Compendium of
ITFG Clarification Bulletins
The Institute of Chartered Accountants of India
(Set up by an Act of Parliament)
New Delhi
© THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
All rights reserved. No part of this publication may be reproduced, stored in a
retrieval system, or transmitted, in any form, or by any means, electronic
mechanical, photocopying, recording, or otherwise, without prior permission,
in writing, from the publisher.
Clarifications given or views expressed by the Ind AS Transition Facilitation
Group (ITFG) represent the views of the members of the ITFG and are not
necessarily the views of the Ind AS Implementation Committee or the Council
of the Institute. The clarifications/views are based on the accounting
principles as on the date the Group finalises the particular clarification. The
date of finalisation of each clarification Bulletin is indicated along with the
clarification Bulletin. The clarification must, therefore, be read in the light of
any amendments and/or other developments subsequent to the issuance of
clarifications by the Group.
First Edition : February, 2018
Committee/Department : Ind AS Implementation Committee
Email : indas@icai.in
Website : www.icai.org
Price : Rs.150/-
ISBN : 978-81-8441-920-7
Published by : The Publication Department on behalf of the
Institute of Chartered Accountants of India,
ICAI Bhawan, Post Box No. 7100, Indraprastha
Marg, New Delhi - 110 002.
Printed by : Sahitya Bhawan Publications, Hospital Road,
Agra 282 003/February/2018/1000 Copies
Foreword
ICAI is leading the way in embracing accounting standards of excellence and
playing a pivotal role to ensure effective and smooth implementation of IFRS
converged Ind AS in India. Various initiatives are undertaken for training of
our accounting professionals, creating awareness and providing guidance on
Ind AS. Transition to Ind AS, a comprehensive set of principle based
standards, involves huge efforts. Hence, any transition of this size and nature
comes with its own set of challenges. Recognising the challenges at an early
stage, ICAI is making every possible effort to take these in stride, such as
constitution of Ind AS Implementation Committee, way back in the year 2011.
This Committee, since formation, is actively engaged in providing guidance
to the members and other stakeholders so as to enable them to implement
these Standards in the same spirit in which these have been formulated. For
addressing transition related queries in a timely and speedy manner, an Ind
AS Transition Facilitation Group (ITFG) of the Committee is working hard in
providing timely clarifications to members and others concerned. For this
purpose, the Group issues clarification bulletins addressing implementation
issues from time to time. Till date, the Group has brought out clarifications on
104 issues through its 14 clarification bulletins. For ease of reference of
members it has been considered appropriate that a publication containing
compilation of all the 104 issues clarified till date through these 14 ITFG
Clarifications Bulletins be brought out along with its standard-wise
indexation.
I convey my heartfelt thanks to CA. Dhinal Ashvinbhai Shah, Chairman, CA.
Sanjay Vasudeva, Vice- Chairman, and all members of the Ind AS Transition
Facilitation Group (ITFG) of Ind AS Implementation Committee for their
tremendous contribution in bringing out these clarification bulletins.
I am confident that this publication would be of great relevance for the
members and other stakeholders in implementing Ind AS.
New Delhi CA. Nilesh S.Vikamsey
February 2, 2018 President, ICAI
Preface
In order to enable the nation with robust high quality globally acceptable
accounting standards, ICAI spearheaded the implementation of IFRS-
converged Indian Accounting Standards (Ind AS). Application of these
standards requires high level of professional competence and skill sets. ICAI
recognised this challenge at an early stage and has taken a number of steps
to satisfactorily address this challenge and ensure smooth trouble free
transition to new accounting standard framework. ICAI efforts have yielded
the positive result and Ind AS has become a reality now as the era of
Implementation of Ind AS has already begun in the country with Phase I
companies who have published their financial statements prepared in
accordance with Ind AS for financial year 2016-17. Phase II companies have
published their half yearly results prepared in accordance with Ind AS.
