- 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.
Compound Financial Liabilities
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.
An entity is required to take into account the following while considering the accounting policies as per Ind AS 101:
- Use the same accounting policies in its opening Ind AS Balance Sheet and throughout all periods presented in its first Ind AS financial statements
- Accounting policies to comply with each Ind AS effective at the end of its first Ind AS reporting period
- May apply a new Ind AS that is not yet mandatory if that Ind AS permits early application
- Not apply different versions of Ind ASs that were effective at earlier dates
Changes in accounting policies
- Ind AS 8 does not apply to the changes in accounting policies an entity makes when it adopts Ind ASs or to changes in those policies until after it presents its first Ind AS financial statements.
- Ind AS 8’s requirements about changes in accounting policies do not apply in an entity’s first Ind AS financial statements.
Accounting policies changes during the year
If an entity
- changes its accounting policies during the period covered by its first Ind AS financial statements or
- changes its use of the exemptions contained in this Ind AS
it shall explain the changes between its first Ind AS interim financial report and its first Ind AS financial statements, and it shall update the reconciliations.