Foreign currency denominated financial statements should be expressed in a single currency so as to enable the users of such financial statements to under-stand and analyse the financial results of the entity. The entity may also have been incorporated / registered as per the country where it operates and may be statutorily required to prepare the financial statements in such currency. Hence, foreign currency denominated transactions should be translated into the currency of the country where the entity is registered as per the requirements of the entity’s GAAP.
Ind AS 21 deals primarily with the question as to how to include foreign currency transaction and report the foreign operations in its financial statements and in order to compare with which exchange rate or rates should be used and how to report the effects of such changes in the financial statements.
Main benefit achieved by Ind AS 21 is that it reduces the risk of foreign activities being incorrectly accounted for and the functional currency being determined incorrectly. If the functional currency is not determined as per the requirements of the standard, it would result in a major impact on the financial statements of the entity. The standard also clearly specifies the methodology by which the financial statements should be translated into the presentation currency and how the exchange difference on such translation should be accounted for.
Kindle e-book on share based payment transactions as per Ind AS 102 (IFRS 2) is available as a free download at Amazon Kindle Store.
The book is available as a free download on 28th September, 2016 for a period of 24 hours. All professional colleagues are requested to download the book The link for downloading the book is given below:
Indian Accounting Standard Ind AS 102 deals with Share based payment trans-actions. This is one of the standards announced by MCA
IFRS 2 is the corresponding Accounting Standard issued by International Ac-counting Standards Board (IASB).
Mandatory requirements – no exceptions:
An entity has to recognise share-based payment transactions in its financial statements, including transactions with employees or other parties to be settled in cash, other assets, or equity instruments of the entity. There are no exceptions to Ind AS 102, other than for transactions to which other Ind ASs apply.
There are specific requirements for three types of transactions as given below:
1. Equity-settled share-based payment transactions: Here the entity receives goods or services as consideration for equity instruments of the entity. This includes equity shares and/or share options.
The goods or services received is measured based on the fair value of such goods or services unless the fair value cannot be estimated reliably. The corresponding value should be increased in the equity. If the fair value of the goods or services cannot be estimated reliably, then the value is ascertained based on the fair value of the equity instruments granted. If the transaction is with the employees or others providing similar services, the fair value of the equity instruments granted is measured as it is not possible to estimate the fair value of the services rendered by the employees. The fair value measurement of the equity instrument granted is always done at the grant date. For transactions with non-employees including those providing such similar services, there is a rebuttable presumption that the fair value of the goods or services received can be measured reliably. Such fair value is measured at the date on which the goods are received or the services rendered by the counter party. Where the presumption is rebutted, the fair value is determined based on the fair value of the equity instruments granted as measured at the date the goods are received by the entity or the services are rendered by the counter party.
Where the fair value is measured based on the fair value of the equity instruments granted, Ind AS 102 specifies the methodology by which such fair value should be determined. All non-vesting conditions are taken into account to estimate the fair value of the equity instruments other than the vesting conditions that are not market conditions. Vesting conditions are taken into account by adjusting the number of equity instruments in such a way that the amount recognized for goods or services rendered is based on the number of equity instruments that eventually vest. In other words, if the equity instruments granted do not vest due to the inability to satisfy the vesting conditions, no amount is recognized on a cumulative basis for such goods or services received.
Fair value to be based on market prices:
Ind AS 102 mandates that the fair value of equity instruments granted to be based on market price if available including the terms and conditions upon which those equity instruments were granted. However, where the market prices are not available, even the fair value is estimated using a prescribed valuation technique so as to determine the value of the equity instruments on the measurement date. Where the terms and conditions on an option or share grant are modified, Ind AS 102 requires that the entity should recognize as a minimum, the services received measured at the grant date of fair value of the equity instruments granted. Any modifications, cancellations or settlement of a grant of an equity instruments to modify would be recognized in the books of accounts if and only if it is beneficial to the employee which ultimately results in recognizing the expense of the employer.
Cash-settled share-based payment transactions: Here the entity acquires goods or services by incurring liabilities to the supplier of those goods or services for amounts that are based on the price or value of the entity’s shares or other equity instruments of the entity.
The goods or services acquired is measured based on the fair value of the liability incurred. Only the liability is settled, the fair value of such liability should be remeasured at the end of each reporting period by recognizing the fair value changes in the profit and loss account. The fair value should also be recognized and accounted for at the date of settlement.
Choice of settlement: This covers transactions in which the entity receives or acquires goods or services and the terms of the arrangement provide either the entity or the supplier of those goods or services with a choice of whether the entity settles the transaction in cash or by issuing equity instruments.
In this case, the entity is required to account for such transaction as a cash settled share based payment transaction to the extent that the entity has incurred a liability to settle in cash. The same will be accounted for as an equity settled share based payment transaction to the extent that no such liability has been incurred.
Ind AS 102 prescribes various disclosure requirements to enable users of financial statements to understand:
the nature and extent of share-based payment arrangements that existed during the period;
how the fair value of the goods or services received, or the fair value of the equity instruments granted, during the period was determined;
the effect of share-based payment transactions on the entity’s profit or loss for the period and on its financial position.
