Adoption of IFRS in India

    Users of financial statements have always demanded transparency in financial reporting and disclosures. However, the willingness and need for better disclosure practices have intensified only in recent times. Globalisation has helped Indian companies raise funds from offshore capital markets. This has required Indian companies, desirous of raising funds, to follow the Generally Accepted Accounting Principles (GAAP) of the investing country. The different disclosure requirements for listing purposes have hindered the free flow of capital. This has also made comparison of financial statements across the globe impossible. A movement was initiated by an international body called International Organisation of Securities Commissions to harmonise diverse disclosure practices followed in different countries. This would ease free flow of capital and reduce costs of raising capital in foreign currencies.

IFRS v. U.S. GAAP :

    The policy makers in India have also realised the need to follow IFRS and it is expected that a large number of Indian companies would be required to follow IFRS from 2011. This poses a great challenge to the preparers of financial statements and also to the auditors. There is an urgent need to understand the nuances in IFRS implementation. The biggest difference between U.S. GAAP and IFRS is that IFRS provides much less overall detail. Its guidance regarding revenue recognition, for example, is significantly less extensive than GAAP. IFRS also contains relatively little industry-specific instructions. Because of long-standing convergence projects between the IASB and the FASB, the extent of the specific differences between IFRS and GAAP has been shrinking. Yet significant differences do remain, any one of which can result in significantly different reported results, depending on a company’s industry and individual facts and circumstances.

    Some of the examples are :

    • IFRS does not permit Last-In, First-Out (LIFO).

    • IFRS uses a single-step method for impairment write-downs rather than the two-step method used in U.S. GAAP, making write-downs more likely.

    • IFRS has a different probability threshold and measurement objective for contingencies.

    • IFRS does not permit debt for which a covenant violation has occurred to be classified as non-current unless a lender waiver is obtained before the balance sheet date.

IFRS compliance in India :

The convergence note of ICAI states that IFRS is applicable from 2011. IFRS in India would cover the following public interest entities in its first wave.

• Listed companies

• Banks, insurance companies, mutual funds, and financial institutions

• Turnover in preceding year exceeding 100 crores

• Borrowing in preceding year exceeding 25 crores

• Holding or subsidiary of the above

First-time adoption of International Financial Reporting Standards :

Applicability to Financial Statements :

• IFRS-1 is applicable to the following financial statements :

1. First annual financial statement in which the entity adopts International Financial Reporting Standards, by an explicit and unreserved statement of compliance with International Financial Reporting Standards.

2. Each interim financial report that the entity presents as part of its first annual financial statement in which the entity adopts International Financial Reporting Standards by an explicit and unreserved statement of compliance with International Financial Reporting Standards.

Period :

• The first IFRS reporting period for entities in India having accounting period beginning on 1 April would be 1 April 2011 to 30 June 2011. For an entity whose accounting period begins on 1 January, the first IFRS reporting period would be 1 January 2012 to 31 March 2012.

Date of transition :

• As per Institute of Chartered Accountants of India’s announcement, an entity in India should have its financials as per IFRS on 1 April 2010 which is the date of transition to International Financial Reporting Standards for entities whose accounting periods begin on 1 April. The entity is required to prepare and present opening IFRS statement of financial position as at the date of transition to International Financial Reporting Standards.

• An entity that presented financial statements in the previous year containing an explicit and unreserved statement of compliance with IFRS would not be a first-time adopter of IFRS even though it contains a qualified audit report.

Accounting policies :

• The entity cannot change its accounting policy during the periods presented in its first IFRS financial statements. For an entity whose accounting period begins on 1 April, the periods presented would be 1 April 2010 to 31 March 2011 and 1 April 2011 to 31 March 2012. No voluntary change in accounting policies is permitted during the period 1 April 2010 to 31 March 2012.

• The entity should adopt accounting policies that are in compliance with each IFRS effective as at 30 June 2011, if the entity prepares and presents an interim financial report or 31 March 2012.

