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International Financial Reporting

Standards (IFRS) Overview

Sambhasiva Rao Venkata Cheedella


IFRS Certified, Senior Consultant, Oracle.
Purpose

This document is regarding International Financial


Reporting Standards (IFRS), implication on regular
business transactions as per IFRS recommendations. Few
examples, case studies on IFRS. It is also one good
resource wishing to make use of accounts under IFRS.
Implementation pre-requisites on ERP (Oracle
Applications) to map according to IFRS.

IFRS Overview 2
Abbreviations
CESR Committee Of European Securities Regulators
EC European Commission
EEA European Commission Area (EU 27 + 3 countries)
EFRAG European Financial Reporting Advisory Group
EITF Emerging Issues Task Force (Of FASB)
EU European Union (27 countries)
FASB Financial Accounting Standards Board (US)
FEE Federation Of European Accountants
GAAP Generally Accepted Accounting Principles
IAS International Accounting Standards
IASB International Accounting Standards Board

IFRS Overview 3
IASC International Accounting Standards committee
(Predecessor to the IASB)
IASCF IASC Foundation (parent body of the IASB)
(From 1 March 2010 named as IFRS Foundation)
IFRIC International Financial Reporting Interpretations
Committee Of the IASB, and Interpretations issued by
that committee (from 1 March 2010 named as IFRS
Interpretations Committee)
IFRS International Financial Reporting Standards
IFRSF IFRS Foundation
NCI Non-Controlling interest (previously ‘minority’
interests)

IFRS Overview 4
SAC Standards Advisory Council (advisory to the IASB)
(from 1 March 2010 named as IFRS advisory council)

SEC Securities and Exchange Commission (US)

SIC Standing Interpretations Committee Of the IASC, and


Interpretations issued by that committee

IOSCO International Organization Of Securities Commissions

IFRS Overview 5
IASB and IFRS

IFRS Overview 6
IFRS Overview 7
Members Of IASB

2 Members in IASC from India out of 22.


Mr. Mohandas, Mr.Prabhakar Kalavacherla.
Kalavacherla was previously a partner at KPMG
LLP.

Sri David Tweedie, Chairman became the first


Chairman on 1 January 2001, having served from
1999-2000 as the first full time Chairman of UK
Accounting Standards Board. Term expires 30 June
2011.

IFRS Overview 8
IFRS Overview 9
IASB and its Objectives
International Accounting Standards Board (IASB)
-Independent, privately funded accounting standard setter based
in London.
- Responsibility to develop International Financial Reporting
Standards (IFRS)

The Objectives are:


-To develop a single set of accounting standards
(High quality, understandable, global and enforceable)
-To promote their use and rigorous application
- To work actively with national standard setters
(To bring about convergence of national accounting standards and IFRSs)

IFRS Overview 10
History
1973 IASC formed
1998 Core standards completed
2000 SEC review of core standards; concept release published Feb 2000
IASC approves new constitution
IOSCO review finalized
EU proposes that all EU listed companies (some 6,700) should apply IAS
by 2005
2001 IASB assumes accounting standard setting responsibilities from IASC
2002 EU’s decision to adopt IFRS from 1 Jan 2005
2005 Nearly 7,000 listed business in 25 countries switch to IFRS
2007 SEC accepts fillings from Foreign Private Issues (FPI) without reconciliation
to US GAAP
2010 US allows certain large filers to file IFRS accounts
2014? US converged for listed companies – decision to be taken in 2011

IFRS Overview 11
International Financial Reporting Interpretations
Committee (IFRIC)

Interpretation of contentious accounting issues

- Expand beyond interpretations of current standards to


include areas where there is no guidance

Interpretations are authoritative guidance

IFRS Overview 12
Timelines of achieving convergence

Phase I – Transaction date April 1, 2011

- NIFTY 50
- SENSEX 30
- Companies whose shares or other securities listed on stock
exchanges outside India
- Companies (listed or unlisted) with net worth in excess of
INR.1000 crores.

IFRS Overview 13
Phase II – Transaction date April 1, 2013

- Companies (listed or unlisted) with net worth in excess of


INR.500 crores but less than INR.1000 crores

Phase III – Transaction date April 1, 2014

- Listed companies with net worth in less than INR.500 crores

IFRS Overview 14
IFRS time lines for banks and insurance companies

Banks

SCB* and UCB# with


SCB* and UCB# with net worth > INR 200 crores
net worth > INR 300 crores but <= INR300 crores

April 1, 2013 April 1, 2014

•Scheduled commercial banks


• urban Co – Operative banks

IFRS Overview 15
Insurance
Companies

April 1, 2012

IFRS Overview 16
NBFCs

1. Part of Nifty 50/ BSE 30


Net worth > INR. 500 Crores
2. Net worth > INR. 1000Cr

April 1, 2013 April 1, 2014

IFRS Overview 17
MCA clarifications on IFRS adoption

Presentation of comparatives
Opening balance sheet prepared at 1 April 2011 and the financial statements for
the year ending 31 March 2012 shall be in accordance with the converged
accounting standards; but comparative period figures (I.e. for the year ending 31
March 2011) shall continue to be reported as per the non-converged accounting
standards.

Option to present comparatives voluntarily (2010-2011)


A company may however, voluntarily choose to report comparative period figures
(I.e. for the year ending 31 March 2011) as per the converged accounting
standards as an additional column in the financial statements. The opening balance
sheet (and therefore transaction adjustments) for companies in such a case shall
be 1 April 2010.

IFRS Overview 18
Voluntary adoption for Phase 2 and 3 companies
- Phase 2 and 3 companies will have an option to early adopt the converged
accounting standards, commencing on or after 1 April 2011
- All other companies can also early adopt IFRS

If, subsequent to the adoption, the company does not meet


the IFRS adoption criteria, should it discontinue IFRS?
- Once a company follows the converged accounting standards it shall continue
preparing financial statements in accordance with the converged accounting
standards. It shall not revert to the non-converged accounting standards.

