4th Semester M.Com.

Degree Examination, June/July 2016

(CBCS)
COMMERECE
AT-4.2: Corporate Reporting Practices and Ind. AS
SECTION- A

1. Answer any seven of the following questions. In about 3-4 lines each

a) What is GAAP

GAAP (Generally Accepted Accounting Principal) is a general term for a set of

financial accounting standards and reporting guidelines used to prepare accounting in a given
environment

b) State the meaning of Convergence

The convergence of accounting standards refers to the goal of establishing a single set
of accounting standards that will be used internationally. Convergence in some form has been
taking place for several decades, and efforts today include projects that aim to reduce the
differences between accounting standards

c) who is the transferee company as per as 14?

Any excess of the amount of the consideration over the value of the net assets of the transferor
company acquired by the transferee company should be recognised in the transferee company's
financial statements as goodwill arising on amalgamation

d) state any two factors which influence in estimating the useful life
of goodwill

The following important factors which affect the value of goodwill, i.e., (1) Location, (2)
Time, (3) Nature of Business, (4) Capital Required (5) Trend of Profit, (6) Efficiency of
Management, and (7) Others

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 e) what do you mean by cross holdings?

Cross holding is a situation in which a publicly traded corporation owns stock in another
publicly traded company. So, technically, listed corporations’ own securities issued by other
listed corporations

f) How do you identify an associate under as 23?

This Standard is to set out principles and procedures for recognising, in the consolidated
financial statements, the effects of the investments in associates on the financial position and
operating results of a group.

g) what are biological assets as per Ind as 41

Indian Accounting Standards 41 – Agriculture (Ind AS 41) has introduced the concept
of biological assets where a biological asset is defined to be a living animal or plant, and
includes produce growing on bearer plants.

h) what is reinsurance contract

Reinsurance is the practice whereby insurers transfer portions of their risk portfolios to other
parties by some form of agreement to reduce the likelihood of paying a large obligation
resulting from an insurance claim. The party that diversifies its insurance portfolio is known as
the ceding party.

i) what is joint controlled operations

Joint arrangements are either joint operations or joint ventures: A joint operations
a joint arrangement whereby the parties that have joint control of the arrangement have rights
to the assets, and obligations for the liabilities, relating to the arrangement. Those parties are
called joint operators.

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 j) what do you mean by post-acquisition profit?

post-acquisition profit. noun. a profit of a subsidiary company in the period after it has been
acquired, which is treated as revenue and transferred to the consolidated reserves of the holding
company.

5 MARKS

Answer any four of the following in about one page. Each question carries 5
marks.

2. Briefly explain the advantage and significant criticisms’ of converting

to IFRS

➢ It allows for greater comparability.

Businesses using similar standards to prepare financial statements can more
accurately compare with each other. This is very useful when comparing businesses
that are based in different countries, as they may otherwise have different
methodologies and rules in preparing these documents. This greater comparability has
aided investors to better identify where their investments should go.

➢ It is beneficial to new and small investors.

The IFRS can help new and small investors by making reporting standards to have
better quality and become simpler, putting these investors in a similar position with
professional investors, which was not feasible under previous standards. This also
entails a reduced risk for these investors when they trade, as the professionals will not
be able to take advantage because the nature of financial statements will just be
simple to be understood by all.

➢ It creates more flexibility.

Using a philosophy that is based on principles, instead of rules, this set of standards
will have the goal of arriving at a reasonable valuation with various ways to
accomplish tasks. This would give businesses the freedom to adopt IFRS to their

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 specific situations, which will result in financial statements that are more easily read
and useful.

List of Disadvantages of Adopting IFRS

➢ It requires high costs.

Whether large or small, all businesses would feel the impact if a country adopts IFRS.
However, small companies would not have sufficient resources to implement the
changes that come with it, not to mention that they would need to train staff or hire
accountants or consultants for assistance. They would simply bear more financial
burden than their larger counterparts.

➢ It is prone to manipulation.
As businesses can only use the methods that they wish, this would lead to financial
statements show only desired results, which can lead to profit manipulation. While
this new set of standards requires changes to how the rules should be applied to be
justifiable, it is often possible for businesses to come up with reasons for making such
changes. This means that stricter rules should be implemented to ensure all companies
will value their statements in a similar fashion.

