The estimates considered as per Ind ASs at the date of transition should be consistent with the estimates made for the same date as per the previous GAAP. While preparing the financial statements, an entity is required to make estimates depending upon the requirements of the concerned accounting standards wherever such estimates are required to be made. When estimates are required to be made as per Ind AS, it should be ensured that such estimates are consistent with the estimates made as per the previous GAAP.
Receipt of additional information
When the entity receives information after the date of transition to Ind AS about estimates that it had made under previous GAAP, the receipt of that information should be treated in the same way as non-adjusting even after the reporting period as specified in Ind ASs with events after the reporting period. In other words, the impact of the new information received should be reflected in the current year accounts and should not be adjusted against the opening balance sheet.
- Date of transition: 1 April 2015; new information received on 15 July 2015 requires the revision of an estimate made as per previous GAAP at 31 March 2015.
- New information in not reflected in its opening Ind AS Balance Sheet.
- Unless the estimates need adjustment for any differences in accounting policies or there is objective evidence that the estimates were in error.
- The new information reflected in profit or loss or OCI for the year ended 31 March 2016.
Estimates not required as per previous GAAP.
- Estimates may be needed as per Ind ASs at the date of transition that were not required at that date under previous GAAP
- Those estimates as per Ind ASs shall reflect conditions that existed at the date of transition to Ind ASs
- Estimates at the date of transition to Ind ASs of market prices, interest rates or foreign exchange rates shall reflect market conditions at that date
Estimates for comparative period
- Estimates also apply to a comparative period presented in an entity’s first Ind AS financial statements.
- References to the date of transition to Ind ASs are replaced by references to the end of that comparative period.
Estimates – Implementation guidance
- Ind AS 10 is applied in determining whether:
- its opening Ind AS statement of financial position reflects an event that occurred after the date of transition and
- comparative amounts in its first Ind AS financial statements reflect an event that occurred after the end of that comparative period.
- Should determine whether changes in estimates are adjusting or non-adjusting events at the date of transition.
Estimates – Implementation – Case 1
- Previous GAAP required estimates of similar items for the date of transition to Ind ASs.
- Accounting policy is consistent with Ind ASs.
- The estimates as per Ind ASs are consistent with estimates made for that date as per previous GAAP.
- There is no objective evidence that those estimates were in error.
- The entity reports later revisions to those estimates as non-adjusting events of the period in which it makes the revisions.
Estimates – Implementation guidance
Estimates – Implementation – Case 2
- Previous GAAP required estimates of similar items for the date of transition to Ind ASs.
- Accounting policies are not consistent with its accounting policies as per Ind ASs.
- Estimates as per Ind ASs need to be consistent with the estimates as per previous GAAP for that date after adjusting for the difference in accounting policies.
- The opening Ind AS statement of financial position reflects those adjustments for the difference in accounting policies.
- As in case 1, later revisions to those estimates are non-adjusting events reported as events of the period in which it makes the revisions.
- Example: Previous GAAP may have required an entity to recognise and measure provisions on a basis consistent with Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets.
- The previous GAAP measurement was on an undiscounted basis.
- The entity uses the estimates as per previous GAAP as inputs but discounts the measurement required by Ind AS 37.
Estimates – Case study
Entity A’s first Ind AS financial statements are for a period that ends on 31 March 2015 and include comparative information for one year. Entity A –
- Made estimates of accrued expenses and provisions at those dates.
- Did not recognise a provision for a court case arising from events that occurred in September 2014. When the court case was concluded on 30 June 2015, entity A was required to pay Rs.1,00,000 and paid this on 10 July 2015.
- Accounted on a cash basis for a defined benefit pension plan.
- The estimates are as per previous GAAP for accrued expenses.
- Provisions at 31 March 2013 and 2014 were made on a basis consistent with its accounting policies as per Ind ASs.
- Some of the accruals and provisions turned out to be overestimates and others to be underestimates.
- However, the estimates were reasonable and no error had occurred.
- How will the above 3 items be dealt with while preparing the accounts as per Ind AS.
Estimates – Case study – Solution
- In its opening Ind AS Balance Sheet at 1 Apr 2014 and in its comparative statement of financial position at 31 Mar 2013, entity A:
1.Estimates for accrued expenses & provisions:
- Accounting for those overestimates and underestimates involves routine adjustment of estimates as per Ind AS 8.