IFRS Overview 19
Applicability to group companies

- The criteria for determination of various phases shall be based on the stand-alone
financial statements of various entities.
- Companies having subsidiaries, joint ventures and associates or covered in any of
the phases shall prepare consolidated financial statements in accordance with the
converged accounting standards.
- Group companies (subsidiaries, joint ventures or associates) not covered in the
phases similar to the parent company shall continue to prepare financial statements
according to the according to respective phases as applicable.
- However, such companies may voluntarily adopt the converged accounting
standards.

IFRS Overview 20
ICAI Standards – Converged progress (1)
S. Topic Standard Standard Differen Nature of
No under under ces difference
IGAAP IFRS noted
1 Abbreviations
Presentation of Financial
Statements AS 1 IAS 1 No -
2 Inventories AS 2 IAS 2 No -
3 Statement of Cash Flows AS 3 IAS 7 Yes GAAP
4 Events after the reporting IAS 10
period AS 4 IFRIC 17 No -
5 Accounting policies,
changes in accounting
estimates and errors AS 5 IAS 8 No -
6 Construction Contracts AS 7 IAS 11 Transactio
IFRIC 12 nal
& SIC 29 Yes provisions

IFRS Overview 21
ICAI Standards – Converged progress (2)
S. Topic Standard Standard Differen Nature of
No under under ces difference
IGAAP IFRS noted
7 Abbreviations
Revenue recognition AS 9 IAS 18
SIC 31 Yes Terminolo
IFRIC 13, gy &
15 & 18 transaction
al
provisions
8 Property, plant & IAS 16 Yes
Equipment AS 10* IFRIC 1 - same as7-

9 Effect of Change in foreign - same as7-


exchange rates AS 11 IAS 21 Yes
* Includes AS 6
depreciation a/c ing

IFRS Overview 22
ICAI Standards – Converged progress (3)
S. Topic Standard Standard Differ Nature of
No under under ences difference
IGAAP IFRS noted
10 Abbreviations
Government grant AS 12 IAS 20 No -
Terminology,
11 Business Combinations AS 14 IFRS 3 Yes Transactional
provisions
IAS 19
12 Employee benefits AS 15 IFRIC 14 Yes GAAP
13 Borrowing Costs AS 16 IAS 23 Yes GAAP
Transactional
14 Operating Segments AS 17 IFRS 8 Yes provisions
15 Related party disclosures AS 18 IAS 24 Yes GAAP
IAS 17
16 Leases AS 19 IFRIC 4 No -

IFRS Overview 23
ICAI Standards – Converged progress (4)
S. Topic Standard Standard Differ Nature of
No under under ences difference
IGAAP IFRS noted
17 Abbreviations
Earnings per share AS 20 IAS 33 Yes GAAP
18 Consolidated and separate IAS 27 Transactional
financial statements AS 21 SIC 12 Yes provisions
IAS 12
19 Income Taxes AS 22 SIC 21, 25 Yes GAAP
20 Investments in Associates AS 23 IAS 28 Yes GAAP
Non current assets held for
21 sale & discontinued AS 24 IFRS 5 Yes GAAP
operations
IAS 34
22 Interim financial reporting AS 25 IFRIC 10 No -
23 Intangible assets AS 26 IAS 38 Yes GAAP

IFRS Overview 24
ICAI Standards – Converged progress (5)
S. Topic Standard Standard Differ Nature of
No under under ences difference
IGAAP IFRS noted
Abbreviations Terminology,
24 Joint ventures AS 27 IAS 31 Yes Transactional
SIC 13 provisions
25 Impairment AS 28 IAS 36 Yes - As 24-
Provisions, contingent Transactional
26 liabilities & contingent AS 29 IAS 37 Yes provisions
assets
IAS 39 Terminology,
Financial instruments, AS 30 IFRIC 9, Yes Transactional
27 recognition & measurement 16 & 19 provisions
Financial instruments IAS 32
28 presentation AS 31 IFRIC 2 Yes GAAP

IFRS Overview 25
ICAI Standards – Converged progress (6)
S. Topic Standard Standard Differ Nature of
No under under ences difference
IGAAP IFRS noted
Abbreviations
Financial instruments:
29 Disclosures AS 32 IFRS 7 Yes GAAP
IFRS 2
30 Share based payments AS 33 IFRIC 8 Yes Transactional
IFRIC 11 provisions
Financial reporting in IAS 29
31 hyperinflationary economies AS 34 IFRIC 7 No -
Exploration of & evaluation Transactional
32 of mineral resources AS 35 IFRIC 6 Yes provisions
Accounting and reporting
33 by retirement benefit plans AS 36 IAS 26 Yes GAAP

IFRS Overview 26
ICAI Standards – Converged progress (7)
S. Topic Standard Standard Differ Nature of
No under under ences difference
IGAAP IFRS noted
Abbreviations Transactional
34 Investment property AS 37 IAS 40 Yes provisions
Terminology,
35 Agriculture AS 38 IAS 41 Yes Transactional
provisions
36 Insurance Contracts AS 39 IFRS 4 Yes Terminology
difference
Terminology
37 Financial Instruments AS 40 IFRS 9 Yes difference

38 First time Adoption AS 41 IFRS 1 Yes GAAP

IFRS Overview 27
IFRS Framework

IFRS Overview 28
Key points
The IASB uses its conceptual framework as an aid to drafting new
or revised IFRSs
- Objective and elements of financial statements
-Underlying assumptions and qualitative characteristics
- Definitions

The framework is a key point of reference in the absence of


specific guidance
-Specific guidance in IAS 8 applies

IFRSs do not apply to items that are “immaterial”


Transactions should be accounted for in accordance with their
substance, rather than only their legal form.