• The adjustments due to changes in accounting policies from previous GAAP to International Financial Reporting Standards at the date of transition to International Financial Reporting Standards should be adjusted directly in retained earnings or a specific reserve such as IFRS transition reserve.

De-recognising of some old assets and liabilities :

The entity should eliminate previous GAAP assets and liabilities from the opening balance sheet if they do not qualify for recognition under IFRSs. [IFRS 1-10(b)] For example :    

• IAS 38 does not permit recognition of expenditure on any of the following as an intangible asset: research, start-up, pre-operating, and pre-opening costs, training, advertising and promotion, moving and relocation if the entity’s previous GAAP had recognised these as assets; they are eliminated in the opening IFRS balance sheet.

•     If the entity’s previous GAAP had allowed accrual of liabilities for ‘general reserves’, restructurings, future operating losses, or major overhauls that do not meet the conditions for recognition as a provision under IAS 37, these are eliminated in the opening IFRS balance sheet.

•     If the entity’s previous GAAP had allowed recognition of reimbursements and contingent assets that are not virtually certain, these are eliminated in the opening IFRS balance sheet.

Recognition of some new assets and liabilities:

Conversely, the entity should recognise all assets and liabilities that are required to be recognised by IFRS even if they were never recognised under previous GAAP. [IFRS 1.10(a)] For example:

IAS 39 requires recognition of all derivative financial assets and liabilities, including embedded de-rivatives. These were not recognised under many local GAAPs.

IAS 19 requires an employer to recognise its liabilities under defined benefit plans. These are not just pension liabilities but also obligations for medical and life insurance, vacations, termination benefits, and deferred compensation. In the case of ‘over-funded’ plans, this would be a defined benefit asset.

IAS 37 requires recognition of provisions as liabilities. Examples could include an entity’s obligations for restructurings, onerous contracts, decommissioning, remediation, site restoration, warranties, guarantees, and litigation.

Deferred tax assets and liabilities would be recognised in conformity with IAS 12.

Reclassification:

The entity should reclassify previous GAAP opening balance sheet items into the appropriate IFRS classification. [IFRS 1.10(c)] Examples:

IAS 10 does not permit classifying dividends declared or proposed after the balance sheet date as a liability at the balance sheet date. In the opening IFRS balance sheet these would be reclassified as a component of retained earnings.

If the entity’s previous GAAP had allowed treasury stock (an entity’s own shares that it had purchased) to be reported as an asset, it would be reclassified as a component of equity under IFRS.

Items classified as identifiable intangible assets in a business combination accounted for under the previous GAAP may be required to be classified as goodwill under IFRS 3, because they do not meet the definition of an intangible asset under IAS 38. The converse may also be true in some cases. These items must be reclassified.

IAS 32 has principles for classifying items as financialliabilities or equity. Thus mandatory redeemable preferred shares that may have been classified as equity under previous GAAP would be reclassified as liabilities in the opening IFRS balance sheet.

Note that IFRS 1 makes an exception from the ‘split-accounting’ provisions of IAS 32. If the liability component of a compound financial instrument is no longer outstanding at the date of the opening IFRS balance sheet” the entity is not required to reclassify out of retained earnings and into other equity the original equity component of the compound instrument.

The reclassification principle would apply for the purpose of defining reportable segments under IFRS 8.

The scope of consolidation might change depending on the consistency of the previous GAAP requirements to those in IAS 27. In some cases, IFRS will require consolidated financial statements where they were not required before.

Some offsetting (netting) of assets and liabilities or of income and expense items that had been acceptable under previous GAAP may no longer be acceptable under IFRS.