- Previous estimates for accrued expenses and provisions not adjusted
2.Provision for court case:
Assumption 1 – Previous GAAP was consistent with Ind AS 37.
- Entity A concluded that the recognition criteria were not met.
- In this case, Entity A’s assumptions as per Ind ASs are consistent with its assumptions as per previous GAAP.
- Entity A does not recognise a provision at 31 Mar 2014.
Assumption 2 – Previous GAAP was not consistent with Ind AS 37.
- Estimates are made as per Ind AS 37.
- As per Ind AS 37, determine whether an obligation exists at the end of the reporting period by taking account of all available evidence, including any additional evidence provided by events after the reporting period.
- As per Ind AS 10 the resolution of a court case after the reporting period is an adjusting event after the reporting period if it confirms that the entity had a present obligation at that date.
- The resolution of the court case confirms that entity A had a liability in September 2013 when the events occurred that gave rise to the court case.
- So Entity A recognises a provision at 31 Mar 20X4.
- Entity A measures that provision by discounting Rs.1,00,000 paid on 10 July 2015 to its present value, using a discount rate that complies with Ind AS 37 and reflects market conditions at 31 Mar 2014.
- Accounting for pension plan:
- Makes estimates (in the form of actuarial assumptions) necessary to account for the pension plan as per Ind AS 19 Employee Benefits.
- Entity A’s actuarial assumptions at 1 January 20X4 and 31 December 20X4 do not reflect conditions that arose after those dates.
For example, entity A’s:
- discount rates at 1 January 20X4 and 31 December 20X4 for the pension plan and for provisions reflect market conditions at those dates; and
- actuarial assumptions at 1 January 20X4 and 31 December 20X4 about future employee turnover rates do not reflect conditions that arose after those dates — such as a significant increase in estimated employee turnover rates as a result of a curtailment of the pension plan in 20X5.
- The difference is adjusted in the opening balance sheet.
Estimates – do not override other Ind ASs
- Estimates as per Ind AS 101 do not override requirements in other Ind ASs that base classifications or measurements on circumstances existing at a particular date.
- the distinction between finance leases and operating leases
- the restrictions in Ind AS 38 Intangible Assets that prohibit capitalisation of expenditure on an internally generated intangible asset if the asset did not qualify for recognition when the expenditure was incurred
- the distinction between financial liabilities and equity instruments
Two categories of adjustments – Mandatory & Optional
Two categories of adjustments to the principle that an entity’s opening Ind AS Balance Sheet shall comply with each Ind AS
a) Prohibit retrospective application of some aspects of other Ind ASs [Mandatory exceptions]
- derecognition of financial assets and financial liabilities
- hedge accounting
- non-controlling interests
- classification and measurement of financial assets
- impairment of financial assets
- embedded derivatives and
- government loans
b) Grant exemptions from some requirements of other Ind ASs [Optional exemptions]
- share-based payment transactions
- insurance contracts
- deemed cost
- cumulative translation differences
- investments in subsidiaries, joint ventures and associates
- assets and liabilities of subsidiaries, associates and joint ventures
- compound financial instruments
- designation of previously recognised financial instruments
- fair value measurement of financial assets or financial liabilities at initial recognition
- decommissioning liabilities included in the cost of property, plant and equipment
- financial assets or intangible assets accounted for in accordance with Appendix C to Ind AS 115 Service Concession Arrangements
- borrowing costs
- extinguishing financial liabilities with equity instruments
- severe hyperinflation
- joint arrangements
- stripping costs in the production phase of a surface mine
- designation of contracts to buy or sell a non-financial item
- revenue from contracts with customers and
- non-current assets held for sale and discontinued operations
In its opening Ind AS Balance Sheet, an entity shall
- recognise all assets and liabilities whose recognition is required by Ind ASs
- derecognise items as assets or liabilities if Ind ASs do not permit such recognition
- reclassify items that it recognised as per previous GAAP as one type of asset, liability or component of equity, but are a different type of asset, liability or component of equity as per Ind ASs
- remeasure all recognised assets and liabilities as per Ind ASs
- Embedded derivatives not identified so far
- All derivatives at fair value
- Impairment loss allowance on financial guarantee contracts
- Deferred costs that do not meet the Ind AS definition of an asset.
- Restructuring provisions where there is no legal or constructive obligation.
- General provisions or reserves where there is no legal or constructive obligation.
- Receivables for revenue where the risks and rewards of ownership have not been transferred to the buyer or the service has not been provided.