Kindle e-book on share based payment transactions as per Ind AS 102 (IFRS 2) is just published. The ebook is available at Amazon Kindle Store for a price of Rs.399/-.
However, the book will be available as a free download only on 16th September, 2016 for a period of 24 hours. All professional colleagues are requested to download the book and are also requested to give your esteemed feedback on the same by way of writing a review in the Amazon Kindle e-book store. The link for downloading the book is given below:
Ind AS 102 is the converged version of IFRS 2 that deals with share based payment transactions. This is one of the standards that is required to be adopted mandatorily along with a set of other Ind AS Standards as per the notification by the Ministry of Corporate Affairs.
It is customary to compensate employees either through stock options or equity instruments, especially for start up entities. Also an entity may also settle a liability while purchasing goods or services through its own equity instruments. If an entity enters into a share based payment transaction then such an entity has to recognise the share based payment transactions in its financial statements including transactions with employees or other parties to be settled in cash, other assets or equity instruments of the entity. There are no exceptions to this requirement other than for transactions to which other Ind ASs apply. Ind AS 102 mainly covers equity settled share based payment transactions and transactions that contain a choice of settlement either in cash or by issue of equity instruments.
This publication covers the key features of share based payment transactions, the accounting treatment for all types of share based payment transactions and disclosures that are mandatorily required to be given. The book includes extracts from published annual reports of several listed companies following IFRS 2 which can be used as very valuable precedence for accounting and reporting as per Ind AS 102.
This book includes several illustrations and worked out examples including practical case studies. At the end of the book, several objective type questions and problems/case studies are given, the answers of which are provided in the website http://learnaccountingstandards.com/
The exemption arises because many first-time adopters may not have all the information necessary to apply Ind AS 103 to past business combinations
A first-time adopter has the following options:
apply Ind AS 103 retrospectively to all past business combinations.
apply Ind AS 103 to restate a past business combination and any later business combinations.
not apply Ind AS 103 to any past business combinations.
Exemption only for ‘business combinations’
Exemption applicable only to transactions that meet Ind AS 103’s definition of a business combination.
The exemption is not applicable to acquisitions of assets including entities holding one or more assets that do not constitute a business
Business: An integrated set of activities and assets that generally consists of a) inputs, b) processes and c) the ability to create outputs; rebuttable presumption that a group of assets in which goodwill is present is a business [Ind AS 103]
Asset purchase that is not a business
Prior to its transition date, a first-time adopter ABC acquired a group of assets.
Under previous GAAP, this transaction was treated as a business combination.
However as per Ind ASs this transaction should be treated as an asset purchase and not a business combination.
Therefore, the exemption is not available to ABC in relation to this asset purchase.
ABC restates the asset purchase, and any goodwill recognised under previous GAAP is removed in the opening statement of financial position.
However, there may be other exemptions available to ABC in relation to the asset purchase, such as treating fair value as deemed cost.
Approach when exemption is availed
These requirements deal with the following:
classification of the business combination as an acquisition by the legal acquirer, a reverse acquisition by the legal acquiree, or uniting of interests.
the assets and liabilities acquired or assumed in the past business combination that are included in/excluded from the opening balance sheet.
measurement in the opening balance sheet of assets and liabilities acquired or assumed in the past business combination.
goodwill recognised in the past business combination.
Classification of business combination
Same classification of the business combination as per previous GAAP is retained.
The first time adopter does not restate the accounting using the purchase method.
The requirements for recognising and measuring assets and liabilities are still applicable for assets acquired in business combination.
Recognition in the opening balance sheet
Effect of availing the exemption does not mean all assets and liabilities as per previous GAAP are included in the balance sheet as it is. Some items recognised under previous GAAP is derecognised under Ind ASs and some items not recognised under previous GAAP is recognised under Ind ASs.
Items recognised under previous GAAP
The first-time adopter continues to recognise assets such as PPE and receivables that would typically have been recognised under previous GAAP and also qualify for recognition under Ind ASs.
The first-time adopter should derecognise from its opening balance sheet any item that was recognised under previous GAAP that does not qualify for recognition under Ind ASs.
As per Ind AS 32, an entity is required to split compound financial liability and equity components at inception. An entity need not reassess the equity and liability components subsequently after the first assessment. Ind AS 101 provides an exception when the liability component no longer exists, retrospective application of Ind AS 32 may not be necessary as splitting would amount to merely separating two portions of equity and really does not serve any useful purpose. The first portion is in retained earnings and represents the cumulative interest accreted on the liability component. The other portion represents the original equity component. Hence the first time adopters need not separate these two portions if the liability component is no longer outstanding at the date of transition.
Designation of previously recognised Financial Liability
A financial liability is normally designated as measured at amortized cost. However, a financial liability can be designated as a financial liability at Fair Value through Profit or Loss when it meets certain criteria i.e. it substantially eliminates or reduces amounting mismatch and such designation is made at the inception of the liability without any undue delay. In spite of this requirement as per Ind AS 101, an entity is permitted to designate any financial liability as at Fair Value through Profit or Loss at the date of transition provided the liability meets the criteria mentioned above.