IFRS Overview 29
Presentation of Financial Statements

IFRS Overview 30
Required Components of Financial Statements
- Statement of Financial Position
- Statement of Comprehensive Income
- Statement of Chages in Equity
- Statement of Cash flows
- Notes

- Statement of financial position as at the beginning of the earliest


comparative period when an entity restates comparative
information, if material, following a:
- Changes in accounting policy
- Correction of an error, OR
- Reclassification of items in the financial statements
- Equal prominence for all of the financial statements

IFRS Overview 31
Identification of financial statements
Must be clearly identified and distinguished from other information
in annual report
Required disclosures
- Name of the entity
- Separate, individual or consolidated financial statements
- Date of the end of the reporting period or period covered by the
financial statements
- Presentation currency
- Level of rounding
Reporting Period
Financial statements to be presented at least annually
If shorted or longer period, disclose
- Reason
- Fact that amounts reported may not be comparable
No prohibition on 52-week period for practicality

IFRS Overview 32
Accrual basis of accounting

Financial statements, except for cash flow information, should be


prepared using the accrual basis

Assets, liabilities, equity, income and expenses recognized when


the definitions and recognition criteria in the framework are met

IFRS Overview 33
Offsetting

Assets and liabilities should not be offset unless


- Required or permitted by an IFRS

Items of income and expenses should not be offset unless


- Required or permitted by an IFRS
- Gains, losses and related expenses arising from the same or
similar items are not material

IFRS Overview 34
Comparative Information

Numerical comparative information for the previous period


required unless an IFRS requires or permits otherwise
Narrative comparative information required if relevant to
understanding of current period
Reclassify comparative amounts unless impracticable to change
presentation or classification
- Disclosure required
When an entity applies an accounting policy retrospectively, corrects
a prior year error, or reclassifies items in its financial statements, it
shall present, in addition a statement of financial position as of the
beginning of the earliest period presented, if material

IFRS Overview 35
Compliance with IFRSs

“Explicit and unreserved statement of compliance”


Compliance with all IFRSs

Disclose application of IFRSs before effective date


Inappropriate accounting treatments can not be rectified by
disclosure

IFRS Overview 36
Statement of financial position- Current/ non-
current

Present assets and liabilities in the statement of financial


position as
- Current/ non-current OR
- Broadly in order of liquidity (when reliable and more relevant)

Disclose amounts due for recovery or settlement after more


than 12 months for each asset and liability
Deferred tax assets and liabilities are never presented as
current
Assets current if: Liabilities current if:
All other assets and liabilities are non-current
Events might qualify for disclosure as non-adjusting events in
accordance with IAS 10

IFRS Overview 37
Statement of financial position- Sub-classifications

Sub-classifications of items presented, either


- In the statement of financial position; or
- In notes

Separate presentation of amounts payable to and receivable


from the parent, subsidiaries, associates and other related
parties
Further guidelines in individual standards

IFRS Overview 38
Statement of comprehensive income- Presentation

Single statement or income statement and a separate statement


of comprehensive income
Analysis of expenses (in SCI or notes): by nature or function
If classification based on function, additional information
required:
- Depreciation / amortization
- Employee benefits expense
Separate disclosure of nature and amounts of material items of
income and expense (in SCI or notes)
No extraordinary items
Other comprehensive income for the period
Other disclosures

IFRS Overview 39
Statement of comprehensive income- Unusual and
exceptional items

No definition of “exceptional” or “unusual” events or items of


income or expense given in IFRSs
Items not exceptional just because of requirement to disclose
separately
Exceptional items occur infrequently
Classification in same way as non-exceptional items of same
function or nature
Description of use of the term in notes, and applied consistently

IFRS Overview 40
Statement of changes in equity

Include

- Total comprehensive income for the period


- For each component of equity, the effect of retrospective
application or restatement recognized in accordance with IAS 8

- For each component of equity, a reconciliation between the carrying


amount at the beginning and the end of the period disclosing
separately
Profit or loss
Each item of other comprehensive income
Transactions with owners

IFRS Overview 41
Statement of changes in equity- additional
disclosure

Also present, either in the statement of changes in equity or in


the notes

- the amount of dividends recognized as distribution to owners during


the period, and the related amount per share

IFRS Overview 42
Information about share capital

For each class of share capital (in the statement of financial


position, statement of changes in equity or notes):
- Number of shares authorized
- Number of shares issued: fully paid and not fully paid
- Par value or no par value
- Reconciliation of movements in number of shares
- Rights, preferences and restrictions
- Treasury shares
- Share held for options and sale contracts (including terms/
amounts)
Nature and purpose of each equity reserve

IFRS Overview 43
Example Question

Which components of financial statement is NOT prepared


using the accrual basis of accounting?
a) Statement of financial position

b) Statement of comprehensive income

c) Statement of changes in equity

d) Statement of cash flows

e) Notes to financial statements

Ans: d

IFRS Overview 44
Statement
IFRS Framework
of Cashflows

IFRS Overview 45
Introduction

IAS 7 requires the provision of information about the historical


changes in cash and cash equivalents of an entity by means of a
statement of cash flows which cash cash flows during the period into:

- operating activities
- investing activities
- financing activities

IFRS Overview 46
Scope

IFRS Overview 47
Key definitions

IFRS Overview 48
Examples

IFRS Overview 49
Revenue

IFRS Overview 50
Types of income and related standards

IFRS Overview 51
Revenue recognition criteria

Common
- Inflow of future economic benefits to entity is probable
- Revenue is measurable reliably
- Costs (incurred and expected) are identifiable and measurable
reliably

Specific criteria for sale of goods


- Significant risks and rewards of ownership transferred
- Retain neither
. managerial involvement; nor
. effective control

IFRS Overview 52
Layaway sales

Recognize when goods are delivered

But:
If experience indicates that most such sales are consummated, then
recognize when
- Significant deposit has been received
- Goods are on hand, identified, ready for delivery

IFRS Overview 53
IFRIC: 13 Customer Loyalty Programs

IFRIC: 15 Agreements for the Construction of


Real Estate

IFRIC: 18 Transfer of Assets from Customers

IFRS Overview 54
Scope

Addresses accounting for customer loyalty award


credits
- Granted to customers as part of a sales transaction
- Can be redeemed in future for free or discounted goods or services

Include entities receiving consideration from a party other than


the customer to whom it grants credits
- Credit card companies are with in the scope

Excludes programs that grant the customer a financial asset or


do not include a sales transaction

IFRS Overview 55
Issues

Whether award credits are:

- Separately identifiable component for which revenue should be


deferred until awards are delivered (apply IAS 18.19) or

If separate component

- How much revenue to be allocated?