- Deferred tax assets where it is not probable there will be sufficient profits in future periods to recover the asset.
- Amounts classified as equity under the previous GAAP that would meet the definition of a liability in Ind AS.
- Assets and liabilities shown net under previous GAAP that cannot be offset under Ind AS.
- Assets and liabilities that are not classified into those amounts that are current and those that are non-current in accordance with Ind AS.
- Investments that must be classified in accordance with Ind AS 109.
- Deferred taxes in accordance with Ind AS 12.
- Provisions in accordance with Ind AS 37.
- Effect of business combinations.
- Changes in accounting policies requiring retrospective adjustments.
- Accounting errors requiring adjustment in earlier years.
- Use of functional currency which is different than the recording currency.
- Deferred Tax impact on consolidation.
- Fair Value measurements.
- PPE and intangible assets where the depreciation or amortisation period under previous GAAP does not comply with Ind AS.
- Capitalisation of borrowing costs and exchange differences.
- Intangible assets having indefinite useful life.
- Financial assets and liabilities that are measured in accordance with the requirements of Ind AS 109.
- The accounting policies that an entity uses in its opening Ind AS Balance Sheet may differ from those that it used for the same date using its previous GAAP.
- The resulting adjustments arise from events and transactions before the date of transition to Ind ASs.
- Those adjustments are recognised directly in retained earnings at the date of transition to Ind ASs.
First Ind AS financial statements are the first and only financial statements in which the entity adopts Ind ASs as per the Ind ASs notified in the Companies Act 2013 and makes an explicit and unreserved statement in those financial statements of compliance with Ind ASs.
It should be noted that the entire set of standards notified by the Ministry of Corporate Affairs should be complied with by the entity without any exception for any standard.
Opening Ind AS balance sheet:
An entity should prepare opening Ind AS balance sheet at the date of transition to Ind AS. This becomes the starting point for its accounting as per the Ind ASs.
Roadmap – Phase I
- 1st April 2015 or thereafter: Voluntary Basis for all companies
- 1st April 2016: Mandatory Basis
- Companies listed on Stock Exchange having net worth equal to or more than Rs.500 Crore
- Unlisted Companies having net worth equal to more than Rs.500 Crore
- Parent, Subsidiary, Associate and Joint Venture of above
Roadmap – Phase II
Phase II 1st April 2017 (Mandatory Basis)
1st April 2017 (Mandatory Basis)
- Parent, Subsidiary, Associate and JV of above
- Unlisted Companies having net worth equal to or more than Rs.250 Crore up to Rs.500 Crore
- All Listed Companies not covered in Phase I
- Other companies will continue to follow existing ASRoadmap for banks, NBFCs and insurance companies still to be decided
- Banks, Insurance Companies, MBFC’s, RRB’s not yet covered in Phase I and Phase II. Roadmap is notified subsequently
Requirements of an entity applying Ind AS for the first time
- The end of entity A’s first Ind AS reporting period is 31 March 2017 (For companies covered under Phase 1).
- Entity A decides to present comparative information in those financial statements for one year only.
- Its date of transition to Ind ASs is the beginning of business on 1 April 2015 (or, equivalently, close of business on 31 March 2015).
- Entity A presented financial statements in accordance with its AS (previous GAAP) annually to 31 March each March 2016.year up to, and including, 31
Entity A is required to apply the Ind ASs effective for periods ending on 31 March 2017 in preparing & presenting:
1. Its opening Ind AS balance sheet at 1 April 2015.
2. Balance sheet for 31 March 2017 (comparative for YE 31 March 2016).
3. Statement of profit and loss.
4. Statement of changes in equity.
5. Statement of cash flows for the year to 31 March 2017 (comparative for YE 31 March 2016).
6. Disclosures (including comparative information for YE 31 March 2016).
First Ind AS financial statements
An entity’s first Ind AS financial statements shall include at least
1. Three Balance Sheets
2. Two Statements of profit and loss
3. Two Statements of cash flows and
4. Two Statements of changes in equity and
5. Related notes
6. Includes comparative information for all statements presented
Non Ind AS info and historical summaries
- Historical summaries are sometimes presented for prior periods before the first period for which they present full comparative information in accordance with Ind ASs.
- Such summaries need not comply with the recognition and measurement requirements of Ind ASs.
Non-Ind AS comparative information
- Some entities present comparative information in accordance with previous GAAP as well as the comparative information required by Ind AS 1.
