for any differences in accounting policies or there is objective evidence that the estimates were in error.
- The new information reflected in profit or loss or OCI for the year ended 31 March 2016.
Estimates not required as per previous GAAP.
- Estimates may be needed as per Ind ASs at the date of transition that were not required at that date under previous GAAP
- Those estimates as per Ind ASs shall reflect conditions that existed at the date of transition to Ind ASs
- Estimates at the date of transition to Ind ASs of market prices, interest rates or foreign exchange rates shall reflect market conditions at that date
Estimates for comparative period
- Estimates also apply to a comparative period presented in an entity’s first Ind AS financial statements.
- References to the date of transition to Ind ASs are replaced by references to the end of that comparative period.
Estimates – Implementation guidance
- Ind AS 10 is applied in determining whether:
- its opening Ind AS statement of financial position reflects an event that occurred after the date of transition and
- comparative amounts in its first Ind AS financial statements reflect an event that occurred after the end of that comparative period.
- Should determine whether changes in estimates are adjusting or non-adjusting events at the date of transition.
Estimates – Implementation – Case 1
- Previous GAAP required estimates of similar items for the date of transition to Ind ASs.
- Accounting policy is consistent with Ind ASs.
- The estimates as per Ind ASs are consistent with estimates made for that date as per previous GAAP.
- There is no objective evidence that those estimates were in error.
- The entity reports later revisions to those estimates as non-adjusting events of the period in which it makes the revisions.
Estimates – Implementation guidance
Estimates – Implementation – Case 2
- Previous GAAP required estimates of similar items for the date of transition to Ind ASs.
- Accounting policies are not consistent with its accounting policies as per Ind ASs.
- Estimates as per Ind ASs need to be consistent with the estimates as per previous GAAP for that date after adjusting for the difference in accounting policies.
- The opening Ind AS statement of financial position reflects those adjustments for the difference in accounting policies.
- As in case 1, later revisions to those estimates are non-adjusting events reported as events of the period in which it makes the revisions.
- Example: Previous GAAP may have required an entity to recognise and measure provisions on a basis consistent with Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets.
- The previous GAAP measurement was on an undiscounted basis.
- The entity uses the estimates as per previous GAAP as inputs but discounts the measurement required by Ind AS 37.
Estimates – Case study
Entity A’s first Ind AS financial statements are for a period that ends on 31 March 2015 and include comparative information for one year. Entity A –
- Made estimates of accrued expenses and provisions at those dates.
- Did not recognise a provision for a court case arising from events that occurred in September 2014. When the court case was concluded on 30 June 2015, entity A was required to pay Rs.1,00,000 and paid this on 10 July 2015.
- Accounted on a cash basis for a defined benefit pension plan.
- The estimates are as per previous GAAP for accrued expenses.
- Provisions at 31 March 2013 and 2014 were made on a basis consistent with its accounting policies as per Ind ASs.
- Some of the accruals and provisions turned out to be overestimates and others to be underestimates.
- However, the estimates were reasonable and no error had occurred.
- How will the above 3 items be dealt with while preparing the accounts as per Ind AS.
Estimates – Case study – Solution
- In its opening Ind AS Balance Sheet at 1 Apr 2014 and in its comparative statement of financial position at 31 Mar 2013, entity A:
1.Estimates for accrued expenses & provisions:
- Accounting for those overestimates and underestimates involves routine adjustment of estimates as per Ind AS 8.
- Previous estimates for accrued expenses and provisions not adjusted
2.Provision for court case:
Assumption 1 – Previous GAAP was consistent with Ind AS 37.
- Entity A concluded that the recognition criteria were not met.
- In this case, Entity A’s assumptions as per Ind ASs are consistent with its assumptions as per previous GAAP.
- Entity A does not recognise a provision at 31 Mar 2014.
Assumption 2 – Previous GAAP was not consistent with Ind AS 37.
- Estimates are made as per Ind AS 37.
- As per Ind AS 37, determine whether an obligation exists at the end of the reporting period by taking account of all available evidence, including any additional evidence provided by events after the reporting period.
- As per Ind AS 10 the resolution of a court case after the reporting period is an adjusting event after the reporting period if it confirms that the entity had a present obligation at that date.
- The resolution of the court case confirms that entity A had a liability in September 2013 when the events occurred that gave rise to the court case.
- So Entity A recognises a provision at 31 Mar 20X4.
- Entity A measures that provision by discounting Rs.1,00,000 paid on 10 July 2015 to its present value, using a discount rate that complies with Ind AS 37 and reflects market conditions at 31 Mar 2014.
- Accounting for pension plan:
- Makes estimates (in the form of actuarial assumptions) necessary to account for the pension plan as per Ind AS 19 Employee Benefits.
- Entity A’s actuarial assumptions at 1 January 20X4 and 31 December 20X4 do not reflect conditions that arose after those dates.
For example, entity A’s:
- discount rates at 1 January 20X4 and 31 December 20X4 for the pension plan and for provisions reflect market conditions at those dates; and
- actuarial assumptions at 1 January 20X4 and 31 December 20X4 about future employee turnover rates do not reflect conditions that arose after those dates — such as a significant increase in estimated employee turnover rates as a result of a curtailment of the pension plan in 20X5.