- When should revenue be recognized?

IFRS Overview 56
Separate Components

IFRS Overview 57
IFRIC 15 – Agreements for the Construction of
Real Estate

Divergence in practice
- IAS 11 vs IAS 18 accounting

Issues addressed by IFRIC 15


- Applicable standards (IAS 11 or IAS 18)
- Timing of revenue recognition

IFRS Overview 58
Continuing managerial involvement or effective
control?

IFRS Overview 59
IAS 11 or IAS 18?

IFRS Overview 60
Effective date and transition

Effective date
- Annual periods beginning on or after 1 January 2009
- Earlier application permitted, and shall be disclosed

Transition
- Retrospective application
- In accordance with IAS 8 Accounting Policies, changes in Accounting
Estimates and Errors

IFRS Overview 61
Revenue Vs principal

Revenue of the agent


- Amount of commission
- Plus any other amounts charged by the agent

Revenue of the principal

- Gross amount charged to the ultimate customer

IFRS Overview 62
Example:1
Company A operates an Internet site from which it will sells Company T's
products. Customers place their orders for the product by making a product
selection directly from the internet site and providing a credit card number
for the payment. Company A receives the order and authorization from the
credit card company, and passes the order on to Company T. Company T
ships the product directly to the customer.

Company A does not take title to the product and has no risk of loss or
other responsibility for the product. Company T is responsible for all product
returns, defects, and disputed credit card charges. The product is typically
sold for USD 175 of which Company A receives USD 25. In the event a
credit card transaction is rejected, Company A losses its margin on the sale
(i.e. the USD 25)

Should Company A revenue on a gross basis as USD 175 along with


costs of sales of USD 150 or on a net basis as USD 25, similar to a
commission?

Ans: Here company is an Agent, is not taking any risk.

IFRS Overview 63
IFRIC 18 – Transfer of Assets from Customers

Divergence in practice
- Recognize contributed PPE at fair value or cost of nil?
- Recognize credit as revenue immediately or over period of service / asset life?

Issues addressed by IFRIC 18


- Should asset be recognized by the entity receiving the transfer? At what amount?
- How to account for the credit? Cash contributions?

Scope
- Accounting by the entity receiving the transfer (contribution)

Effective date
- Transfer of assets on or after 1 July 2009
- Prospective application

IFRS Overview 64
Revenue by Category

- Sale of goods

- Rendering of services

- Construction contracts

- Interest

- Royalties

- Dividends

IFRS Overview 65
IAS 11 vs AS 7

There is major difference the Exposure draft of AS 7 (revised 20xx),


Construction Contracts and International Accounting Standard (IAS) 11,
Construction Contracts, IFRIC 12, Service Concession Arrangements
and SIC 29, Service Concession Agreements: Disclosures, except that
the transactional provisions given in IFRIC 12 have not been given in
the Exposure Draft of AS 7 (Revised 20xx), keeping in view that
Accounting Standard corresponding to IFRS 1, First-time Adoption of
International Financial Reporting Standards, will deal with same.

IFRS Overview 66
IAS 18 vs AS 9
IFRS AS 9

Terminology used is 'Statement of financial Different terminology is used, as used in


position' and 'Statement of Comprehensive existing laws e.g. term 'balance sheet' and
income'. 'Statement of profit & loss'

The transactional provisions given in SIC 31, IFRIC 13, IFRIC 15 regarding
changes in accounting policy have not been given in the Exposure draft of AS 9
(Revised 20xx), since IFRS 1, First time Adoption of International Financial
Reporting Standards, provides that transitional provisions in other IFRSs do not
apply to a first time adopters transition to IFRSs, unless otherwise permitted in
IFRS 1. It is noted that IFRS 1does not permit use of these transactional
provisions. Accordingly, deleting or retaining the said paragraph would have the
same effect. Transitional provisions given in IFRIC 18 have not been given in the
Exposure draft of AS 9 (Revised 20xx), since the Accounting Standard
corresponding to IFRS 1, First time Adoption of International Financial
Reporting Standards, will deal with the same.

IFRS Overview 67
Example 2

“Bill and hold” sales, in which delivery is delayed at the buyer's request but
the buyer assumes title and accepts invoicing, should be recognized when

a) The buyer makes an order

b) The sales starts manufacturing the goods

c) The title has been transferred but the goods are kept on the seller's premises

d) It is probable that the delivery will be made, payment terms have been
established, and the buyer has acknowledged the delivery instructions

Ans: d

IFRS Overview 68
Example 3
X ltd, a large manufacturer of cosmetics, sells merchandise to Y ltd, a retailer, which
in turn sells the goods to the public at large through its chain of retail outlets. Y ltd.
Purchases merchandise from X ltd. Under a consignment contract. When should
revenue from the sale of merchandise to Y ltd be recognized by X ltd ?

a) When goods are delivered to Y ltd

b)When goods are sold by Y ltd

C) It will depend on the terms of delivery of the merchandise by X ltd

d) It will depend on the terms of payment between Y ltd and X ltd (Cash or credit)