- In any financial statements containing historical summaries or comparative info as per previous GAAP, an entity shall:
- label the previous GAAP information prominently as not being prepared as per Ind ASs and
- disclose the nature of the main adjustments that would make it comply with Ind ASs.
- An entity need not quantify those adjustments.
Explanation & reconciliations
- An entity shall explain how the transition from previous GAAP to Ind ASs affected its reported Balance sheet, financial performance and cash flows.
- An entity’s first Ind AS financial statements shall include:
a) reconciliations of its equity as per previous GAAP to its equity as per Ind ASs for both of the following dates:
i. the date of transition to Ind ASs.
ii. the end of the latest period presented in the entity’s most recent annual financial statements in accordance with previous GAAP.
- A reconciliation to its total comprehensive income as per Ind ASs for the latest period in the entity’s most recent annual financial statements.
- The starting point for that reconciliation shall be total comprehensive income as per previous GAAP for the same period or, if an entity did not report such a total, profit or loss under previous GAAP.
- The reconciliations shall give sufficient detail about material adjustments to the Balance Sheet and Statement of profit and loss.
- If an entity presented a Statement of cash flows under its previous GAAP, it shall also explain the material adjustments to the Statement of cash flows.
- If an entity becomes aware of errors made under previous GAAP, it shall distinguish the correction of those errors from changes in accounting policies.
When an entity following accounting standards (AS) as per iGAAP gets transitioned into Ind AS, there would be some challenges faced by the entity. The initial issue is to have a proper starting point for preparation of the accounts as per Ind AS. The entity that wants to adopt Ind AS, should prepare an opening balance sheet that is consistent with Ind ASs.
The objective of Ind AS 101 is to ensure that the first Ind AS financial statements and interim financial reports contain high quality information and is transparent for the users and comparable over all the periods that are presented.
The standard also provides guidance to prepare the opening balance sheet so as to get a suitable starting point for accounting as per Indian Accounting Standards (Ind ASs). In all of these, the objective is that the high quality information should be generated at a cost that does not exceed the benefits.
Overview of Ind AS 101
- IFRS 1 defines previous GAAP as the basis of accounting that a first-time adopter used immediately before adopting IFRS.
- However, Ind AS 101 defines previous GAAP as the basis of accounting that a first-time adopter used for its reporting requirement in India immediately before adopting Ind AS.
- The change makes it mandatory for Indian entities to consider the financial statements prepared in accordance with existing notified Indian accounting standards as was applicable to them as previous GAAP when it transitions to Ind ASs.
Ind AS 101 applies to entities during its first Ind AS financial statements and also during each interim financial report under Ind AS 101.
- Ind AS 101 is applicable for the first time adoption of Ind AS only and does not apply to changes in accounting policies made by an entity that already applies Ind AS.
- Ind AS 101 is different from transition adjustment that is provided in each standard. When a new accounting standard is introduced, the standard provides as to how the issues relating to transitioning the standards from existing GAAP to
- Ind AS is mentioned in the respective standards. The transition adjustments will not be applicable to entities in India, as the entire set of 39 accounting standards are applicable with effect from the date on which it is set to be mandatorily applicable by the Ministry of Corporate Affairs.
- When an Ind AS is applicable, ipso facto it is applicable with effect from the date of inception of the entity and not from the date on which the standard becomes mandatorily applicable. In order to avoid the hardship caused to the entities
- while applying the same on a retrospective basis, every accounting standard contains a section known as ‘transition adjustments’ which specifies the way in which the entity can avail certain exceptions and exemptions from the rigors of implementing the standard on a retrospective basis.
Training on financial instruments
Training on financial instruments and accounting standards for financial instruments are important for all officers of the bank. As an endeavour to enable the banks in India to adopt the complex Indian Accounting Standards, especially accounting standards for financial instruments, we are happy to announce training program for the officers of the banks. The training is done as a workshop model with extensive hands on problems and solutions from real life scenarios. The interactive training program assumes no prior knowledge of accounting for the participants. As the entire subject may be relatively new to several participants, training is imparted from the basics. Training on the new set of standards is imperative, as this will enable the officers to understand the impact of convergence to Ind AS. Also, it will enable them to evaluate Ind AS based financial statements of their customers which will effectively improve the process of credit appraisal before granting such facilities to them. Needless to say that this knowledge will be useful in their responsibility of monitoring the financial performance of their customers on a periodical basis.