ICAI is leading the way in embracing accounting standards of excellence and
is committed to play an important role to ensure effective and smooth
implementation of IFRS converged Ind AS in India. For this purpose, the Ind
AS Implementation Committee of the ICAI is actively engaged in providing
adequate guidance to members on Ind AS through its various initiatives. As
the implementation of Ind AS began in the country, a number of issues were
being raised by the members, preparers and other stakeholders with regard
to applicability/implementation of Ind AS. In order to provide timely
clarification on the issues raised, an Ind AS Transition Facilitation Group
(ITFG) was constituted under the aegis of this Committee in the year 2016.
The Group comprised of experts from accountancy firms, industry
representatives and other eminent professionals. The group met 14 times in
a span of two years to resolve the queries raised and till date have issued 14
clarification bulletins comprising 104 issues.
The purpose of this publication is to bring all the issues clarified through
these 14 ITFG Clarifications Bulletins at one place for ease of reference of
the members and other stakeholders.
I may apprise that the clarifications given or views expressed by the Ind AS
Transition Facilitation Group (ITFG) represent the views of the members of
the ITFG and are not necessarily the views of the Ind AS Implementation
Committee or the Council of the Institute. The clarifications/views are based
on the accounting principles as on the date the Group finalises the particular
clarification. The date of finalisation of each clarification Bulletin is indicated
along with the clarification Bulletin. The clarification must, therefore, be read
in the light of any amendments and/or other developments subsequent to the
issuance of clarifications by the Group.
I would like to convey sincere gratitude to our Honorable President, CA.
Nilesh S. Vikamsey and Vice-President, CA. Naveen N D Gupta for providing
us the opportunity of bringing out this publication. I am also thankful to CA.
Sanjay Vasudeva, Vice-Chairman, Ind AS Implementation Committee for his
efforts in all the endeavours of the Committee. I am extremely thankful to all
the members of the Ind AS Transition Facilitation Group (ITFG) for their
valuable contribution in bring out these clarification bulletins in a short span
of time.
I deeply appreciate the technical contribution made by CA. Geetanshu
Bansal, Secretary, Ind AS Implementation Committee and CA. Prachi Jain,
Executive Officer in bringing out all the ITFG Clarification Bulletins. I also
acknowledge CA. Geetu Jain, Project Associate and CA. Vaishali Jaggi,
Project Associate in helping out in bringing this publication. I would also like
to thank CA. Vidhyadhar Kulkarni, Head, Technical Directorate, ICAI, for his
technical support and guidance.
I sincerely believe that this compilation of all the ITFG Clarification bulletins
would help members and other stakeholders in implementing Ind AS.
New Delhi CA. Dhinal Ashvinbhai Shah
February 2, 2018 Chairman,
Ind AS Implementation Committee
vi
Contents
(i) Applicability related Issues: Roadmap ............................................ 1-23
(ii) Applicability related Issues: Net worth criteria .............................. 24-30
(iii) Issues related to Ind AS 101 ....................................................... 31-68
(iv) Issues related to Ind AS 103 ....................................................... 69-75
(v) Issues related to Ind AS 107 ........................................................ 76-79
(vi) Issues related to Ind AS 108 ........................................................ 80-81
(vii) Issues related to Ind AS 109 ........................................................ 82-91
(viii) Issues related to Ind AS 110 ........................................................ 92-98
(ix) Issues related to Ind AS 8 ................................................................. 99
(x) Issues related to Ind AS 12 ...................................................... 100-110
(xi) Issues related to Ind AS 16 ...................................................... 111-125
(xii) Issues related to Ind AS 17 ...................................................... 126-130
(xiii) Issues related to Ind AS 18 ...................................................... 131-135
(xiv) Issues related to Ind AS 20 ...................................................... 136-142
(xv) Issues related to Ind AS 21 ...................................................... 143-146
(xvi) Issues related to Ind AS 23 ...................................................... 147-150
(xv) Issues related to Ind AS 24 ...................................................... 151-152
(xvi) Issues related to Ind AS 27 ...................................................... 153-155
(xvii) Issues related to Ind AS 32 ...................................................... 156-160
(xviii) Issues related to Ind AS 33 ...................................................... 161-163
(xix) Issues related to Ind AS 37 ............................................................. 164
(xx) Issues related to Ind AS 38 ...................................................... 165-166
(xxi) Schedule III related Issues ...................................................... 167-169
(xxii) Appendices ........................................................................... 171-201
Appendix I FAQs related to Ind AS issued by the Accounting
Standards Board (ASB) of ICAI .......................... 173-181
Appendix II- Extracts of roadmap as amended vide notification dated
30.3.16 ............................................................... 182-189
Appendix III- Indexation of Issues-Standard-wise .................... 190-191
Appendix IV- Indexation of Issues in order of ITFG Clarification
Bulletins ............................................................. 192-201
viii
Tabulation of Issues: Topic-wise
Issue Topic Issue addressed Bulletin Issue Para of Other Ind Page
No. No. No. of Ind AS AS/AS No.