Designation of previously recognised Financial Asset
An entity is allowed to designate a Financial Asset as measured at Fair Value through Profit or Loss in accordance with the facts and circumstances that exist on initial recognition. The designation is possible only if it reduces the accounting mismatch and done without any undue delay. However as per Ind AS 101, an entity may designate based on the facts and circumstances that exist at the date of transition to Ind AS.
Designation of previously recognised Equity Instrument
An entity may designate an investment in equity investment either at Fair Value through Profit or Loss or at Fair Value through other comprehensive income depending upon the facts and circumstance that exist at the date of inception of such equity investment. The entity is allowed to designate an investment in equity instrument as Fair Value through Other Comprehensive Income provided it is not held for trading purposes and such designation is made without undue delay. In spite of this requirement, an entity is permitted as per Ind AS 101 to designate an Equity Instrument as Fair Value through Other Comprehensive Income on the basis of the facts and circumstances that exist at the date of transition to Ind AS.
Fair Value of Financial Assets / Financial Liabilities at initial recognition
An entity may apply the requirements relating to fair value of financial assets and financial liabilities at initial recognition prospectively to transactions entered into on or after the date of transition to Ind ASs.
Extinguishing Financial Liabilities with Equity Instruments
A first-time adopter may apply the Appendix D of Ind AS 109 Extinguishing Financial Liabilities with Equity Instruments from the date of transition to Ind ASs.
Designation of contracts to buy or sell a non-financial item
Certain contracts to buy or sell a non-financial item can be designated at inception as measured at fair value through profit or loss.
Despite this requirement an entity is permitted to designate, at the date of transition to Ind ASs, contracts that already exist on that date as measured at fair value through profit or loss but only if they meet the other requirements for doing so and the entity designates all similar contracts.
Four ways of settlement
Terms permit either party to settle in net in cash.
Contract is readily convertible to cash.
Terms not explicit but net settlement is the practice.
Practice is to take delivery but sold within a short period with profit motive.
All the four types of contracts are within the scope of Ind AS 109.
(c) and (d) is out of scope if usually meant to take/give delivery of non-financial asset.
May now be included within the scope of Ind AS 109 subject to certain conditions i.e., irrevocable and reduces accounting mismatch.
Written options is always within the scope even if it results in taking or giving delivery of non-financial asset.
The estimates considered as per Ind ASs at the date of transition should be consistent with the estimates made for the same date as per the previous GAAP. While preparing the financial statements, an entity is required to make estimates depending upon the requirements of the concerned accounting standards wherever such estimates are required to be made. When estimates are required to be made as per Ind AS, it should be ensured that such estimates are consistent with the estimates made as per the previous GAAP.
Receipt of additional information
When the entity receives information after the date of transition to Ind AS about estimates that it had made under previous GAAP, the receipt of that information should be treated in the same way as non-adjusting even after the reporting period as specified in Ind ASs with events after the reporting period. In other words, the impact of the new information received should be reflected in the current year accounts and should not be adjusted against the opening balance sheet.
Date of transition: 1 April 2015; new information received on 15 July 2015 requires the revision of an estimate made as per previous GAAP at 31 March 2015.
New information in not reflected in its opening Ind AS Balance Sheet.
Unless the estimates need adjustment for any differences in accounting policies or there is objective evidence that the estimates were in error.
The new information reflected in profit or loss or OCI for the year ended 31 March 2016.
Estimates not required as per previous GAAP.
Estimates may be needed as per Ind ASs at the date of transition that were not required at that date under previous GAAP
Those estimates as per Ind ASs shall reflect conditions that existed at the date of transition to Ind ASs
Estimates at the date of transition to Ind ASs of market prices, interest rates or foreign exchange rates shall reflect market conditions at that date
Estimates for comparative period
Estimates also apply to a comparative period presented in an entity’s first Ind AS financial statements.
References to the date of transition to Ind ASs are replaced by references to the end of that comparative period.
Estimates – Implementation guidance
Ind AS 10 is applied in determining whether:
its opening Ind AS statement of financial position reflects an event that occurred after the date of transition and
comparative amounts in its first Ind AS financial statements reflect an event that occurred after the end of that comparative period.
Should determine whether changes in estimates are adjusting or non-adjusting events at the date of transition.
Estimates – Implementation – Case 1
Previous GAAP required estimates of similar items for the date of transition to Ind ASs.
Accounting policy is consistent with Ind ASs.
The estimates as per Ind ASs are consistent with estimates made for that date as per previous GAAP.
There is no objective evidence that those estimates were in error.
The entity reports later revisions to those estimates as non-adjusting events of the period in which it makes the revisions.
Estimates – Implementation guidance
Estimates – Implementation – Case 2
Previous GAAP required estimates of similar items for the date of transition to Ind ASs.
Accounting policies are not consistent with its accounting policies as per Ind ASs.