➢ It is not globally accepted.

Truth is, the US has not yet adopted the IFRS, so as other countries that choose to
continue holding out as well. This means that accounting by foreign companies
operating in these countries are facing difficulties because they have to prepare
financial statements using such a set of standards and another set of principles that is
generally accepted in these countries

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 3. Differentiate between amalgamation in nature of merger and
amalgamation in the nature of purchase.

Amalgamation in nature of Purchase

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 4. Explain the objective and scope of regulatory deferral accounts as per
IND as 114

Ind AS 114, Regulatory Deferral Accounts: The objective of Ind AS 114 is to specify the
financial reporting requirements for regulatory deferral account balances that arise when an
entity provides goods or services to customers at a price or rate that is subject to rate regulation

An entity is permitted to apply the requirements of this Standard in its first Ind AS financial
statements, if and only if, it

• conducts rate-regulated activities; and

• recognised amounts that qualify as regulatory deferral account balances in its financial
statements in accordance with its previous GAAP.

An entity shall present separate line items in the balance sheet for:

• the total of all regulatory deferral account debit balances; and

• the total of all regulatory deferral account credit

An entity that elects to apply this Standard shall disclose information that enables users to
assess:

• the nature of, and the risks associated with, the rate regulation that establishes the
price(s) that the entity can charge customers for the goods or services it provides; and

• the effects of that rate regulation on its financial position, financial performance and
cash

An entity shall apply the requirements of the Standard in its financial statements for subsequent
periods, if and only if, in its first Ind AS financial statements, it recognised regulatory deferral
account balances by electing to apply the requirements of this Standard.

An entity that is within the scope of, and that elects to apply, th is Standard shall apply all of
its requirements to all regulatory deferral account balances that arise from all of the entity’s
rate-regulated activities.

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An entity that has rate-regulated activities and that is within the scope of, and elects to apply,
this Standard shall apply paragraphs 10 and 12 of Ind AS 8 when developing its accounting
policies for the recognition, measurement, impairment and derecognition of regulatory deferral
account balances.

On initial application of this Standard, an entity shall continue to apply previous GAAP
accounting policies for the recognition, measurement, impairment and derecognition of
regulatory deferral account balances, except for any changes permitted by paragraphs 13–15
of the Standard. However, the presentation of such amounts shall comply with the presentation
requirements of this Standard, which may require changes to the entity’s previous GAAP
presentation policies

An entity shall not change its accounting policies in order to start to recognise regulatory
deferral account balances. An entity may only change its accounting policies for the
recognition, measurement, impairment and derecognition of regulatory deferral account
balances, if the change makes the financial statements more relevant to the economic decision-
making needs of users and no less reliable, or more reliable and no less relevant to those needs.
An entity shall judge relevance and reliability using the criteria in paragraph 10 of Ind AS 8.

Any specific exception, exemption or additional requirements related to the interaction of the
Standard with other Standards are contained within the Standard. In the absence of any such
exception, exemption or additional requirements, other Standards shall apply to regulatory
deferral account balances in the same way as they apply to assets, liabilities, income and
expenses that are recognised in accordance with other Standards.

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 5. Briefly explain procedures involved in preparation of consolidated
financial statements

PURCHASE METHOD
Assume the Parent Co. is following the cost method to account for its Investment in the sub.

At the date of acquisition: On the WORKING PAPERS ONLY

✓ Eliminate the reciprocal accts. (Inv. in stock and the stockholder’s equity
accts.) If partially owned sub. adjusts minority interest for its share.
✓ Adjust the assets of the sub to their fair market values if necessary.

At the end of the first year of acquisition: On the WORKING PAPERS ONLY

➢ Eliminate the reciprocal accts. (Inv. in stock and the stockholder’s equity
accts. 1/1 balance.) If partially owned sub. adjusts minority interest for
its share.
➢ Adjust the assets of the sub to their fair market values if necessary.
➢ Amortize the excess of cost over book values if necessary.
➢ Eliminate Dividends of the sub. against Dividend Income recorded on
the Parent’s Inc. Stmt.
➢ If partially owned sub. completes the minority interest column.