Ans: b

IFRS Overview 69
Example 4

Considering the provisions of IAS 18 for Multiple Deliverable Contracts,


which of the following statement is true?

a) In case of multiple deliverable contracts, transaction should be segmented into


individual transactions and recognition criteria must be applied to each of them

b) In case of multiple deliverable contracts, recognition criteria needs to be


applied on the combined transaction as a whole

Ans: a

IFRS Overview 70
Property, Plant & Equipment

IFRS Overview 71
Definition and Scope

•Definition

–Tangible items
•Held for production or supply of goods or services, or
•Rental to others, or
•For administrative purposes
–Expected to be used during more than one period

•Scope: accounting for all PPE

–Unless another standard requires or permits a different accounting treatment

IFRS Overview 72
Recognition

•PPE is recognized as an asset when


–Future economic benefits are probable, and
–Cost can be measured reliably

•Criteria apply to all costs when incurred, including


–Initial acquisition or construction costs
–Subsequent costs (covered later)

•PPE is measured initially at cost

IFRS Overview 73
Cost of acquired or self-constructed assets

•Purchase price (including import duties and non-refundable


purchase taxes)

–Less any discounts or rebates deducted


–Less implicit interest in deferred payment
–Plus borrowing costs in the case of “qualifying assets” (refer IAS 23)
–Plus any other directly attributable costs

•Excludes abnormal amounts of wasted material, labour and


other resources

IFRS Overview 74
Expenses not recognized as cost of PPE
•Feasibility assessment costs
•Costs of opening new facility
•Costs of introducing new product or service
•Costs of conducting business in new location or with new class of customer
•Costs of staff training
•Administration and other general overhead costs
•Costs incurred in using or redeploying an item
•Amounts related to certain incidental operations
•Costs incurred while construction is interrupted, unless certain criteria are met

IFRS Overview 75
Asset exchange transactions

•Cost of exchanged asset is measured at fair value unless


–Exchange transaction lacks commercial substance, or
–Fair value of neither asset received nor given up can be measured reliably

•Fair value of asset given up is used, unless fair value of asset


received is more clearly evident
•If not measured at fair value, then carrying amount of asset
given up becomes new cost basis

IFRS Overview 76
Subsequent costs

•Subsequent costs are capitalized only if meet general


recognition criteria
–Future economic benefits are probable
–Cost can be measured reliably

•Costs of day-to-day servicing are expenses as incurred


•Recognize cost of replacing part of PPE item when incurred
•Recognize major inspection cost as replacement

IFRS Overview 77
Parts of an item –“Component accounting”

•on initial recognition, allocate cost to significant parts of asset,


including non-physical parts

• Separate depreciation of each “component”


Ship costs 150, useful life 10 yrs. Estimated docking cost 15, planned after 3 yrs.

IFRS Overview 78
Measurement after recognition

IFRS Overview 79
Depreciation

•Systematic allocation of cost to profit or loss over useful life


•Depreciable amount determined after deducting residual value
•Review at least at each balance sheet date
–Residual value
–Useful life
–Depreciation method

•Changes are changes in estimate, so adjust current and future


periods only

IFRS Overview 80
Revaluation model (1)

•Revalue regularly
•Revalue all assets of the same class
•To adjust accumulated depreciation at the date of the
revaluation either:
–Restate it proportionately with the change in the gross carrying amount of the asset,
or
–Eliminate it against the gross carrying amount of the asset and restate the net amount
to the revalued amount of the asset

IFRS Overview 81
Revaluation model (2)

•Revaluation increases credited to


–Profit or loss to the extent they reverse previous revaluation decrease of that asset
recognized in profit or loss
–Otherwise, equity (revaluation surplus)

•Revaluation decreases debited to


–Equity to the extent of any revaluation surplus in equity related to that asset
–Otherwise, profit or loss

•The revaluation surplus maybe transferred to retained earnings


when the asset is derecognized or as it is used by the entiry

IFRS Overview 82
Example (1) Revaluation Model

•Company A owns a building with the initial cost of 1000,


accumulated depreciation of 600. The fair value of the asset on
the same date is assessed at 800
•Entries to recognize revaluation of the asset should be:
OPTION 1: PROPORTIONATE RESTATEMENT
Dr Revaluation reserve 600
Cr Accumulated depreciation 600

Dr Building, cost 1,000


Cr Revaluation reserve 1,000

IFRS Overview 83
Example (2) Revaluation Model

•Company A owns a building with the initial cost of 1000,


accumulated depreciation of 600. The fair value of the asset on
the same date is assessed at 800
•Entries to recognize revaluation of the asset should be:
OPTION 2: ELIMINATION AGAINST ASSET COST

Dr Accumulated depreciation 600


Cr Building, cost 600

Dr Building, cost 400


Cr Revaluation reserve 400

IFRS Overview 84
IFRIC 1 Changes in Existing Decommissioning,
Restoration and Similar Liabilities(1)
•Changes due to a change in
–Estimated timing and amount of payments
–Estimated amount of payments
–Discount rate
•Added to / deducted from cost of underlying asset and
depreciated prospectively over remaining useful life
•Foreign exchange gains and losses may be recognised in profit
or loss or adjusted against cost of PPE
•Applies regardless of accounting policy (cost or revaluation
model) but implementation varies
•New obligations: in our view, accounting analogous to change in
estimates

IFRS Overview 85
IFRIC 1 Changes in Existing Decommissioning,
Restoration and Similar Liabilities(2)

•Cost model

–Changes in liability added/deducted from asset cost in current period


–No negative carrying amount possible; any excess recognised immediately in profit
or loss
–Increase in carrying amount triggers consideration of impairment, including, if
necessary, calculation of recoverable amount

IFRS Overview 86
IFRIC 1 Changes in Existing
Decommissioning,Restoration and Similar Liabilities(3)

•Revaluation model
- Change in liability does not affect valuation of asset (impact on valuation reserve)

- Changes in liability: indication that asset might have to be revalued.