Estimates as per Ind ASs need to be consistent with the estimates as per previous GAAP for that date after adjusting for the difference in accounting policies.
The opening Ind AS statement of financial position reflects those adjustments for the difference in accounting policies.
As in case 1, later revisions to those estimates are non-adjusting events reported as events of the period in which it makes the revisions.
Example: Previous GAAP may have required an entity to recognise and measure provisions on a basis consistent with Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets.
The previous GAAP measurement was on an undiscounted basis.
The entity uses the estimates as per previous GAAP as inputs but discounts the measurement required by Ind AS 37.
Estimates – Case study
Entity A’s first Ind AS financial statements are for a period that ends on 31 March 2015 and include comparative information for one year. Entity A –
Made estimates of accrued expenses and provisions at those dates.
Did not recognise a provision for a court case arising from events that occurred in September 2014. When the court case was concluded on 30 June 2015, entity A was required to pay Rs.1,00,000 and paid this on 10 July 2015.
Accounted on a cash basis for a defined benefit pension plan.
The estimates are as per previous GAAP for accrued expenses.
Provisions at 31 March 2013 and 2014 were made on a basis consistent with its accounting policies as per Ind ASs.
Some of the accruals and provisions turned out to be overestimates and others to be underestimates.
However, the estimates were reasonable and no error had occurred.
How will the above 3 items be dealt with while preparing the accounts as per Ind AS.
Estimates – Case study – Solution
In its opening Ind AS Balance Sheet at 1 Apr 2014 and in its comparative statement of financial position at 31 Mar 2013, entity A:
1.Estimates for accrued expenses & provisions:
Accounting for those overestimates and underestimates involves routine adjustment of estimates as per Ind AS 8.
Previous estimates for accrued expenses and provisions not adjusted
2.Provision for court case:
Assumption 1 – Previous GAAP was consistent with Ind AS 37.
Entity A concluded that the recognition criteria were not met.
In this case, Entity A’s assumptions as per Ind ASs are consistent with its assumptions as per previous GAAP.
Entity A does not recognise a provision at 31 Mar 2014.
Assumption 2 – Previous GAAP was not consistent with Ind AS 37.
Estimates are made as per Ind AS 37.
As per Ind AS 37, determine whether an obligation exists at the end of the reporting period by taking account of all available evidence, including any additional evidence provided by events after the reporting period.
As per Ind AS 10 the resolution of a court case after the reporting period is an adjusting event after the reporting period if it confirms that the entity had a present obligation at that date.
The resolution of the court case confirms that entity A had a liability in September 2013 when the events occurred that gave rise to the court case.
So Entity A recognises a provision at 31 Mar 20X4.
Entity A measures that provision by discounting Rs.1,00,000 paid on 10 July 2015 to its present value, using a discount rate that complies with Ind AS 37 and reflects market conditions at 31 Mar 2014.
Accounting for pension plan:
Makes estimates (in the form of actuarial assumptions) necessary to account for the pension plan as per Ind AS 19 Employee Benefits.
Entity A’s actuarial assumptions at 1 January 20X4 and 31 December 20X4 do not reflect conditions that arose after those dates.
For example, entity A’s:
discount rates at 1 January 20X4 and 31 December 20X4 for the pension plan and for provisions reflect market conditions at those dates; and
actuarial assumptions at 1 January 20X4 and 31 December 20X4 about future employee turnover rates do not reflect conditions that arose after those dates — such as a significant increase in estimated employee turnover rates as a result of a curtailment of the pension plan in 20X5.
The difference is adjusted in the opening balance sheet.
Estimates – do not override other Ind ASs
Estimates as per Ind AS 101 do not override requirements in other Ind ASs that base classifications or measurements on circumstances existing at a particular date.
the distinction between finance leases and operating leases
the restrictions in Ind AS 38 Intangible Assets that prohibit capitalisation of expenditure on an internally generated intangible asset if the asset did not qualify for recognition when the expenditure was incurred
the distinction between financial liabilities and equity instruments
First Ind AS financial statements are the first and only financial statements in which the entity adopts Ind ASs as per the Ind ASs notified in the Companies Act 2013 and makes an explicit and unreserved statement in those financial statements of compliance with Ind ASs.
It should be noted that the entire set of standards notified by the Ministry of Corporate Affairs should be complied with by the entity without any exception for any standard.
Opening Ind AS balance sheet:
An entity should prepare opening Ind AS balance sheet at the date of transition to Ind AS. This becomes the starting point for its accounting as per the Ind ASs.
