International Financial Reporting Standards (IFRS) Overview
Sambhasiva Rao Venkata Cheedella
IFRS Certified, Senior Consultant, Oracle.
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.
CESR EC EEA EFRAG EITF EU FASB FEE GAAP IAS IASB Committee Of European Securities Regulators European Commission European Commission Area (EU 27 + 3 countries) European Financial Reporting Advisory Group Emerging Issues Task Force (Of FASB) European Union (27 countries) Financial Accounting Standards Board (US) Federation Of European Accountants Generally Accepted Accounting Principles International Accounting Standards International Accounting Standards Board
IASC IASCF IFRIC
IFRS IFRSF NCI
International Accounting Standards committee (Predecessor to the IASB) IASC Foundation (parent body of the IASB) (From 1 March 2010 named as IFRS Foundation) International Financial Reporting Interpretations Committee Of the IASB, and Interpretations issued by that committee (from 1 March 2010 named as IFRS Interpretations Committee) International Financial Reporting Standards IFRS Foundation Non-Controlling interest (previously ‘minority’ interests)
Standards Advisory Council (advisory to the IASB) (from 1 March 2010 named as IFRS advisory council) Securities and Exchange Commission (US) Standing Interpretations Committee Of the IASC, and Interpretations issued by that committee International Organization Of Securities Commissions
IASB and IFRS
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.
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)
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
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
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.
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 time lines for banks and insurance companies
SCB* and UCB# with net worth > INR 300 crores
SCB* and UCB# with net worth > INR 200 crores but <= INR300 crores
April 1, 2013
•Scheduled commercial banks • urban Co – Operative banks
April 1, 2014
April 1, 2012
Part of Nifty 50/ BSE 30 Net worth > INR. 1000Cr
Net worth > INR. 500 Crores
April 1, 2013
April 1, 2014
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.
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.
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.
ICAI Standards – Converged progress (1)
S. Topic No 1 2 3 4 5 Standard under IGAAP AS 1 AS 2 AS 3 AS 4 Standard Differen under ces IFRS noted IAS 1 IAS 2 IAS 7 IAS 10 IFRIC 17 No No Yes No Nature of difference
Abbreviations Presentation of Financial Statements
Inventories Statement of Cash Flows Events after the reporting period Accounting policies, changes in accounting estimates and errors Construction Contracts
AS 5 AS 7
IAS 8 IAS 11 IFRIC 12 & SIC 29
Transactio nal provisions
ICAI Standards – Converged progress (2)
S. Topic No 7 Standard under IGAAP AS 9 Standard Differen under ces IFRS noted IAS 18 SIC 31 Yes IFRIC 13, 15 & 18 Nature of difference
Abbreviations Revenue recognition
Terminolo gy & transaction al provisions - same as7- same as7-
Property, plant & Equipment
IAS 16 IFRIC 1
Effect of Change in foreign exchange rates AS 11 * Includes AS 6 depreciation a/c ing
ICAI Standards – Converged progress (3)
S. Topic No 10 11 Standard under IGAAP AS 12 AS 14 Standard under IFRS IAS 20 IFRS 3 IAS 19 IFRIC 14 IAS 23 IFRS 8 IAS 24 IAS 17 IFRIC 4 Differ ences noted No Yes Nature of difference Terminology, Transactional provisions GAAP GAAP Transactional provisions GAAP 23
Abbreviations Government grant
12 13 14 15 16
Employee benefits Borrowing Costs Operating Segments Related party disclosures Leases
AS 15 AS 16 AS 17 AS 18 AS 19
Yes Yes Yes Yes No
ICAI Standards – Converged progress (4)
S. Topic No 17 18 Standard under IGAAP AS 20 AS 21 AS 22 AS 23 AS 24 Standard under IFRS IAS 33 IAS 27 SIC 12 Differ ences noted Yes Yes Nature of difference GAAP Transactional provisions GAAP GAAP GAAP
Abbreviations Earnings per share
Consolidated and separate financial statements Income Taxes Investments in Associates Non current assets held for sale & discontinued operations Interim financial reporting Intangible assets
19 20 21
IAS 12 SIC 21, 25 Yes IAS 28 IFRS 5 IAS 34 IFRIC 10 IAS 38 Yes Yes
AS 25 AS 26
ICAI Standards – Converged progress (5)
S. Topic No Standard under IGAAP AS 27 AS 28 AS 29 Standard under IFRS IAS 31 SIC 13 IAS 36 IAS 37 IAS 39 IFRIC 9, 16 & 19 IAS 32 IFRIC 2 Differ ences noted Yes Yes Yes Nature of difference Terminology, Transactional provisions - As 24Transactional provisions Terminology, Transactional provisions GAAP
24 25 26 Joint ventures Impairment Provisions, contingent liabilities & contingent assets Financial instruments, recognition & measurement Financial instruments presentation
ICAI Standards – Converged progress (6)
S. Topic No Standard under IGAAP AS 32 AS 33 Standard under IFRS IFRS 7 IFRS 2 IFRIC 8 IFRIC 11 IAS 29 IFRIC 7 IFRIC 6 IAS 26 Differ ences noted Yes Yes Nature of difference
Abbreviations Financial instruments: Disclosures
Share based payments
GAAP Transactional provisions Transactional provisions GAAP
31 32 33
Financial reporting in hyperinflationary economies AS 34 Exploration of & evaluation of mineral resources Accounting and reporting by retirement benefit plans AS 35 AS 36
No Yes Yes
ICAI Standards – Converged progress (7)
S. Topic No Standard under IGAAP AS 37 AS 38 AS 39 Standard under IFRS IAS 40 IAS 41 IFRS 4 Differ ences noted Yes Yes Yes Nature of difference Transactional provisions Terminology, Transactional provisions Terminology difference Terminology difference GAAP
34 35 36 Investment property Agriculture Insurance Contracts
Financial Instruments First time Adoption
AS 40 AS 41
IFRS 9 IFRS 1
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.