Subsequent Years after acquisition: On the WORKING PAPERS ONLY

➢ Reconcile the reciprocal accts. (establishing reciprocity) by doing a

retroactive catch up from cost to equity.
➢ Eliminate the reciprocal accts. (Inv. in stock and the stockholder’s equity
accts. 1/1 balance.) If partially owned sub. adjusts minority interest for
its share.
➢ Adjust the assets of the sub to their fair market values if necessary.
➢ Amortize the excess of cost over book values if necessary. Do a catch
up of the amortized amts. of the previous years by adjusting the 1/1
balance of the R/E of the Parent Co.
➢ Eliminate Dividends of the sub. against Dividend Income recorded on
the Parent’s Inc. Stmt.
➢ If partially owned sub. completes the minority interest column.

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ST. ALOYSIUS DEGREE COLLEGE & CENTRE FOR POST GRADUATE STUDIES Page8
 6.

Solution:

Dr Adjusted profit and loss account Cr

Particulars Rs Particulars Rs

To General Reserve write off 35000 By balance b/d (PY 2014) 60000

To Goodwill write off 10000 By Carried forward of cash flow 50000

Operating activities
(70000-60000)

To Balance c/d 65000

1,10,100 1,10,100

Cash Flow statement of for the year ending in 31/03/2015

Particulars Rs Rs

Cash flow from operating activities

Profit before tax (offer non-cash items) 50000

Changes in Working Capital

+ Decrease Debtors (85000-48000) 37000

- Increase BR (40000-8000) (41000)

- Wages outstanding (26000-8000) (18000)

- Salaries Prepaid (8000-10000) (2000) 26000

- Tax Paid -

Net Cash Flow Operating Activities 26000

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ST. ALOYSIUS DEGREE COLLEGE & CENTRE FOR POST GRADUATE STUDIES Page9
 SECTION – C

Answer any three of the following, each question carries 12 Marks

8. make a detailed comparison between International financial reporting

standards and Indian accounting standards converged IFRS

The organisation communicates its Financial Position using financial statements and reports.
For any communication to be effective and efficient, the language must be the same. It will be
difficult to communicate if the language is different i.e. comparing, analysing, etc. of Financial
statements of different organisation will be difficult. The problem of uniform reporting of
Financial Statement had overcome by introduction of common set of Standards known as
Accounting Standards.

If the financial accounting process is not properly regulated, there is possibility of financial
statements being misleading, tendentious and providing a distorted picture of the business,
rather than the true state of affairs. In order to ensure transparency, consistency, comparability,
adequacy and reliability of financial reporting, it is essential to standardize the accounting
principles and policies.

Accounting standards are written policy documents issued by expert accounting body or by
government or other regulatory body covering the aspects of recognition, measurement,
treatment, presentation and disclosure of accounting transactions in the financial statements.

Every country has its own set of Local Accounting Standards for recognition, measurement,
presentation & disclosure of financial statement.

In India, Local standards are known as Accounting Standards (AS) issued by Accounting
Standard Board (ASB) in consultation with Institute of Chartered Accountants of India (ICAI).

Now, the apple to apple comparison was possible at national level due to introduction of
Accounting Standards. Today, we are living in Global Era, now we are supposed to create apple
to apple situation at Global level. The answer to this is International Financial Reporting
Standards (IFRSs).

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International Financial Reporting Standards (IFRSs)

IFRSs refers to the entire body of IASB pronouncements, including standards and
interpretations approved by the International Accounting Standard Board (IASB) & IASs and
SIC interpretations approved by the predecessor International Accounting Standards
Committee (IASC)

Broadly, IFRS consist of,

1. 13 International Financial Reporting Standard (IFRS)

2. 28 International Accounting Standard (IAS)
3. 15 International Financial Reporting Interpretation committee (IFRIC) Interpretations
4. 9 Standard Interpretation Committee (SIC) Interpretation

Simply be put, IFRS are AS of the World.

The Accounting Standards (AS) issued by ICAI are prepared on the basis of the Indian
environment, while International Financial Reporting Standards (IFRS) are prepared by
considering the global environment as a whole. The Indian environment and Global
environment are different which leads to a huge gap between AS issued by ICAI & IFRS issued
by IASB. So as to bridge the gap between AS & IFRS, ICAI issued Indian Accounting Standard
converged with IFRS (formally known as Ind AS)

Indian Accounting Standards Converged with IFRS (Ind AS)

Ind AS are set of accounting standards notified by Ministry of Corporate Affairs (MCA),
converged with International Financial Reporting Standards (IFRS), these accounting
standards are formulated by Accounting Standard Board (ASB) of Institute of Chartered
Accountants of India (ICAI).