Roadmap – Phase I
1st April 2015 or thereafter: Voluntary Basis for all companies
1st April 2016: Mandatory Basis
Companies listed on Stock Exchange having net worth equal to or more than Rs.500 Crore
Unlisted Companies having net worth equal to more than Rs.500 Crore
Parent, Subsidiary, Associate and Joint Venture of above
Roadmap – Phase II
Phase II 1st April 2017 (Mandatory Basis)
1st April 2017 (Mandatory Basis)
Parent, Subsidiary, Associate and JV of above
Unlisted Companies having net worth equal to or more than Rs.250 Crore up to Rs.500 Crore
All Listed Companies not covered in Phase I
Other companies will continue to follow existing ASRoadmap for banks, NBFCs and insurance companies still to be decided
Banks, Insurance Companies, MBFC’s, RRB’s not yet covered in Phase I and Phase II. Roadmap is notified subsequently
Requirements of an entity applying Ind AS for the first time
The end of entity A’s first Ind AS reporting period is 31 March 2017 (For companies covered under Phase 1).
Entity A decides to present comparative information in those financial statements for one year only.
Its date of transition to Ind ASs is the beginning of business on 1 April 2015 (or, equivalently, close of business on 31 March 2015).
Entity A presented financial statements in accordance with its AS (previous GAAP) annually to 31 March each March 2016.year up to, and including, 31
Entity A is required to apply the Ind ASs effective for periods ending on 31 March 2017 in preparing & presenting:
1. Its opening Ind AS balance sheet at 1 April 2015.
2. Balance sheet for 31 March 2017 (comparative for YE 31 March 2016).
3. Statement of profit and loss.
4. Statement of changes in equity.
5. Statement of cash flows for the year to 31 March 2017 (comparative for YE 31 March 2016).
6. Disclosures (including comparative information for YE 31 March 2016).
First Ind AS financial statements
An entity’s first Ind AS financial statements shall include at least
1. Three Balance Sheets
2. Two Statements of profit and loss
3. Two Statements of cash flows and
4. Two Statements of changes in equity and
5. Related notes
6. Includes comparative information for all statements presented
Non Ind AS info and historical summaries
Historical summaries are sometimes presented for prior periods before the first period for which they present full comparative information in accordance with Ind ASs.
Such summaries need not comply with the recognition and measurement requirements of Ind ASs.
Non-Ind AS comparative information
Some entities present comparative information in accordance with previous GAAP as well as the comparative information required by Ind AS 1.
In any financial statements containing historical summaries or comparative info as per previous GAAP, an entity shall:
label the previous GAAP information prominently as not being prepared as per Ind ASs and
disclose the nature of the main adjustments that would make it comply with Ind ASs.
An entity need not quantify those adjustments.
Explanation & reconciliations
An entity shall explain how the transition from previous GAAP to Ind ASs affected its reported Balance sheet, financial performance and cash flows.
An entity’s first Ind AS financial statements shall include:
a) reconciliations of its equity as per previous GAAP to its equity as per Ind ASs for both of the following dates:
i. the date of transition to Ind ASs.
ii. the end of the latest period presented in the entity’s most recent annual financial statements in accordance with previous GAAP.
A reconciliation to its total comprehensive income as per Ind ASs for the latest period in the entity’s most recent annual financial statements.
The starting point for that reconciliation shall be total comprehensive income as per previous GAAP for the same period or, if an entity did not report such a total, profit or loss under previous GAAP.
The reconciliations shall give sufficient detail about material adjustments to the Balance Sheet and Statement of profit and loss.
If an entity presented a Statement of cash flows under its previous GAAP, it shall also explain the material adjustments to the Statement of cash flows.
If an entity becomes aware of errors made under previous GAAP, it shall distinguish the correction of those errors from changes in accounting policies.
When an entity following accounting standards (AS) as per iGAAP gets transitioned into Ind AS, there would be some challenges faced by the entity. The initial issue is to have a proper starting point for preparation of the accounts as per Ind AS. The entity that wants to adopt Ind AS, should prepare an opening balance sheet that is consistent with Ind ASs.
The objective of Ind AS 101 is to ensure that the first Ind AS financial statements and interim financial reports contain high quality information and is transparent for the users and comparable over all the periods that are presented. The standard also provides guidance to prepare the opening balance sheet so as to get a suitable starting point for accounting as per Indian Accounting Standards (Ind ASs). In all of these, the objective is that the high quality information should be generated at a cost that does not exceed the benefits.
Overview of Ind AS 101
IFRS 1 defines previous GAAP as the basis of accounting that a first-time adopter used immediately before adopting IFRS.
However, Ind AS 101 defines previous GAAP as the basis of accounting that a first-time adopter used for its reporting requirement in India immediately before adopting Ind AS.
The change makes it mandatory for Indian entities to consider the financial statements prepared in accordance with existing notified Indian accounting standards as was applicable to them as previous GAAP when it transitions to Ind ASs.
Ind AS 101 applies to entities during its first Ind AS financial statements and also during each interim financial report under Ind AS 101.
Ind AS 101 is applicable for the first time adoption of Ind AS only and does not apply to changes in accounting policies made by an entity that already applies Ind AS.
Ind AS 101 is different from transition adjustment that is provided in each standard. When a new accounting standard is introduced, the standard provides as to how the issues relating to transitioning the standards from existing GAAP to
Ind AS is mentioned in the respective standards. The transition adjustments will not be applicable to entities in India, as the entire set of 39 accounting standards are applicable with effect from the date on which it is set to be mandatorily applicable by the Ministry of Corporate Affairs.