IFRS Overview 87
Impairment assessment

IFRS Overview 88
Impairment loss recognition

•Recognize impairment loss as expense immediately

–Unless carried at revalued amount (treat as revaluation)


–Use “new” carrying amount to calculate future depreciation

•Refer to IAS 36 for impairment loss calculation

IFRS Overview 89
Derecognition

•Derecognize:
–On disposal, or
–When no future benefits expected from use or disposal
•Difference between carrying amount and net disposal proceeds
recognized as gain/loss in profit or loss
•Gains (or proceeds) are not classified as revenue
•Exception: when an entity routinely sells assets it has held for
rental, it transfers them to inventory when they cease to be
rented.

IFRS Overview 90
Compensation for impairment, loss or surrender

IFRS Overview 91
IAS 16 –Key learning points (1)

•Analyze costs carefully to determine what can be capitalised


•Use cost or revaluation model to account for assets in the same
class
•Adjust changes in existing decommissioning, restoration and
similar liabilities to cost of underlying asset:
–Cost model: to asset cost in current period
–Revaluation model: to revaluation surplus

IFRS Overview 92
IAS 16 –Key learning points (2)

•Allocate cost to significant components and depreciate


separately
•Depreciation method, useful life, residual value reviewed at
each balance sheet date
•Specific disclosure requirements for revalued assets
•Should capitalize borrowing costs on “qualifying assets” in
accordance with IAS 23 (R). The revised standard applies for
accounting periods beginning on or after 1 January 2009

IFRS Overview 93
IAS 16 vs AS 10

There is no major difference between the exposure draft of AS


10 (revised 20xx), property, plant and equipment and
International Accounting Standards (IAS) 16, Property, plant
and equipment and IFRIC 1, changes in existing
decommissioning, restoration and similar liabilities except that
the transitional provisions given in IAS 10 (revised 20xx),
keeping in view that Accounting Standards corresponding to
IFRS 1, First-time Adoption of International Financial
Reporting Standards, will deal with the same.

IFRS Overview 94
Impairment of Assets

IFRS Overview 95
Cash-generating unit –Definition

•Determine recoverable amount for the individual asset if


possible
•Apply the CGU concept if the asset does not generate cash
inflows independent from other assets
•CGU is smallest identifiable group of assets that generates cash
inflows that are largely independent from other (groups of)
assets.

IFRS Overview 96
CGU –Factors to be considered

•Key factor: ability to generate independent cash inflows


–If an active market exists for the output of an asset group, then it is a CGU even if
the output is only sold to another division with the entity
–The focus is on cash inflows, not net cash flows
•Consider how management makes decisions about continuing
or disposing of assets / operations
•Consider how management monitors operations

IFRS Overview 97
Goodwill

•Future economic benefits arising from assets that are not


capable of being individually identified and separately
recognised

•Does not generate independent cash flows

IFRS Overview 98
Indications of impairment

•External sources
–Significant decline in market value
–Technological, market, economic, legal environment
–Increases in interest rates or rates of return
–Lower market capitalization than equity book value
•Internal sources
–Evidence of obsolescence or physical damage
–Discontinuance, disposal, restructuring plans
–Asset performance declining or expected to decline
–Receipt from a dividend of a subsidiary, jointly controlled entity or associate when
the carrying amount of the investment exceeds the share of underlying net assets
(including goodwill) in the consolidated accounts or when the dividend exceeds total
comprehensive income of the investee

IFRS Overview 99
Frequency and timing of testing (1)

•CGU to which goodwill has been allocated


•Intangible assets with an indefinite useful life
•Intangible assets not yet available for use

IFRS Overview 100


Frequency and timing of testing (2)

•Recent calculation can be used if the following criteria are met:


–CGU did not change substantially
–Most recent recoverable amount was significantly greater than carrying amount
–Analysis of events and circumstances –no elimination of the difference

Note: A recent calculation can only be used in the case of


intangible assets with an indefinite useful life and cash-
generating units to which goodwill has been allocated

IFRS Overview 101


Recoverable amount

•Recoverable amount is the greater of:


–Value in use (VIU): present value of estimated future cash flows to be derived from
an asset/CGU (continuing use and ultimate disposal)
–Fair value less costs to sell (FVLCS): amount obtainable from the sale of asset/CGU
in an arm’s length transaction less costs of disposal
•If FVLCS is determinable, then not required to measure VIU or
test at CGU level when:
–an asset’s FVLCS is higher than the carrying amount; or
–an asset’s FVLCS can be estimated to be close to VIU (e.g. asset held for disposal)

IFRS Overview 102


Allocating impairment loss –Step by step

IFRS Overview 103


Reversal of impairment loss

IFRS Overview 104


Key disclosures

•By category of asset


–Amount of impairment losses recognized / reversed during the period in
•Profit or loss or
•Other comprehensive income
–If recognized in profit or loss, disclosure of where items are included
–Segment reporting information

•By category of asset


–Disclosures when impairment losses are material for an individual asset
–Information on basis used for determining recoverable amount
–Discount rate used

IFRS Overview 105


Key learning points

•IAS 36 covers impairment of PPE, goodwill, intangible assets


and investments in subsidiaries, joint ventures and associates
•Detailed impairment testing generally is required only when
there is an indication of impairment
•Annual impairment testing:
–Intangible assets not yet available for use
–Intangible assets with indefinite useful life
–Goodwill
•Recognize impairment loss

IFRS Overview 106


IAS 36 vs AS 28

IFRS Converged Standard


Terminology used is Different terminology is
'Statement of financial used, as used in existing
position' and 'Statement laws e.g. term 'Balance
of comprehensive income' sheet' is used instead of
'Statement of profit and
losses' is used instead of
'Statement of
comprehensive income'

The transitional provisions have not been include in the


exposure draft of AS28 (revised 20xx), since these are not
relevant in the present Indian context as they relate to
amendments made in the standard from time to time.