Bulletin 101 Standards
1 Roadmap Applicability of Ind AS- Subsidiaries of Listed 1 2 NA NA 1-4
Company (different scenario)
2 Roadmap Applicability of Ind AS to NBFCs in case not 13 4 NA NA 4
registered with RBI
3 Roadmap Applicability of Ind AS to India branch office of 12 6 NA NA 5
foreign company
IX
4 Roadmap Applicability of Ind AS to non-corporate entities 11 7 NA NA 5-6
5 Roadmap Applicability of Ind AS to holding company(NBFC) 6 3 NA NA 6-8
of the subsidiary which is covered under the
criteria of Ind AS roadmap
6 Roadmap Applicability of Ind AS - Section 8 company 6 2 NA NA 8-9
7 Roadmap Applicability of Ind AS- Date of Transition 4 4 NA NA 9-10
8 Roadmap Applicability of Ind AS - change in status of listed 3 8 NA NA 10-11
company
9 Roadmap Applicability of Ind AS to holding company when 3 7 NA NA 11-12
Compendium of ITFG Clarification Bulletins
subsidiary meets the criteria for applicability of Ind
AS
10 Roadmap Applicability of Ind AS - associate company 3 6 NA NA 13-14
In case of quarterly results
11 Roadmap Applicability of Ind AS to Core Investment 3 2 NA NA 14-15
Company (CIC)
12 Roadmap Date of Transition in case a company is already 2 3 Appendix NA 15-16
preparing financials as per IFRS A
13 Roadmap Applicability of Ind AS to an Indian subsidiary 2 2 NA NA 16-17
of a foreign company
14 Roadmap Applicability of Ind AS - associate company 3 5 NA Ind AS 28 17-20
x
Consideration of share warrants which are
convertible into equity shares
15 Roadmap Applicability of Ind AS to holding, subsidiary , joint 3 4 NA Ind AS 28 20-21
venture and associate company through direct or
indirect association in case of voluntary adoption
by the parent company
16 Roadmap Applicability of Ind AS to holding company, if 5 1 NA Ind AS 110 21-23
subsidiary company incorporated for divestment
purpose complies with Ind AS.