When an Ind AS is applicable, ipso facto it is applicable with effect from the date of inception of the entity and not from the date on which the standard becomes mandatorily applicable. In order to avoid the hardship caused to the entities
while applying the same on a retrospective basis, every accounting standard contains a section known as ‘transition adjustments’ which specifies the way in which the entity can avail certain exceptions and exemptions from the rigors of implementing the standard on a retrospective basis.
Training on financial instruments and accounting standards for financial instruments are important for all officers of the bank. As an endeavour to enable the banks in India to adopt the complex Indian Accounting Standards, especially accounting standards for financial instruments, we are happy to announce training program for the officers of the banks. The training is done as a workshop model with extensive hands on problems and solutions from real life scenarios. The interactive training program assumes no prior knowledge of accounting for the participants. As the entire subject may be relatively new to several participants, training is imparted from the basics. Training on the new set of standards is imperative, as this will enable the officers to understand the impact of convergence to Ind AS. Also, it will enable them to evaluate Ind AS based financial statements of their customers which will effectively improve the process of credit appraisal before granting such facilities to them. Needless to say that this knowledge will be useful in their responsibility of monitoring the financial performance of their customers on a periodical basis.
Mandatory application of Ind AS
The Ministry of Corporate Affairs on 18th January 2016 announced the road map for implementation of Ind AS for scheduled commercial banks, insurance companies and non-banking financial companies (NBFCs). They are required to prepare the Ind AS based financial statements beginning from 1st April 2018 onwards. It should be noted that Banks are prohibited from adopting Ind AS voluntarily from an earlier date other than the dates mentioned above. Subsequently, in a notification issued by the Reserve Bank of India (RBI) on 11th February, 2016, Banks are required to assess the impact of implementing Ind AS and are required to submit quarterly progress reports to their respective boards. Banks are also required to be in preparedness to submit proforma Ind AS financial statements to the RBI from the half year ended September 30, 2016.
As per the said notification, banks are also required to disclose in their annual reports the strategy for implementing Ind AS and the progress made in such implementation from the financial year 2016-17 until the implementation process is completed.
Pursuant to the above mentioned regulatory requirements, banks are mandatorily required to comply with Indian Accounting Standards (Ind AS) for financial statements beginning from 1st April 2018 onwards with comparatives for the periods ending 31st March 2018 or thereafter. Ind AS would be applicable to both standalone financial statements and consolidated financial statements.
Consequences of introducing Ind AS
The requirement by the RBI ensuring Ind AS compliance by banks, insurance companies and NBFCs casts enormous amounts of responsibility on their part. While the RBI recommendation is a welcome development in the backdrop of the global perspective, it requires significant learning at various levels for the officers, managers and other top officials of every bank, so that they understand the importance of the new regulatory requirements thrust on them.
Financial instruments as per Ind AS
Financial instruments which probably are the most complex topic in the entire literature of accounting standards are one of the key areas from the perspective of a bank. Most line items in a balance sheet of a bank are invariably financial instruments and hence it is extremely important to understand the requirements of financial instruments accounting standards. Banks may not have the recourse to any precedence as the financial instruments standard viz. IFRS 9 is applicable for accounting periods beginning on or after 1st January 2018 onwards globally wherever IFRS is adopted. It is pertinent to note that IFRS 9 underwent a major revision in several of the key conceptual areas viz., recognition, classification, derecognition and impairment amongst other concepts. Hedge accounting underwent a major overhaul which is now part of the new IFRS 9 that is adopted in India and converged as Ind AS 109.
The training program would be customised based on the bank’s requirements.
The suggested program is for a three day course and a model session plan is given below which can be modified depending upon your specific requirements.
We have expert trainers who have hands on experience for more than 30 years in handling accounting standards. Depending upon the Bank’s requirement additional topics can be covered by respective trainers who have specialised knowledge on the subject selected.
Model session plan
Three day training course on Financial Instruments as per Ind AS requirements
10 am to 1 pm
Basic concepts of derivative instruments – What are derivatives and why we need them – Meaning of Forward, Futures and options – Pricing futures – Hedging, speculation & gambling – Option basics: ITM, ATM, OTM, Exercise, Lapse
2 pm to 5 pm
Advanced concepts on derivative instruments – Greeks in options pricing – Black-Scholes model / Binomial model – Put-call parity
Features of equity and equity derivatives – Exercise with practical problems Features of Interest Rate Derivatives – Interest Rate Swaps – Interest Rate CAPs / Floors – Interest Rate Collars / Reverse Collars – Cross Currency Swaps Fixed Income Securities FX Derivatives Credit Default Swaps Total Return Swaps
10 am to 1 pm
Accounting Standard Ind AS 32 – Financial asset and financial liabilities – Compound instruments – Liability Vs. Equity
2 pm to 5 pm
Accounting Standard Ind AS 109 – Recognition, measurement, subsequent measurement – Amortized cost – Classification, reclassification & derecognition – Impairment – Embedded derivatives Ind AS 107 Disclosures – Live examples from published accounts Report of the working group on implementation of Ind AS by Banks – Discussion of the report and practical implications thereof
10 am to 11.15 pm
Accounting for financial instruments – Interest rate derivatives – Fixed income securities Effect of changes in foreign exchange rates Ind AS 21 – Impact on financial instruments / hedge accounting
11.30 am to 1 pm
Hedge Accounting – Fair Value Hedge – Cash Flow Hedge
2 pm to 5 pm
Hedge Accounting – Case studies on Hedge Accounting Financial instruments nuances in First time adoption
Let us see the recognition and measurement of foreign currency transactions in the books of accounts.