- The difference is adjusted in the opening balance sheet.
Estimates – do not override other Ind ASs
- Estimates as per Ind AS 101 do not override requirements in other Ind ASs that base classifications or measurements on circumstances existing at a particular date.
- the distinction between finance leases and operating leases
- the restrictions in Ind AS 38 Intangible Assets that prohibit capitalisation of expenditure on an internally generated intangible asset if the asset did not qualify for recognition when the expenditure was incurred
- the distinction between financial liabilities and equity instruments
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.
First Ind AS financial statements are the first and only financial statements in which the entity adopts Ind ASs as per the Ind ASs notified in the Companies Act 2013 and makes an explicit and unreserved statement in those financial statements of compliance with Ind ASs.
It should be noted that the entire set of standards notified by the Ministry of Corporate Affairs should be complied with by the entity without any exception for any standard.
Opening Ind AS balance sheet:
An entity should prepare opening Ind AS balance sheet at the date of transition to Ind AS. This becomes the starting point for its accounting as per the Ind ASs.
Roadmap – Phase I
- 1st April 2015 or thereafter: Voluntary Basis for all companies
- 1st April 2016: Mandatory Basis
- Companies listed on Stock Exchange having net worth equal to or more than Rs.500 Crore
- Unlisted Companies having net worth equal to more than Rs.500 Crore
- Parent, Subsidiary, Associate and Joint Venture of above
Roadmap – Phase II
Phase II 1st April 2017 (Mandatory Basis)
1st April 2017 (Mandatory Basis)
- Parent, Subsidiary, Associate and JV of above
- Unlisted Companies having net worth equal to or more than Rs.250 Crore up to Rs.500 Crore
- All Listed Companies not covered in Phase I
- Other companies will continue to follow existing ASRoadmap for banks, NBFCs and insurance companies still to be decided
- Banks, Insurance Companies, MBFC’s, RRB’s not yet covered in Phase I and Phase II. Roadmap is notified subsequently
Requirements of an entity applying Ind AS for the first time
- The end of entity A’s first Ind AS reporting period is 31 March 2017 (For companies covered under Phase 1).
- Entity A decides to present comparative information in those financial statements for one year only.
- Its date of transition to Ind ASs is the beginning of business on 1 April 2015 (or, equivalently, close of business on 31 March 2015).
- Entity A presented financial statements in accordance with its AS (previous GAAP) annually to 31 March each March 2016.year up to, and including, 31
Entity A is required to apply the Ind ASs effective for periods ending on 31 March 2017 in preparing & presenting:
1. Its opening Ind AS balance sheet at 1 April 2015.
2. Balance sheet for 31 March 2017 (comparative for YE 31 March 2016).
3. Statement of profit and loss.
4. Statement of changes in equity.
5. Statement of cash flows for the year to 31 March 2017 (comparative for YE 31 March 2016).
6. Disclosures (including comparative information for YE 31 March 2016).
First Ind AS financial statements
An entity’s first Ind AS financial statements shall include at least
1. Three Balance Sheets
2. Two Statements of profit and loss
3. Two Statements of cash flows and
4. Two Statements of changes in equity and
5. Related notes
6. Includes comparative information for all statements presented
Non Ind AS info and historical summaries
- Historical summaries are sometimes presented for prior periods before the first period for which they present full comparative information in accordance with Ind ASs.
- Such summaries need not comply with the recognition and measurement requirements of Ind ASs.
Non-Ind AS comparative information
- Some entities present comparative information in accordance with previous GAAP as well as the comparative information required by Ind AS 1.
- In any financial statements containing historical summaries or comparative info as per previous GAAP, an entity shall:
- label the previous GAAP information prominently as not being prepared as per Ind ASs and
- disclose the nature of the main adjustments that would make it comply with Ind ASs.
- An entity need not quantify those adjustments.
Explanation & reconciliations
- An entity shall explain how the transition from previous GAAP to Ind ASs affected its reported Balance sheet, financial performance and cash flows.
- An entity’s first Ind AS financial statements shall include:
a) reconciliations of its equity as per previous GAAP to its equity as per Ind ASs for both of the following dates:
i. the date of transition to Ind ASs.
ii. the end of the latest period presented in the entity’s most recent annual financial statements in accordance with previous GAAP.
- A reconciliation to its total comprehensive income as per Ind ASs for the latest period in the entity’s most recent annual financial statements.
- The starting point for that reconciliation shall be total comprehensive income as per previous GAAP for the same period or, if an entity did not report such a total, profit or loss under previous GAAP.
- The reconciliations shall give sufficient detail about material adjustments to the Balance Sheet and Statement of profit and loss.
- If an entity presented a Statement of cash flows under its previous GAAP, it shall also explain the material adjustments to the Statement of cash flows.
- If an entity becomes aware of errors made under previous GAAP, it shall distinguish the correction of those errors from changes in accounting policies.
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.
