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April 2011

GAPs in GAAP — Presentation of Comparatives under Ind-AS

By Dolphy D’Souza, Chartered Accountant
Reading Time 5 mins
The Institute of Chartered Accountants of India (ICAI) recently submitted a set of near-final Indian IFRS standards (known as ‘Ind-AS’) to the National Advisory Committee on Accounting Standards (NACAS). Subsequently, the Ministry of Corporate Affairs (MCA) notified the Ind-AS standards. These notified standards contain many changes from the IFRS as issued by the International Accounting Standard Board (IASB). Some of the changes are resulting in internal inconsistencies or may give rise to practical challenges (generally referred to as ‘GAP in GAAP’ by the author). This article highlights one such key issue. Whilst all the previous articles have focussed on Indian GAAP, henceforth this series will also additionally bring out the GAP in GAAP on the new Ind-AS’s.

IFRS 1 First-time adoption requires a company to transit from a previous GAAP (say, Indian GAAP) to IFRS at the beginning of the comparative period. Therefore an Indian company that has to prepare IFRS accounts for 2011-12 financial year, will transit to IFRS on 1st April 2010 (transition date or start date). This approach results in the company having both the current year (2011-12) and the comparable year (2010-11) prepared under IFRS with one transition date. By providing comparable numbers under the same IFRS framework, investors and analysts will have a better understanding of those financial statements.

A somewhat different approach is followed in Ind- AS 101 First-time Adoption of Ind-AS. Under this standard there is no mandatory requirement to prepare comparable numbers under the same Ind-AS framework. So typically an Indian company would have current year numbers under Ind-AS 101 prepared with the transition date of 1st April 2011 and comparable numbers as per Indian GAAP. Under this approach, the investors and analysts may face difficulties in understanding the financial statements that do not contain comparable numbers prepared under the same reporting framework.

There is another alternative approach that is allowed under Ind-AS 101, so that companies can provide comparative information under Ind-AS. Ind-AS 101 defines the ‘transition date’ as the beginning of the current period, i.e., 1st April 2011. Thus, a company cannot adopt Ind-AS from the beginning of the comparative period. If it desires to give comparative information as per Ind-AS in its first Ind-AS financial statements, it can do so on memorandum basis only. For the purposes of preparing comparative information on a memorandum basis, the company will have a deemed transition date, i.e., 1st April 2010. This gives rise to the following issue.

If a company decides to give Ind-AS comparatives in the first year of adoption, it will use two transition dates : actual transition date and memoranda/ deemed transition date. For example, if a company covered in phase 1 of the IFRS conversion roadmap and having 31st March year decides to give one year comparative, its actual transition date will be 1st April 2011. In addition, it will use 1st April 2010 as memoranda/deemed transition date to prepare memoranda comparatives. It may be noted that the memorandum balance sheet prepared at the end of 31st March 2011, will not be carried forward and a new balance sheet will be prepared at 1st April 2011, by applying Ind-AS 101 all over again. Though the intention is to provide comparability between two years under Ind-AS, the approach in Ind-AS 101 will end up doing exactly the opposite. Given below are few examples that explain the point.

(a) A company acquires a new business whose acquisition date falls within the memoranda comparable period (2010-11 in the above example). In preparing its memoranda information as at and for the year ended 31st March 2011, the company will apply acquisition accounting as per Ind-AS 103 Business Combinations. However, in preparing Ind-AS opening balance sheet at 1st April 2011, it can still use Ind-AS 101 exemption and continue with previous GAAP accounting under Indian GAAP, after making certain specific adjustments. The 2010-11 numbers will have the impact of acquisition accounting, but the 2011-12 numbers will be based on Indian GAAP accounting.

(b) A company decides to use fair value as deemed cost exemption for property, plant and equipment (PPE). For its memoranda transition, it will determine the fair value as at 1st April 2010. For actual transition, fair valuation as at 1st April 2011 will be needed. Other than having to do fair valuation for two transition dates, the value of the PPE and the resultant depreciation for the two years will not be comparable.

Paragraph 21(b)(ii) of Ind-AS 101 actually acknowledges this fact and states that “For example, the first-time adopter for whom the first reporting period is financial statements for the year ending 31st March, 2012 would apply the exceptions and exceptions as at 1st April, 2010 and 1st April, 2011; accordingly the balance sheet as at end of 31st March, 2011 may not be equivalent to the opening balance sheet as at 1st April, 2011.”

Requiring IFRS conversion on two transition dates (i.e., 1st April 2010 and 1st April 2011), so as to enable a company to prepare comparative numbers under Ind-AS seems rather unique, unnecessary cost and burden and self-defeating. The approach results in nonmatching of the balance sheets and in many cases may actually distort comparability. It is therefore likely that many companies may provide comparable numbers only under Indian GAAP rather than under Ind-AS.

For the standards-setters a better strategy would have been to accept IFRS 1, as it is. This standard would require transitioning to IFRS on 1st April 2010 as a starting point. Comparable and current year numbers would be prepared on that basis and the issue of noncomparability or non-matching balance sheets would not arise. Moreover investors would have found it easy to understand and useful for decision-making purposes. Global investors too would have preferred it, as being compliant with IASB IFRS.

It may be noted that this article assumes that the transition date is as suggested in the original roadmap issued by the MCA. However, MCA has clarified on the notified standards that the implementation date will be intimated later. Therefore it cannot be said with any certainty whether the dates mentioned in the roadmap will be met.

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