With its press release dated 25th February 2011, the Ministry of Corporate Affairs (MCA) notified 35 Indian Accounting Standards converged with IFRS (Ind-AS), thereby eliminating the speculation on the contents of the final standards. However, the press release does not contain the date of implementation of the converged standards. The MCA has clarified that the date of implementation shall be notified at a later date.
The final standards notified by the MCA are substantially similar to the current IFRS standards. However, there are certain changes made to the Ind-AS standards as part of the convergence (rather than adoption) process to make them suitable to the Indian environment. These changes can be classified into the following categories:
- Mandatory differences as compared to IFRS;
- Removal of accounting policy choices available under IFRS;
- Additional accounting policy options provided, which are not in compliance with IFRS requirements;
- Certain IFRS guidance to be adopted with separate (deferred) implementation dates.
Our previous article explained the first category of carve-outs i.e., mandatory differences with IFRS and their impact on the financial statements. This article attempts to cover the other categories of carve-outs, whose primary focus is on accounting policies.
I. Removal of accounting policy choices available under IFRS:
This category of carve-outs pertain to several areas where IFRS offers multiple policy choices while Ind- AS restricts these policy choices.
This category of carve-outs do not result in deviations from IFRS, as they represent permitted policy choices. However, while following the policies prescribed under Ind AS will result in conformity with IFRS, these carve-outs could pose a challenge for Indian companies, if global peers follow other alternative policies (such as fair value model for investment property); if such companies are a part of a global group that follows other alternative policies; or if the Indian company has previously followed other alternative policies for IFRS reporting to overseas stakeholders.
Presentation of profit and loss account based on single statement or two-statement approach:
Position under IFRS:
IFRS provides entities with an accounting policy choice in relation to the presentation of income statement. The reporting entity can present comprehensive income as:
- a single statement of comprehensive income (which includes all components of profit or loss and other comprehensive income); or
- in the form of two statements i.e., an income statement (which displays components of profit or loss) followed immediately by a separate ‘statement of comprehensive income’ (which begins with profit or loss as reported in the income statement and discloses components of other comprehensive income aggregating to total comprehensive income for the period).
Position under Ind-AS:
Ind-AS requires entities to present the profit and loss account based on the single-statement approach. The two-statement approach is not permitted under Ind-AS.
Presentation of expenses based on nature or function:
Position under IFRS:
Expenses in the profit and loss account are classified according to their nature or function.
When expenses are classified according to function, expenses are generally allocated to cost of sales, selling, administrative or any other functions of the reporting entity.
There is no guidance in IFRS on how specific expenses are allocated to functions. An entity establishes its own definitions of functions such as cost of sales, selling and administrative activities, and applies these definitions consistently. Additional information based on the nature of expenses (e.g., depreciation, amortisation and staff costs) is disclosed in the notes to the financial statements.
When classification by nature is used, expenses are aggregated according to their nature (e.g., purchases of materials, transport costs, depreciation and amortisation, staff costs and advertising costs).
Position under Ind-AS:
Ind-AS permits presentation of expenses based on the nature of expenses only. As such, presentation of expenses based on function is not permitted.
Presentation of dividend/interest received and paid in the cash flow statement:
Position under IFRS:
Interest paid/received and dividends received are usually classified as operating cash flows for a financial institution. For other entities, IFRS provides entities with an accounting policy choice whereby:
- Interest paid and interest and dividends received may be classified as operating cash flows, because they enter into the determination of profit or loss.
- Alternatively, interest paid and interest and dividends received may be classified as financing cash flows and investing cash flows, respectively, because they are costs of obtaining financial resources or returns on investments.
Position under Ind-AS:
Ind-AS requires interest paid and interest and dividends received to be classified as financing cash flows and investing cash flows, respectively.
Investment property: Cost model and fair value model:
Position under IFRS:
All investment properties are initially measured at cost. Subsequent to initial recognition, an entity chooses an accounting policy to be applied consistently, either to:
- measure all investment property using the fair value model; or
- measure all investment property using the cost model.
Where an entity has adopted a fair value model, all changes in fair value subsequent to initial recognition are recognised in the profit and loss account.
Position under Ind-AS:
Ind-AS prohibits use of fair value model for investment property.
Actuarial gains and losses:
Position under IFRS:
Under IFRS, actuarial gains and losses on defined benefit plans can be recognised using various acceptable policy choices. Thus, such actuarial gains or losses can either be recognised in other comprehensive income; or recognised immediately in the profit and loss account; or amortised into the profit and loss account using the corridor approach (or any other systematic method which results in faster recognition than the corridor approach).
