- 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.
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.