17 Net worth Applicability of Ind AS - Net Worth Criteria 11 1 NA NA 24
Treatment of ESOP Reserve
18 Net worth Computation of net worth for Ind AS applicability- 6 4 NA AS 12 25
Tabulation of Issues: Topic-wise
Government Grant to be considered as capital
reserve
19 Net worth Applicability of Ind AS - Net worth criteria 6 1 NA NA 26-27
20 Net worth Applicability of Ind AS - In case of Negative net 4 3 NA NA 27-29
worth
21 Net worth Applicability of Ind AS- Net worth Criteria 1 1 NA NA 29-30
22 Ind AS 101 Date of Transition to Ind AS 8 3 Para 6 NA 31
23 Ind AS 101 Adjustments due to other Ind AS if deemed cost 12 10 Para 10 NA 32-33
exemption availed
24 Ind AS 101 Date for assessment of functional currency 1 5 Para 10 NA 33-34
xi
25 Ind AS 101 Accounting treatment of the balance outstanding in 8 7 Para 10, Ind AS 1 34-35
the "Revaluation Reserve" and deferred tax on this 11 Ind AS 12
transition revaluation reserve
26 Ind AS 101 Applicability of Ind AS 109, Financial Instruments, 12 9 Para C1 Ind AS 109 35-38
if financial instruments have been acquired as part & C4
of the business combinations and the exemption
under paragraph C1 of Ind AS 101 availed
27 Ind AS 101 Accounting Treatment of the Government Grant 12 2 Para D5, 38-39
received before the date of transition and 10 Ind AS 20
measurement of property, plant and equipment at
the date of transition to Ind AS
Compendium of ITFG Clarification Bulletins
28 Ind AS 101 Reversal of the impairment provision recognised in 8 5 Para D6 Ind AS 16 40-41
books as at the date of transition when exemption Ind AS 36
under paragraph D6 of Ind AS 101 availed
29 Ind AS 101 Availment of deemed cost exemption for the 10 4 Para AS 10 41-43
assets classified as `Assets held for sale' but D7AA Ind AS 105
which do not fulfil the criteria for classifying as
held for sale in accordance with Ind AS 105 on the
date of transition
30 Ind AS 101 Applicability of paragraph D7AA for capital work in 3 11 Para Ind AS 16 43-44
progress D7AA
31 Ind AS 101 Deemed cost exemption under paragraph D7AA 12 5 Para Ind AS 110 44-45
xii
(Treatment of intragroup profits) D7AA
32 Ind AS 101 Reversal of impact of paragraph 46A of AS 11 7 3 Para Para 45-46
when exemption as per paragraph D7AA of Ind AS D7AA 46/46A of
101 availed AS 11
33 Ind AS 101 Selective adoption of deemed cost exemption 5 3 Para NA 46-47
under paragraph D7AA D7AA
34 Ind AS 101 Treatment of Government Grant on the date of 5 5 Para Ind AS 20 47-49
transition-In case of deemed cost exemption D7AA
and Para
D10
Tabulation of Issues: Topic-wise
35 Ind AS 101 Treatment of unadjusted processing of fees on 5 4 Para Ind AS 109 49-50
loans taken before the date of transition -In case D7AA
of deemed cost exemption and Para
D10
36 Ind AS 101 Applicability of paragraph D13AA on long term 7 4 Para Para 51-52
foreign exchange contracts D13AA 46/46A of
AS 11
37 Ind AS 101 Capitalisation of exchange differences arising from 1 4 Para Para 52-53
long term foreign currency monetary items (In 13AA 46/46A of
case of first-time adoption of Ind AS and when AS 11
change in functional currency)
38 Ind AS 101 Exemption under paragraph D13AA to foreign 7 1 Para Para 53-54
xiii
currency loan drawn after Ind AS applicability to D13AA 46/46A of
the entity AS 11
39 Ind AS 101 Applicability of paragraph D13AA on foreign 3 10 Para Para 54-55
currency swaps in case of hedged items D13AA 46/46A of
AS 11
Ind AS 109
40 Ind AS 101 Revision of balance of Foreign Currency Monetary 2 6 Para Ind AS 109 55-58
Item Translation Difference Account (FCMITDA) at 13AA
the time of first time adoption of Ind AS on account
of finance cost
41 Ind AS 101 Amortisation of balance of Foreign Currency 2 1 Para Para 58-59
Monetary Item Translation Difference Account 13AA 46/46A of
(FCMITDA) AS 11
42 Ind AS 101 Capitalisation of exchange differences arising from 1 3 Para Para 59-60
Compendium of ITFG Clarification Bulletins
long term foreign currency monetary items in case 13AA 46/46A of
of fixed assets(In case of first time adoption of Ind AS 11
AS)
43 Ind AS 101 Accounting Treatment of interest free loan to 10 1 Para Ind AS 27 60-61
subsidiary company when exemption under D14, D15
paragraph D15 of Ind AS 101 availed & 10
44 Ind AS 101 Measurement of Investment in Subsidiary when 11 4 Para NA 61-63
exemption under paragraph D15 of Ind AS 101 D14,
availed D15, D7
45 Ind AS 101 Exemption of paragraph D15 on investment in 7 8 Para D15 Ind AS 110 63-65
debentures of subsidiary company Ind AS 27
xiv
Ind AS 109
46 Ind AS 101 Exemption under paragraph D22 of Ind AS 101 in 7 9 Para D22 Ind AS 38 65-66
respect of intangible assets arising from service
concession arrangements (toll roads)which are in
progress.