Convergence means alignment of the standards of different standard setters with a certain rate
of compromise, by adopting the requirements of the standards either fully or partially.

Indian Accounting Standards are almost similar to IFRS but with few carve outs so as to make
them suitable for Indian Environment.

Till now, MCA has notified 35 Ind AS. However the date of implementation is yet to be
notified.

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Need for Ind AS

The need for Ind AS can be understood in two different parts,

1. Why there must be a Change or Transition?

2. If change then, what type of change, Adoption or Convergence?

Need for Change

The only thing which will be received from such transition is common set of accounting
standards. The benefits of having the common standards for financial reporting are the reasons
which attract this transition.

These are as follows,

a. Better Comparability-By following a common set of standards, will help the

stakeholders to compare the organisations globally, i.e. to create an apple to apple comparison.

b. Better Transparency- The users of accounts will be benefited by this as, same accounting
standards will help to them understand the fundamentals of the organisation which will
generate better transparency.

c. Many companies having subsidiary or Holding company in different countries are

required to follow dual set of accounting standards, local standards on one hand & global
standards on the other hand. The transition will be helpful in saving time & cost on the finance
department. For example, Swiss pharmaceutical giant ROCHE group, which operates in more
than 100 countries, likely to save more than $100 million through Convergence.

d. Attract Foreign Investment- Since the investors can compare with other organisations
globally, it will help them to take investment decision, at the same time it will help the
organisation to present their financial position in more efficient way to the world, in a language
that all can understand.

e. Due to transition many companies will be attracted towards India, for investing, for
setting up subsidiary, etc., which will result in increase in employment opportunities.

f. Globalization-Globalization can be understand at three levels

➢ World Trade- Smooth trade can be achieved.

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 ➢ Listing, Securities Markets etc. – Listing of Securities on international Stock
Exchanges will be eased. Cross border flow of investment will lead to economic
growth.
➢ Stakeholders- Stakeholder can easily take the decision in regards to the organisation.

g. Cost Saving

➢ Saving of time and money in planning and executing of accounting and auditing.
➢ Costs involved in the access to the capital market are expected to reduce.
➢ Labour Cost-In developing countries, the labour cost is cheap, but capital availability
is difficult. By convergence the cost of capital will reduce & its availability will also be
eased.

Adoption or Convergence

From the above discussion one may wonder why to introduce Ind AS instead of following IFRS
as it is. Some countries had accepted the IFRS as it is instead of convergence, Question is why
not India?

One of the main reason is any changes in the IFRS would have impact on books of Indian
Companies; it would be hard for companies to adopt or cope up with the IFRS as and when
amended.

At the same time, India is multi regulator nation. In India there are many regulators like,
Companies Act, Income Tax Act, Securities Exchange Board of India (SEBI), Insurance
Regulatory & Development Authority (IRDA), and Reserve Bank of India (RBI) etc.

To welcome the change in IFRS the respective Rules and Regulation must be amended
accordingly, which can be time consuming. If the changes in IFRS are not in consensus with
the Rules and Regulation, then there will be chaos in the corporate reporting. So Introduction
of Ind AS is a way to buy some time to analyse the situation or the change with a view to take
necessary action by MCA as it thinks fit.

Hence, substantially similar to the IFRSs, the Ind AS have some carve outs to ensure that these
standards are suitable for application in the Indian environment

In a nut shell, Ind AS can be referred as “International Dish with Indian

Flavour” or “Desi version of IFRS”

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Challenges:

a. Rules & Regulations- Since there are many Rules & Regulations in India, for implementation
of Ind AS the appropriate amendment must be done in the Rules & Regulations.

b. Technological Aspect- Right now, book keeping and accounting is done through software
like, Tally, Miracle, Busy, SAP, etc.; these accounting softwares are based on Indian GAAP &
AS. There will be a huge cost to invest in such upgraded software.

c. Personnel- There is lack of efficient personnel. However, it can be avoided by Training &
Awareness programs.