Training on financial instruments
Training on financial instruments and accounting standards for financial instruments are important for all officers of the bank. As an endeavour to enable the banks in India to adopt the complex Indian Accounting Standards, especially accounting standards for financial instruments, we are happy to announce training program for the officers of the banks. The training is done as a workshop model with extensive hands on problems and solutions from real life scenarios. The interactive training program assumes no prior knowledge of accounting for the participants. As the entire subject may be relatively new to several participants, training is imparted from the basics. Training on the new set of standards is imperative, as this will enable the officers to understand the impact of convergence to Ind AS. Also, it will enable them to evaluate Ind AS based financial statements of their customers which will effectively improve the process of credit appraisal before granting such facilities to them. Needless to say that this knowledge will be useful in their responsibility of monitoring the financial performance of their customers on a periodical basis.
Mandatory application of Ind AS
The Ministry of Corporate Affairs on 18th January 2016 announced the road map for implementation of Ind AS for scheduled commercial banks, insurance companies and non-banking financial companies (NBFCs). They are required to prepare the Ind AS based financial statements beginning from 1st April 2018 onwards. It should be noted that Banks are prohibited from adopting Ind AS voluntarily from an earlier date other than the dates mentioned above.
Subsequently, in a notification issued by the Reserve Bank of India (RBI) on 11th February, 2016, Banks are required to assess the impact of implementing Ind AS and are required to submit quarterly progress reports to their respective boards. Banks are also required to be in preparedness to submit proforma Ind AS financial statements to the RBI from the half year ended September 30, 2016.
As per the said notification, banks are also required to disclose in their annual reports the strategy for implementing Ind AS and the progress made in such implementation from the financial year 2016-17 until the implementation process is completed.
Pursuant to the above mentioned regulatory requirements, banks are mandatorily required to comply with Indian Accounting Standards (Ind AS) for financial statements beginning from 1st April 2018 onwards with comparatives for the periods ending 31st March 2018 or thereafter. Ind AS would be applicable to both standalone financial statements and consolidated financial statements.
Consequences of introducing Ind AS
The requirement by the RBI ensuring Ind AS compliance by banks, insurance companies and NBFCs casts enormous amounts of responsibility on their part. While the RBI recommendation is a welcome development in the backdrop of the global perspective, it requires significant learning at various levels for the officers, managers and other top officials of every bank, so that they understand the importance of the new regulatory requirements thrust on them.
Financial instruments as per Ind AS
Financial instruments which probably are the most complex topic in the entire literature of accounting standards are one of the key areas from the perspective of a bank. Most line items in a balance sheet of a bank are invariably financial instruments and hence it is extremely important to understand the requirements of financial instruments accounting standards. Banks may not have the recourse to any precedence as the financial instruments standard viz. IFRS 9 is applicable for accounting periods beginning on or after 1st January 2018 onwards globally wherever IFRS is adopted. It is pertinent to note that IFRS 9 underwent a major revision in several of the key conceptual areas viz., recognition, classification, derecognition and impairment amongst other concepts. Hedge accounting underwent a major overhaul which is now part of the new IFRS 9 that is adopted in India and converged as Ind AS 109.
The training program would be customised based on the bank’s requirements.
The suggested program is for a three day course and a model session plan is given below which can be modified depending upon your specific requirements.
We have expert trainers who have hands on experience for more than 30 years in handling accounting standards. Depending upon the Bank’s requirement additional topics can be covered by respective trainers who have specialised knowledge on the subject selected.
Model session plan
Three day training course on Financial Instruments as per Ind AS requirements
10 am to 1 pm
|Basic concepts of derivative instruments
– What are derivatives and why we need them
– Meaning of Forward, Futures and options
– Pricing futures
– Hedging, speculation & gambling
– Option basics: ITM, ATM, OTM, Exercise, Lapse
2 pm to 5 pm
|Advanced concepts on derivative instruments
– Greeks in options pricing
– Black-Scholes model / Binomial model
– Put-call parity
Features of equity and equity derivatives
– Exercise with practical problems
Features of Interest Rate Derivatives
– Interest Rate Swaps
– Interest Rate CAPs / Floors
– Interest Rate Collars / Reverse Collars
– Cross Currency Swaps
Fixed Income Securities
Credit Default Swaps
Total Return Swaps
10 am to 1 pm
|Accounting Standard Ind AS 32
– Financial asset and financial liabilities
– Compound instruments
– Liability Vs. Equity
2 pm to 5 pm
|Accounting Standard Ind AS 109
– Recognition, measurement, subsequent measurement
– Amortized cost
– Classification, reclassification & derecognition
– Embedded derivatives
Ind AS 107 Disclosures
– Live examples from published accounts
Report of the working group on implementation of Ind AS by Banks
– Discussion of the report and practical implications thereof
10 am to 11.15 pm
|Accounting for financial instruments
– Interest rate derivatives
– Fixed income securities
Effect of changes in foreign exchange rates Ind AS 21
– Impact on financial instruments / hedge accounting
11.30 am to 1 pm
– Fair Value Hedge
– Cash Flow Hedge
2 pm to 5 pm
– Case studies on Hedge Accounting
Financial instruments nuances in First time adoption
R. Venkata Subramani
ECL / CECL
IFRS / US GAAP / Ind AS
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