Presentation of Financial Statements
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
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
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
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
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
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
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
Statement of financial position- Current/ noncurrent
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
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
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
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
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
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
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
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
Statement of Cashflows IFRS Framework
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
Types of income and related standards
Revenue recognition criteria
- 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
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
IFRIC: 13 Customer Loyalty Programs IFRIC: 15 Agreements for the Construction of Real Estate IFRIC: 18 Transfer of Assets from Customers
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
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?
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
Continuing managerial involvement or effective control?
IAS 11 or IAS 18?
Effective date and transition
- Annual periods beginning on or after 1 January 2009 - Earlier application permitted, and shall be disclosed
- Retrospective application - In accordance with IAS 8 Accounting Policies, changes in Accounting Estimates and Errors
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
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.
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?
- Accounting by the entity receiving the transfer (contribution)
- Transfer of assets on or after 1 July 2009 - Prospective application
Revenue by Category
- Sale of goods - Rendering of services - Construction contracts - Interest - Royalties - Dividends
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.
IAS 18 vs AS 9
Terminology used is 'Statement of financial position' and 'Statement of Comprehensive income'.
Different terminology is used, as used in existing laws e.g. term 'balance sheet' and '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.
“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
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)
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
Property, Plant & Equipment
Definition and Scope
•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
•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
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
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
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
•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
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.
Measurement after recognition
•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
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
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
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
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
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
IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities(2)
–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
IFRIC 1 Changes in Existing Decommissioning,Restoration and Similar Liabilities(3)
- Change in liability does not affect valuation of asset (impact on valuation reserve)
- Changes in liability: indication that asset might have to be revalued.
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
–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.
Compensation for impairment, loss or surrender
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
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
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.
Impairment of Assets
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.
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
•Future economic benefits arising from assets that are not capable of being individually identified and separately recognised
•Does not generate independent cash flows
Indications of impairment
–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
–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
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
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 cashgenerating units to which goodwill has been allocated
•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)
Allocating impairment loss –Step by step
Reversal of impairment loss
•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
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
IAS 36 vs AS 28
Terminology used is 'Statement of financial position' and 'Statement of comprehensive income'
Different terminology is used, as used in existing laws e.g. term 'Balance 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.
•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
•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
•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
•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
•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
First-time Adoption of IFRS
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
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
• The beginning of the earliest period for which an entity presents full comparative information under IFRSs
Date of transition = IFRS opening statement of financial position Reporting date
Comparative period 1 Jan 2008 31 Dec 2008
First IFRS financial statements 31 Dec 2009
• 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
Opening IFRS statement of financial position
Adjustments as a result of applying IFRSs for the first-time
Another equity category
• Derecognition of non-derivative financial instruments • Hedge accounting • Estimates
Derecognition of non-derivative financial instruments
Derecognized after 1 Jan 2004?
Yes Yes No No
Information needed to apply IAS 39 retrospectively obtained at the time of intially accounting for transactions?
Do not apply IAS 39
Apply IAS 39
Does the entity elect to apply IAS 39 retrospectively?
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? On transition apply the following adjustments
Do not reflect hedging relationship in opening IFRS statement of financial position → recognise effect in retained earnings
Fair value hedge: adjust carrying amount of the hedged item in opening IFRS statement of financial position → recognize effect in retained earnings
Cash flow hedge and hedge of a net investment: recognize deffered gains and losses on the hedging instrument in equity as seperate item
Estimates in the opening IFRS statement of financial position
No estimates under previous GAAP
Use information available at the date of transition to IFRSs (i.e no hindsight)
Conditions arising after the date of transition
Apply also to the end of the comparative period
Estimates in the opening IFRS statement of financial position (continued)
Previous GAAP estimate
Adjust, but do not use hindsight
Apply IFRS methodology to estimate made
Apply also to the end of the comparative period
Overview of optional exemptions
• Deemed Cost • Compound financial instruments • Cumulative translation differences • Business Combinations • Employee benefits • Designation of previously recognized financial instruments • Decommissioning liabilities • Transfers of assets from customers • Share-based payments • Day 1 gain or loss • Arrangements containing a lease • Defined benefit obligation pension disclosures • Insurance Contracts • Service concession arrangements • Borrowing Costs
IFRS 1 vs Converged AS 41 (1)
IFRS 1 First-time Adoption of International Financial Reporting Standards was first issued by the International Accounting Standards Board in 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
To that extent Ind-AS 41 reflects only the current set of provisions and exemptions and does not present all the evolution
IFRS 1 vs Converged AS 41 (2) IFRS
Generally, there is only one transition date for a country transitioning to IFRS. IFRS 1 defines transitional date as beginning of earliest period for which an entity presents full comparative information under IFRS. It is this date which is the starting point for IFRS and it is on this date the cumulative impact of transition is recorded based on assessment of conditions at that date
In India, as the converged IFRS standards become applicable in a phased manner it is expected that Ind-AS 41 would be available to each company considering its relevant transition date. Ind-AS41, however provide an entity with a choice to either consider the beginning of the current period or the comparative period as the transition date. Thus, the transition date has been defined as the beginning date of financial year on or after 1April 2011 for which an entity presents financial information under Ind-AS in its first Ind-AS 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.
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
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.
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
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
Implementation pre-requisites on ERP
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)
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..
Need to review and assign required currencies for reporting. Assign reporting currencies to particular ledger.
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).
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.
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
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
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