IFRS Overview 107


Example 1

•Which of the following assets are within the scope of IAS 36?
A. Assets held for sale
B. Inventories
C. Property, plant and equipment
D. Financial assets

Ans: c

IFRS Overview 108


Example 2

•What is the most appropriate definition of the “value in use”?

A. The higher of an asset’s fair value less cost to sell and its market value
B. The market quote
C. The asset’s carrying value in the statement of financial position
D. The discounted present value of future cash flows arising from use of the asset and
from its disposal

Ans: d

IFRS Overview 109


Example 3

•Under IAS 36, which is the most appropriate conclusion when


fair value less costs to sell cannot be determined?

A. The asset is not impaired


B. The value-in-use is the only measure of the recoverable amount
C. The net realizable value should be used as an approximation
D. The carrying value of the asset does not change
Ans: b

IFRS Overview 110


Example 4

•What is normally the maximum period for which estimates of


future cash flows can be reasonably developed?
A. Five years
B. Eight years
C. Ten years
D. Three years

Ans: a

IFRS Overview 111


Example 5

•Which of the following cash flows should NOT be included


when calculating the estimates of future cash flows?
A. Cash flows from the sale of assets produced by the asset
B. Cash flows from disposal
C. Income tax payments
D. Cash outflows on the maintenance of the asset

Ans: c

IFRS Overview 112


First-time Adoption of IFRS

IFRS Overview 113


When to apply IFRS 1

• Apply IFRS 1

- In the first set of financial statements that contain an explicit and unreserved
statement of compliance with IFRSs

- In any interim financial statements for a period covered by those financial statements
that are prepared under IFRS

IFRS Overview 114


Why does IFRS 1 apply to?

• Entity A stated compliance with all IFRSs except IAS 39


(Financial instruments)

• Entity B claimed compliance, but it was IFRSs “lite” (i.e. only


selected standards were applied)

• Entity C followed IFRSs for group reporting only

IFRS Overview 115


Transition date

• The beginning of the earliest period for which an entity presents full
comparative information under IFRSs
Date of transition Reporting date
= IFRS opening statement of financial position

Comparative period First IFRS financial statements

1 Jan 2008 31 Dec 2008 31 Dec 2009

IFRS Overview 116


General Requirements

• Step 1 – Select IFRS accounting policies


- Latest version of IFRSs only

• Step 2 – Recognize/ derecognize an necessary, for example


- Laibilities (e.g. future losses, decomissioning obligations, leases)
- Special pur[pouse entites

• Step 3 – Remeasure, for example


- Basis same, but measured differently (e.g IFRS cost not equal to previous GAAP
cost)
- Basis changed (e.g. from cost to fair value)
- Discounting is required / prohibited (e.g. deffered tax, provisions, impairments)

• Step 4 – Reclassify, for example


- Between captions (e.g. debt/ equity)
- Current/ non-current

IFRS Overview 117


Opening IFRS statement of financial position

Adjustments as a result of applying IFRSs for the first-time

Exemptions
Retained earnings Another equity category

Goodwill

IFRS Overview 118


Mandatory exceptions

• Derecognition of non-derivative financial instruments

• Hedge accounting

• Estimates

IFRS Overview 119


Derecognition of non-derivative financial instruments

Information needed to
apply IAS 39 retrospectively
Derecognized after No
obtained at the time of
No Do not apply IAS 39
1 Jan 2004? intially accounting for
transactions?
Yes
Yes
No
Does the entity elect
Apply IAS 39 to apply IAS 39 retrospectively?
Yes

IFRS Overview 120


Hedge accounting
Measure all derivatives at fair value and remove all deferred gains and losses arising on
derivatives recognised under previous GAAP

Designated as a hedge under


previous GAAP and is the hedge effective? No
Yes

Do not reflect hedging


On transition apply the relationship in opening IFRS statement
following adjustments of financial position → recognise effect
in retained earnings

Fair value hedge: adjust carrying Cash flow hedge and hedge of a net
amount of the hedged item in opening investment: recognize deffered gains
IFRS statement of financial position and losses on the hedging instrument
→ recognize effect in retained earnings in equity as seperate item

IFRS Overview 121


Estimates in the opening IFRS statement of
financial position

No estimates under previous GAAP

Use information available at Conditions arising after


the date of transition to the date of transition
IFRSs (i.e no hindsight)
“Wrong”
“Right”

Apply also to the end of the comparative period

IFRS Overview 122


Estimates in the opening IFRS statement of
financial position (continued)

Previous GAAP estimate Error

Adjust, but
No error
do not use hindsight

Apply IFRS methodology


to estimate made

Apply also to the end of the comparative period

IFRS Overview 123


Overview of optional exemptions

• Deemed Cost • Share-based payments


• Compound financial instruments • Day 1 gain or loss
• Cumulative translation differences • Arrangements containing a lease
• Business Combinations • Defined benefit obligation pension disclosures
• Employee benefits • Insurance Contracts
• Designation of previously • Service concession
recognized financial instruments arrangements
• Decommissioning liabilities • Borrowing Costs
• Transfers of assets from customers

IFRS Overview 124


IFRS 1 vs Converged AS 41 (1)
IFRS Converged Standard
IFRS 1 First-time Adoption of International To that extent Ind-AS 41 reflects only the current
Financial Reporting Standards was first issued by set of provisions and exemptions and does not
the International Accounting Standards Board in present all the evolution
June 2003 and thereafter has been amended
many times to accommodate the changes to
other relevant IASs and IFRSs and the first time
Accommodation required arising from those
changes. For the purposes of Ind-AS 41, the
IFRS 1 as restructured and issued in 2008 has
been used as the basis and updated to reflect
subsequent amendments up to November 2009
excluding the amendments so far as they relate
to changes arising from instruction of IFRS 9 –
Financial Instruments