First we need to understand what is meant by a foreign currency transaction.
Foreign currency transaction is a transaction in a currency other than the functional currency of the entity.
A foreign currency transaction is the one that is denominated in foreign currency that requires settlement in such foreign currency.
Let us look at the requirements for recognising a foreign currency transaction initially.
First, the foreign currency transaction is entered in separate books of accounts.
Then, the same is revalued by applying the spot rate to get the value in the functional currency of the entity.
In certain situations, average exchange rate may also be allowed, provided certain conditions are fulfilled.
Let us look at the requirements for subsequent measurement of such foreign currency transactions. Foreign currency transaction should be translated into functional currency.
For translating into functional currency, the rate at which the account balances should be converted into foreign currency is determined based on whether the item is a monetary item or a non-monetary item.
Monetary items are translated to the functional currency using the closing rate as on the reporting date.
For non-monetary items, the exchange rate to be used will depend upon the basis of measurement of such item.
If the basis is historical cost, then the account balance should be translated at the rate as on the date of transaction. However, if the basis of measurement is fair value, then the account balance should be translated into the functional currency at the rate as on the date on which the fair value is determined.
Let us understand what is meant a monetary item and a non-monetary item.
Monetary item represents a right to receive or an obligation to deliver a fixed or determinable number of units of a currency.
Some of the examples of a monetary item are investment in debt security in foreign currency classified as amortised cost. This is recorded as a monetary item, because the entity would hold this item till maturity and on maturity would receive the stated maturity amount from the issuer in a pre-determined number of units of the foreign currency.
Pension benefits payable in cash
Provisions to be settled in cash
Dividends payable by an entity recognised as liability
In a non-monetary item, there is no existence of a right to receive or an obligation to pay a fixed or determinable number of units of a currency.
For example, investment in equity shares denominated in foreign currency. This is recorded as a non-monetary item because the entity will be able to get the investment back only by selling the same either in a stock exchange or privately. In other words, the entity has no right to receive a fixed or determinable number of units of such foreign currency from the issuer.
Investment in intangible assets
Investment in DPE
Now for all these examples, the entity will not be able to receive a fixed or determinable number of units of a specified currency.
Let us see how the functional currency is determined for an entity.
Functional currency is determined based on the primary economic environment in which it operates.
The primary economic environment is determined based on two primary factors as specified in the Standard viz., the currency in which cash is generated and the currency in which major expenses are incurred by the entity.
When there is a conflict between the two primary factors, then the entity should look for further indicators viz., the currency in which funds are generated which could be either equity or debt instruments and the currency in which the receipts from the customers are retained.
These two are known as the secondary indicators. The entity need to look for secondary indicators only when there is conflict in the primary factors.
It should be noted that the functional currency is determined separately for every entity, as there is no concept of group functional currency.
The importance of functional currency cannot be over-emphasized, as it has a serious impact on the financial statements.
Exchange differences may not be correctly recorded if the functional currency is not determined properly.
Profits may also be completely distorted.
These are the consequences of incorrect determination of functional currency.
Functional currency for entities in the same group
Let us assume Parent ‘P’ as the functional currency of INR. It may have subsidiaries and each of the subsidiaries can have different functional currency as can be seen in this graphical representation.
Let us see how the functional currency is determined for a foreign operation. So what are the factors to be considered in determining the functional currency of a foreign operation?
Basically, there are four factors to be considered. Let us see those factors one by one.
The first factor to be considered is the degree of autonomy. The question that needs to be asked is whether the foreign operation is conducted as an extension of the reporting entity. Are the activities in such foreign operation carried out without significant autonomy? If the answer is ‘No’, then the local currency would be the functional currency of such foreign operation. However, if the answer is ‘Yes’, then the reporting entity’s currency would be the functional currency of the foreign operation.
The second factor to be considered is the transactions of the foreign operation with the reporting entity. The question that needs to be asked is – Is the percentage and frequency of transaction with the reporting entity significant? If the answer is ‘Yes’, then the reporting entity’s currency would be the functional currency of the foreign operation. If the answer is ‘No’, then the local currency would be the functional currency of such foreign operation.
The third factor to be considered is the effect of cash flows. The question that should be asked is – Does the cash flow of foreign operation affect the cash flows of the reporting entity. If the answer is ‘No’, then the local currency would be the functional currency of the foreign operation. If the answer is ‘Yes’, then the reporting entity’s currency would be the functional currency of such foreign operation.