47 Ind AS 101 Accounting treatment of non-controlling interest in 8 6 Para B7, Ind AS 103 66-68
case of business combinations in its consolidated C1
financial statements as on the date of transition Para C4
of
Appendix
C
48 Ind AS 103 Date of acquisition (i.e. date of obtaining control) 12 8 NA Ind AS 103 69-71
under two scenario in case of court scheme,
Tabulation of Issues: Topic-wise
whether business combination is or is not under
common control.
49 Ind AS 103 Business Combinations of entities under common 9 2 NA Ind AS 103 71-74
control Ind AS 110
50 Ind AS 103 Incorporation of effect of business combination in 14 4 NA Ind AS 103 74-75
the standalone financial statements in case of
scheme of arrangement
51 Ind AS 107 Recognition of the dividend income on an 8 9 NA Ind AS 107 76-78
investment in debt instrument in the books of an Ind AS 109
investor
52 Ind AS 107 Foreign currency risk disclosure in case of option 13 8 Para Ind AS 107 78-79
xv
taken under paragraph D13AA of Ind AS 101 D13AA
53 Ind AS 108 Disclosures by the entity in case it is operating 13 3 NA Ind AS 108 80-81
into one segment
54 Ind AS 109 Valuation of financial guarantee contract 12 11 NA Ind AS 109 82-83
55 Ind AS 109 Accounting Treatment of financial guarantee 13 2 NA Ind AS 109 83-85
received from the Director
56 Ind AS 109 Recognition of renegotiation gain/loss on Financial 13 6 NA Ind AS 109 85-86
Instruments done in subsequent year but before
the approval of financial statements
57 Ind AS 109 Accounting treatment of processing fees belonging 10 2 NA Ind AS 109 86-88
to undisbursed term loan amount
58 Ind AS 109 Accounting Treatment of prepayment premium 12 4 NA Ind AS 109 88-89
Compendium of ITFG Clarification Bulletins
and processing fees of obtaining new loan to
prepay old loan
59 Ind AS 109 Accounting of Financial Guarantee Contract - 12 3 NA Ind AS 109 89-90
Comfort Letter
60 Ind AS 109 Accounting treatment of shares held as stock-in 14 5 NA Ind AS 90-91
trade in accordance with Ind AS 109, Ind
AS 32, Ind
AS 2
61 Ind AS 110 Accounting Treatment of loss of investment in 13 7 NA Ind AS 112 92-93
subsidiary Ind AS 110
62 Ind AS 110 Accounting treatment of dividend distribution tax in 13 9 NA Ind AS 110 93-96
the consolidated financial statements in case of
xvi
partly-owned subsidiary - different scenarios
63 Ind AS 110 Treatment of depreciation in consolidated financial 11 6 NA Ind AS 110 96-98
statements when different method of depreciation Ind AS 8
applied by entities
64 Ind AS 8 Disclosure of the new Ind AS which is not yet 8 2 NA Ind AS 8 99
effective (Ind AS 115)
65 Ind AS 12 Accounting treatment of Tax Holidays under Ind 11 2 NA Ind AS 12, 100-101
AS AS 22
66 Ind AS 12 Recognition of deferred tax asset on the tax 10 3 NA Ind AS 12 101-102
deductible goodwill in the consolidated financial
statements
67 Ind AS 12 Accounting treatment of dividend distribution tax 9 1 NA Ind AS 12 103-105
Tabulation of Issues: Topic-wise
(DDT) and deferred tax liability (DTL) on the
accumulated undistributed profits of the subsidiary
company
68 Ind AS 12 Recognition of deferred tax asset on land sold as 7 7 NA Ind AS 12 105-107
slump sale
69 Ind AS 12 Recognition of the deferred tax on the differences 8 8 Para Ind AS 12 108-110