Position under Ind-AS:
Ind-AS does not permit immediate recognition of actuarial gains or losses in the profit and loss account or amortisation through the profit and loss account. It requires actuarial gains or losses to be recognised directly in other comprehensive income.
Presentation of government grants related to assets:
Position under IFRS: Two methods of presentation in financial statements of grants related to assets are regarded as acceptable alternatives:
- grants presented as deferred income and recognised in profit or loss on a systematic basis over the useful life of the asset.
- grants adjusted against the carrying value of the asset. The grant is recognised in profit or loss over the life of a depreciable asset as a reduced depreciation expense.
Position under Ind-AS:
Ind-AS requires government grants related to assets to be presented in the balance sheet by setting up the grant as deferred income. Recognition as a reduction from the asset is not permitted.
Measurement of non-monetary grants:
Position under IFRS:
A government grant may take the form of a transfer of a non-monetary asset, such as land or other resources, for the use of the entity. If a government grant is in the form of a non-monetary asset, then an entity chooses an accounting policy, to be applied consistently, to recognise the asset and grant at either the fair value of the non-monetary asset or at the nominal amount paid.
Position under Ind-AS:
In case of non-monetary grants, the fair value of the non-monetary asset is assessed and both the grant and the asset are accounted for at that fair value.
II. Additional accounting policy choices:
This category of carve-outs represent an area where a company can either elect to follow policies aligned to IFRS, or alternate policies that diverge from IFRS.
This category of carve-outs represents an area where each individual company needs to apply careful thought and consideration. Thus, if companies want to achieve full compliance with IFRS, they would need to elect accounting policies that are aligned to IFRS. On the other hand, if compliance with IFRS is not relevant for the company, it may elect other policies that are divergent with IFRS. While assessing these policy choices, companies need to evaluate not just their current environment, but future plans (for instance, plans for a future overseas listing or fund-raising).
Such carve-outs include the following:
Exchange differences on long-term foreign currency monetary items:
Position under IFRS:
Foreign exchange gains and losses generally are recognised in the profit or loss.
Position under Ind-AS:
Ind-AS has retained the above position under IFRS. Additionally, it has provided an option to recognise unrealised exchange differences on long-term monetary assets and liabilities to be recognised directly in equity and accumulated in a separate component of equity. The amount so accumulated shall be transferred to profit or loss over the period of maturity of such long-term monetary items in an appropriate manner.
Deemed cost exemption for Property, Plant and Equipment (PPE):
Position under IFRS:
On transition to IFRS, an entity has the following choices with respect to PPE for computing deemed cost under IFRS:
- Revalue individual, some or all items of PPE to its fair value as at the transition date.
- In case assets are revalued under the previous GAAP, then those revalued amounts can be considered as a deemed cost, provided that that revalued amounts are broadly comparable (i) to the fair values as at the date of revaluation, or (ii) cost or depreciated cost in accordance with IFRS adjusted to reflect, for instance, the changes in the general or specific price index.
- Event-driven (such as on account of IPO or Privatisation) fair values may be considered as deemed cost.
Position under Ind-AS:
Apart from the options provided under IFRS, Ind-AS provides an additional option to continue Indian GAAP carrying values of all items of PPE as at the transition date without any modification, except for recognising asset retirement obligations. This exemption, if exercised, is required to be applied to all items of PPE without exception.
III. Certain guidance to be adopted with separate (deferred) implementation dates:
The Ind-AS standards currently notified defer the application of guidance on accounting for embedded lease arrangements and service concession arrangements. It is expected that such guidance will become mandatory at a later date.
Similarly, the Ind-AS on accounting for exploration and evaluation of mineral resources shall be notified at a later date.
Summary:
While Ind-AS financial statements presented for the first transition period cannot be fully compliant with IFRS (since comparatives would not be presented), Ind-AS financial statements for subsequent years can be made fully compliant with IFRS, if a company chooses optimal accounting policies and does not adopt the diluted alternatives available under Ind-AS. This is assuming that a company is not impacted by the mandatory deviations.
It is advisable for the companies to continue the process of estimating the exact impact of the convergence on their business, especially in the light of mandatory carve-outs and other non-mandatory differences with IFRS that are now clear on account of the notification of the final standards. Companies that otherwise need to fully comply with IFRS issued by the IASB (for example, because their securities are listed in overseas markets that require IFRS) need to carefully evaluate the impact of such carve-outs.