Mandatory application of Ind AS
The Ministry of Corporate Affairs on 18th January 2016 announced the road map for implementation of Ind AS for scheduled commercial banks, insurance companies and non-banking financial companies (NBFCs). They are required to prepare the Ind AS based financial statements beginning from 1st April 2018 onwards. It should be noted that Banks are prohibited from adopting Ind AS voluntarily from an earlier date other than the dates mentioned above.
Subsequently, in a notification issued by the Reserve Bank of India (RBI) on 11th February, 2016, Banks are required to assess the impact of implementing Ind AS and are required to submit quarterly progress reports to their respective boards. Banks are also required to be in preparedness to submit proforma Ind AS financial statements to the RBI from the half year ended September 30, 2016.
As per the said notification, banks are also required to disclose in their annual reports the strategy for implementing Ind AS and the progress made in such implementation from the financial year 2016-17 until the implementation process is completed.
Pursuant to the above mentioned regulatory requirements, banks are mandatorily required to comply with Indian Accounting Standards (Ind AS) for financial statements beginning from 1st April 2018 onwards with comparatives for the periods ending 31st March 2018 or thereafter. Ind AS would be applicable to both standalone financial statements and consolidated financial statements.
Consequences of introducing Ind AS
The requirement by the RBI ensuring Ind AS compliance by banks, insurance companies and NBFCs casts enormous amounts of responsibility on their part. While the RBI recommendation is a welcome development in the backdrop of the global perspective, it requires significant learning at various levels for the officers, managers and other top officials of every bank, so that they understand the importance of the new regulatory requirements thrust on them.
Financial instruments as per Ind AS
Financial instruments which probably are the most complex topic in the entire literature of accounting standards are one of the key areas from the perspective of a bank. Most line items in a balance sheet of a bank are invariably financial instruments and hence it is extremely important to understand the requirements of financial instruments accounting standards. Banks may not have the recourse to any precedence as the financial instruments standard viz. IFRS 9 is applicable for accounting periods beginning on or after 1st January 2018 onwards globally wherever IFRS is adopted. It is pertinent to note that IFRS 9 underwent a major revision in several of the key conceptual areas viz., recognition, classification, derecognition and impairment amongst other concepts. Hedge accounting underwent a major overhaul which is now part of the new IFRS 9 that is adopted in India and converged as Ind AS 109.
The training program would be customised based on the bank’s requirements.
The suggested program is for a three day course and a model session plan is given below which can be modified depending upon your specific requirements.
We have expert trainers who have hands on experience for more than 30 years in handling accounting standards. Depending upon the Bank’s requirement additional topics can be covered by respective trainers who have specialised knowledge on the subject selected.
Model session plan
Three day training course on Financial Instruments as per Ind AS requirements
10 am to 1 pm
|Basic concepts of derivative instruments
– What are derivatives and why we need them
– Meaning of Forward, Futures and options
– Pricing futures
– Hedging, speculation & gambling
– Option basics: ITM, ATM, OTM, Exercise, Lapse
2 pm to 5 pm
|Advanced concepts on derivative instruments
– Greeks in options pricing
– Black-Scholes model / Binomial model
– Put-call parity
Features of equity and equity derivatives
– Exercise with practical problems
Features of Interest Rate Derivatives
– Interest Rate Swaps
– Interest Rate CAPs / Floors
– Interest Rate Collars / Reverse Collars
– Cross Currency Swaps
Fixed Income Securities
Credit Default Swaps
Total Return Swaps
10 am to 1 pm
|Accounting Standard Ind AS 32
– Financial asset and financial liabilities
– Compound instruments
– Liability Vs. Equity
2 pm to 5 pm
|Accounting Standard Ind AS 109
– Recognition, measurement, subsequent measurement
– Amortized cost
– Classification, reclassification & derecognition
– Embedded derivatives
Ind AS 107 Disclosures
– Live examples from published accounts
Report of the working group on implementation of Ind AS by Banks
– Discussion of the report and practical implications thereof
10 am to 11.15 pm
|Accounting for financial instruments
– Interest rate derivatives
– Fixed income securities
Effect of changes in foreign exchange rates Ind AS 21
– Impact on financial instruments / hedge accounting
11.30 am to 1 pm
– Fair Value Hedge
– Cash Flow Hedge
2 pm to 5 pm
– Case studies on Hedge Accounting
Financial instruments nuances in First time adoption