Applicability:

The Council of the ICAI, at its meeting, held on March 20-22, 2014, has finalised the roadmap.
As per this roadmap, the first set of accounting standards i.e. converged accounting standards
(Ind AS) shall be applied to the following specified class of companies for preparing their first
Indian Accounting Standards (Ind AS) consolidated financial statements for the accounting
period beginning on or after April 1, 2016, with comparatives for the year ending 31st March
2016 or thereafter.

The specified class of companies include,

(a) Whose equity and/or debt securities are listed or are in the process of listing company stock
exchange in India or Outside India or

(b) Companies other than those covered in (a) above, having net worth of Rs. 500 crore or
more

(c) Holding, Subsidiary, Joint Venture or associate companies covered under (a) or (b) above

However, the standalone financial statements will continue to be prepared as per the existing
notified Accounting Standards which would be upgraded over a period of time.

In Budget 2014 speech, The Honourable Finance Minister, Arun Jaitley, has welcomed the
IFRS by proposing that Indian companies will have to adopt the new Indian Accounting
Standards (Ind AS) voluntarily from fiscal year 2015-16 and on mandatory basis from 2016

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11. “Key Business that will need to be addressed for successful
implementation of IFRS”. Discuss

PROCESS OF SETTING IFRS

Identification and review of associated issues and consideration of the application

of the frame work to the issues.

Study of National Accounting requirements and practices and an exchange of

views with national standards setters

Consultation with SAC about adding the topic to the IASB’s Agenda

Formation of an advisory (“ Working”) Group to advise IASB

Publishing a discussion document (paper i.e. DP) for Public comment.

Publishing an exposure draft (ED) for Public Comment

Consideration of all comments received within the comment period.

If considered desirable, holding a public hearing and conducting field-tests

Approval of a standard by at least Nine Votes of the IASB

PRACTICAL CHALLENGES IN IMPLEMENTATION OF IFRS

1. Change to regulatory environment: For the success of convergence in India, certain
regulatory amendment is required. For example, The Companies Act (Schedule VI)
prescribes the format for presentation of financial statements for Indian companies,
whereas the presentation requirements are significantly different under IFRS. So, the
companies act needs to be amended in line with IFRS.

2. Lack of Preparedness: Adoption of IFRS by approximately 5000 listed companies by

2011 would result in a significant demand for IFRS resources. Corporate India and
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 accounting professionals need to be trained for effective migration to IFRS. Additionally,
auditors would need to train their staff to audit under IFRS environment.

3. Educating Stakeholders: Educating Stakeholders comprising of investors, lenders,

employees, auditors, audit committee and etc would be a big challenge as this would require
a considerable time and effort.

4. Significant cost: Significant one-time costs of converting to IFRS (including costs of

internal personnel time, adapting IT systems, implementing revised reporting policies and
processes, training personnel and educating investors, analysts and members of the board).

5. Complexity in the financial reporting process: Under IFRS, companies would need to
increasingly use fair value measures in the preparation of financial statements. Companies,
auditors, users and regulators would need to get familiar with fair value measurement
techniques.

6. Impact on financial performance: Due to the significant differences between Indian

GAAP and IFRS, adoption of IFRS is likely to have a significant impact on the financial
position and financial performance of most Indian companies.

7. Communication of Impact of IFRS to investors: Companies also need to communicate

the impact of IFRS convergence to their investors to ensure they understand the shift from
Indian GAAP to IFRS.

8. Conceptual differences: For example, the Indian standard on intangibles is based on the
concept that all intangible assets have a definite life, which cannot generally exceed 10
years; while IFRS acknowledge that certain intangible assets may have indefinite lives and
useful lives in excess of 10 years are not unusual.

9. Legal and regulatory considerations: In some cases, the legal and regulatory accounting
requirements in India differ from the IFRS. In India, Companies Act of 1956, Banking
Regulation Act of 1949, IRDA regulations and SEBI guidelines prescribe detailed formats

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 for financial statements to be followed by respective enterprises in their financial reporting.
In such cases, strict adherence to IFRS in India would result in various legal problems.

10. Training to Preparers: Some IFRS are complex. There is lack of adequate skills amongst
the preparers and users of Financial Statements to apply IFRS. Proper implementation of
such IFRS requires extensive education of preparers.

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