Retrospective  adjustments:

An entity need not make retrospective adjustments for complying with all IFRS from the inception/ origination of asset/liability. An entity may opt for the following exemptions:

1. Not applying IFRS 3 to business combinations that occurred before 1 April 2010

2. Taking fair value at the date of transition or re-valuation done before transition date as deemed cost for property, plant & equipment, intangible assets and investment property

3. Recognise all actuarial gains and losses that are unrecognised at 1 April 2010, even though the entity follows corridor approach for recognising actuarial gains and losses

4. Ignore unrecognised cumulative translation differences at the date of transition

5. Need not separate liability and equity component of a compound financial instrument where the liability component is not outstanding as at 1 April 2010

6. Take the values of assets and liabilities of the subsidiary stated in the parent’s consolidated financial statements after removing consolidation adjustments where the subsidiary adopts IFRS later than parent

 7. Take the values of assets and liabilities of the subsidiary stated in its separate financial statements if the parent adopts IFRS later than the subsidiary

 8. Designate a financial asset as available for sale or at fair value through profit or loss and a financialliability as at fair value through profit or loss at 1 April 2010

 9. Not apply IFRS 2 to equity instruments that vested before 1 April 2010

 10. Apply transitional provisions in IFRS 4 to insurance contracts at 1 April 2010

11. Not add to or deduct from the cost of the asset for changes in existing decommissioning, restoration and similar liabilities as specified in IFRIC 1 that occurred before  1 April  2010

12. Determine as at 1 April 2010 whether an arrangement contains a lease on the basis of the facts and circumstances existing on 1 April 2010

13. Take transaction value as fair value of financial assets and financial liabilities

14. Apply transitional provisions in IFRIC 12 to Service Concession Arrangements at 1 April 2010.

 IFRS 1 prohibits retrospective application in the following cases:
    
1. Not apply de-recognition requirements of IAS 39 to transactions that resulted in de-recognition under previous GAAP and that occurred before 1 January 2004

2. Measure all derivatives at fair value at 1 April 2010

3. Designate derivative as hedge instruments from 1 April 2010.

4. Attribute to the owners of the parent and to the controlling interests even if this results in non-controlling interests having a deficit balance

5. Account for changes in parent’s controlling interest in a subsidiary that does not result in loss of control as equity transaction.

The adjustments to be made to the values of assets and liabilities at 1 April, 2010 reflect the changes in accounting policies. No adjustments are required for changes in estimates made under previous GAAP.

Set of financial statements:

An entity’s first IFRS financial statements should contain :

1. Three statements of financial position (i) As at 31 March 20P (ii) As at 31 March 2011 (iii) As at 1 April 2010

2. Two statements of comprehensive income (i) For the period ended on 31 March 2012 (ii) For the period ended on 31 March 2011

3. Two statements of cash flows (i) For the period ended on 31 March 2012 (ii) For the period ended on 31 March 2011

4. Two statements of changes in equity (i) For the period ended on 31 March 2012 (ii) For the period ended on 31 March 2011

Annual  reconciliation:

IFRS 1 requires the following reconciliation in that entity’s financial statements for the period ended on 31 March 2012 :

1. Reconciliation of equity reported under Inter-national Financial Reporting Standards and previous GAAP for (a) 1 April 2010 (b) 31 March 2011.

2. Reconciliation of total comprehensive income under International Financial Reporting Standards with that reported under previous GAAP for the period 1 April 2010 to 31 March 2011.

3. Explanation of material adjustments in the statement of cash flows – IFRS 1 requires reconciliations in that entity’s interim financial reports presented during the period 1 April 2011 to 31 March 2012 between International Financial Reporting Standards and previous GAAP.

Quarterly  Interim  reconciliation:

The reconciliation required for a quarterly interim financial report as at 30 September 2011 is:

1. Reconciliation of equity as at 30 September 2011between that reported under International Financial Reporting Standards and that re-ported under previous GAAP.

2. Reconciliation of total comprehensive income for the period ended 30 September 2011 and 30 September 2010 between that reported under International Financial Reporting Standards and that reported under previous GAAP.

3. Reconciliation of total comprehensive income for the year to date period ended 30 September 2011 and 30 September 2010 between that reported under International Financial Reporting Standards and that reported under previous GAAP.

4. Explanation of material adjustments to statement of cash flows for the period ended 30 September 2011 and 30 September 2010 between that reported under International Finanial Reporting Standards and that reported – under previous GAAP.

5. Explanation of material adjustments to statement of cash flows for the year to date period ended 30 September 2011 and 30 September 2010.