The fourth factor to be considered is about financial and debt servicing. The question that should be asked is whether the cash flows of foreign operations is sufficient to service its own debt? If the answer is ‘Yes’, then the reporting entity’s currency would be the functional currency of such foreign operation. If the answer is ‘No’, then the local currency would be the functional currency of the foreign operation.
If the indicators are mixed, the management should use its discretion to determine the functional currency of the foreign operation.
A change in the functional currency is not generally permitted.
It is changed only when there is a change in underlying factors.
Ind AS 21 deals with the effects of changes in exchange rates.
So, what are the issues that are involved here?
An entity may have foreign currency transactions and/or it may have foreign operations.
So, first we need to determine what is foreign currency.
Assume that an entity based in India purchases inventory from Denver in USD terms. The question arises as to in which currency the financial statements should be prepared. Should it be in INR or should it be in USD?
The financial statements should be prepared in the functional currency of the entity. This leads us to the next important question viz., what is meant by a functional currency. This is covered by Ind AS 21.
Next, an entity may have foreign operations, in the form of say a subsidiary or a joint venture. In that case, first we need to understand what is meant by a foreign operation and how should the functional currency be determined in respect of such foreign operations.
The next question arises as to whether the financial statements can be prepared in any currency which leads us to the next topic viz., what is meant by presentation currency?
Ind AS 21 covers all of these and in addition, it also gives guidance as to how the account balances should be translated into the functional currency, which exchange rate should be used and how the exchange differences should be accounted for.
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Where an entity is in the practice of entering into a derivative contract to either buy or sell a non-financial item in foreign currency, such contracts will also not be regarded as financial instruments. The entity should not be in the practice of dealing with such non-financial item merely with the intention to buy or sell in the short term with a view to making profits.
At the time of entering into contract to either buy or sell a non-financial item in foreign currency, there is also a foreign exchange component that is involved in such contracts. The question arises as to whether the FX component should be segregated and treated as an embedded derivative to be valued on a fair value basis.
The answer is provided in the accounting standard whereby it clearly mentions that the embedded portions in such contracts need not be segregated.
An embedded foreign currency derivative in a host contract that is an insurance contract or not a financial instrument (such as a contract for the purchase or sale of a non-financial item where the price is denominated in a foreign currency) is closely related to the host contract provided it is not leveraged, does not contain an option feature, and requires payments denominated in one of the following currencies:
the functional currency of any substantial party to that contract;
the currency in which the price of the related good or service that is acquired or delivered is routinely denominated in commercial transactions around the world (such as the US dollar for crude oil transactions); or
a currency that is commonly used in contracts to purchase or sell non-financial items in the economic environment in which the transaction takes place (eg a relatively stable and liquid currency that is commonly used in local business transactions or external trade).
Hence, the forward contract dealing with a non-financial item in a foreign currency need not be fair valued.
A contract to deal with a non-financial asset is not a financial instrument. Commodity contracts normally result in either taking delivery or giving delivery of a non-financial item. Such contracts are not regarded as a financial instrument as per financial instruments accounting standard viz., Ind AS 109. However, if the contract is capable of being settled net in cash or any other financial asset, then such contract would be treated as though it is a financial instrument.
Exception to this principle
Contracts entered into with the sole purpose of either taking delivery or giving delivery of a non-financial item is not regarded as a financial instrument and is covered under the own-use exemption. However, there could be some derivative contracts dealing with non-financial items that may result in either delivery or providing delivery. If delivery or receipt of a non-financial item happens on account of a third party exercising an option (say put option), then the entity cannot claim exemption provided in ‘own-use exemption’. This happens especially when an entity enters into a written option contract to deal with a non-financial instrument. For example, if an entity writes a put option (sells a put option), then if the price of such non-financial asset drops below the put option strike price, then the buyer of such put option will exercise the option resulting in delivery of the non-financial item for the entity. In this case, even though the entity receives the non-financial item, it is not because of the entity’s choice to buy such a non-financial item but due to the third party exercising the put option resulting in delivery to the entity. Such contracts will be regarded as financial instruments and the entity should value such contracts on a mark to market basis.
If the entity avails ‘own-use exemption’ in respect of contracts that deal with non-financial items, such contracts need not be fair valued, as ultimately such contracts would result in either receipt or delivery of the non-financial item thereby directly impacting the cost of goods sold or consumed, as the case may be.
I have known R. Venkata Subramani for more than two decades now and he is known for his penchant for topics on financial instruments. He has dumped down the complex topic on the treatment of financial instruments as per Ind AS which I am sure is completely new for most of the professional accountants both in India and elsewhere. The timing of the release of the book coincides with the standards on financial instruments becoming applicable for the top corporate India including Banks and finance companies as per the road map issued by the MCA. I am sure this publication would be found quite useful for all professionals in their regular day-to-day official work, be it in practice or in Industry. My best wishes for the success of this publication.
CA P.B. Sampath
Director & Secretary
Tractors and Farm Equipments Limited