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.
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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/
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.