IFRS Overview 125


IFRS 1 vs Converged AS 41 (2)
IFRS Converged Standard
Generally, there is only one transition date for a In India, as the converged IFRS standards become applicable in a
country transitioning to IFRS. phased manner it is expected that Ind-AS 41 would be available to
IFRS 1 defines transitional date as beginning of each company considering its relevant transition date.
earliest period for which an entity presents full Ind-AS41, however provide an entity with a choice to either consider
comparative information under IFRS. It is this date the beginning of the current period or the comparative period as the
which is the starting point for IFRS and it is on this transition date. Thus, the transition date has been defined as the
date the cumulative impact of transition is beginning date of financial year on or after 1April 2011 for which an
recorded based on assessment of conditions at entity presents financial information under Ind-AS in its first Ind-AS
that date financial statements but where an entity voluntarily decides to
provide a prior period comparatives in accordance with Ind-AS then
the date of transition would be the beginning of the earliest period
for which an entity presents for full comparative information under
Ind-AS in its first Ind-AS financial statements i.e. beginning of
financial year on or after 1 April 2010. Arising from this fundamental
change, there are other consequential changes to Ind-AS 41. For
example, disclosures required under paragraph 21 and
reconciliations under paragraphs 24 to 26 Ind-AS 41 have been
modified to accommodate this option available under Ind-AS 41.
The relevant Implementation Guidance and illustrative examples
have been appropriately modified to reflect the option provided
to transitioning entities.

IFRS Overview 126


Key Learning Points


IFRS 1 sets out all transitional requirements and exemptions
available on the first-time adoption of IFRSs

An opening statement of financial position is prepared at the
date of transition of IFRSs

Accounting policies are chosen from IFRSs in effect at the end
of the first IFRS reporting period

A number of exemptions are available

At least one year of comparative information must be presented

First-time adoption of IFRSs may be reported in annual or
interim financial statements

IFRS Overview 127


Example 1

Under which one of the following circumstances can we


conclude that the entity prepared IFRS financial statements
in the previous year?
a) Financial statements were prepared under IFRSs in the previous year;
however, these were meant for internal purposes only

b) Previous year's financial statements were prepared under the entity's national
GAAP

c) Previous year's financial statements were prepared in conformity with all


requirements of IFRSs; however, these statements that they compiled with IFRSs

d) Previous year's financial statements were prepared in conformity with all


requirements of IFRSs, and these statements contained an explicit and unreserved
statement that they compiled with IFRSs.
Ans: d

IFRS Overview 128


Example 2

Which one of the following is a required adjustment in


preparing an opening IFRS statement of financial
position?
a) Present at least two years of comparative information in the financial
statements

b) Derecognize items as assets or liabilities if IFRSs do not permit such a


recognition

c) Disclose as comparative information all figures for the current year


presented under IFRSs

d) Measure all recognized assets and liabilities at fair value

Ans: b

IFRS Overview 129


Example 3

Which one of the following does NOT qualify for an


exemption allowed by IFRS 1?
a) cumulative translation differences

b) Inventories

c) Business combinations that occurred before the date of transition to


IFRSs

d) Compound financial instruments

Ans: b

IFRS Overview 130


Implementation pre-requisites on ERP

IFRS Overview 131


Implementation pre-requisites on ERP

Implementation pre-requisites on ERP (Oracle


Applications) to map according to IFRS.

a) Detailed Segment Structure

b) Currencies

c) One more Secondary Ledger for IFRS (Adjustment)

IFRS Overview 132


Detailed Segment Structure

Need to prepare detailed segments according to the business and


reporting requirements.

Need to prepare detailed segment values according to IFRS


standards.

While preparing segments consider the points like business units,


operating units, business operations & processes etc..

IFRS Overview 133


Currencies

Need to review and assign required currencies for


reporting.

Assign reporting currencies to particular ledger.

IFRS Overview 134


One more Secondary Ledger for IFRS (Adjustment)

We need to maintain two ledgers. One ledger (Primary ledger)


for GAAP and another ledger (secondary ledger) for IFRS.
Define a new ledger for IFRS as a secondary ledger with type as
adjustment. With this we are mainly doing adjustment entries for
IFRS reporting (detailed reporting).

IFRS Overview 135


Example (from Insurance domain)

Please find below the details of the IFRS ledger:


1. The IFRS ledger will contain the Chart of accounts structure
and values as per IFRS requirement.

2. Transactions shall be accomplished in the specific sub ledgers


like AP, AR from which they shall be transferred to the primary
ledger (as per GAAP).

3. The account balances then shall be transferred to IFRS ledger


from the primary ledger, where users will pass manual entries to
make adjustments in accounts balances from one account to
another as per IFRS requirement.

IFRS Overview 136


Continue (1)
The above points can be understood through an Insurance Industry
example:
Case Study - In case of Insurance, IGAAP just asks for a consolidated
premium booking amount to be booked in the premium revenue
account, while in IFRS it needs to be bifurcated into three heads -
premium main(50%), premium mortality charges(25%) and premium
bid charges(25%)

Thus when we book a receivable Invoice of Rs 100 in AR the


accounting entry to IGAAP ledger would be:

Receivable Dr 100
To Premium Revenue Cr 100

IFRS Overview 137


Continue (2)
These balances would then be transferred to IFRS ledger, where the
user shall pass the following manual adjustment:

Premium Revenue Dr 50
To Premium mortality charges Cr 25
To Premium bid charges Cr 25

Effect in IFRS Ledger :

Receivable Dr 100

To Premium Revenue Cr 50
To Premium mortality charges Cr 25
To Premium bid charges Cr 25

IFRS Overview 138


Q&A

IFRS Overview 139


Thank you

Further Reference & Contact


http://orclappsfunctional.blogspot.com/
sambhasnk@gmail.com

IFRS Overview 140