that are arising from adjustment of exchange D13AA Ind AS 21
difference to the cost of the asset
70 Ind AS 16 Accounting Treatment of expenditure on the 11 8 NA Ind AS 16 111-113
construction/development of railway siding, road
and bridge to facilitate the construction of a new
refinery
xvii
71 Ind AS 16 Selection of valuation model of immovable 12 1 NA Ind AS 16 113-115
properties Ind AS 40
72 Ind AS 16 Accounting treatment of the wrongly capitalised 8 4 Para Ind AS 16 115-116
asset which does not meet the definition of D7AA,
tangible asset 10, 24,
26
73 Ind AS 16 Re-computation of Depreciation based on useful 3 14 Para D Ind AS 16 117-118
life when Ind AS 16 applied retrospectively 7AA
74 Ind AS 16 Property, plant and equipment - capitalisation of 3 9 Para Ind AS 16 118-120
capital spares when deemed cost exemption D7AA
availed for property, plant and equipment on and Para
transition to Ind AS 10
75 Ind AS 16 Property, Plant and Equipment - Capitalisation of 2 5 NA Ind AS 16 120
Compendium of ITFG Clarification Bulletins
expenditure on assets not owned by the company
76 Ind AS 16 Property Plant and Equipment- Recognition 2 4 NA Ind AS 16 120-121
Criteria of spare part as an item of property, plant
and equipment and depreciation thereon
77 Ind AS 16 Accounting of spare parts which meet the 5 6 Para D Ind AS 16 121-124
definition of property, plant and equipment on the 7AA
date of transition
78 Ind AS 16 Accounting treatment of the Revaluation surplus 14 6 D5 Ind AS 16 124-125
as per previous GAAP on transition date and
Revaluation gain arising after transition date when
Ind AS 16 applied retrospectively
xviii
79 Ind AS 17 Classification of land lease under Ind AS 7 5 NA Ind AS 17 126-127
80 Ind AS 17 Straight-lining of lease payments if escalation of 5 7 NA Ind AS 17 128-129
lease payments is different from general inflation.
81 Ind AS 17 Accounting treatment of restoration costs in case 14 2 NA Ind AS 17 129-130
of a leasehold land
82 Ind AS 18 Classification of expense of providing free third 10 6 Ind AS 18 131-132
party goods under Customer Loyalty Programmes
83 Ind AS 18 Revenue Recognition - Treatment of Service Tax 4 2 NA Ind AS 18 132-133
84 Ind AS 18 Revenue Recognition - presentation of Excise 4 1 NA Ind AS 18 133-134
Duty (Gross or net of sales)
85 Ind AS 18 Whether an entity should adjust the consideration 14 3 NA Ind AS 18 134-135
Tabulation of Issues: Topic-wise
(including advance payments) for the effect of time
value of money
86 Ind AS 20 Accounting of below-market rate interest loan - 12 7 Para B10 Ind AS 32 136-138
exemption under para B10 of Ind AS 101 Ind AS 109
87 Ind AS 20 Accounting treatment of exemption of custom duty 11 5 NA Ind AS 20 138-140
under EPCG scheme
88 Ind AS 20 Accounting treatment of the grants in the nature of 9 3 NA Ind AS 20 140-142
promoters' contribution on the date of transition to
Ind AS and post transition to Ind AS
89 Ind AS 21 Determination of functional currency and 7 2 NA Ind AS 21 143-145
presentation currency for preparation of annual
xix
financial statements in case of Group
90 Ind AS 21 Identification of functional currency of an entity 3 3 NA Ind AS 21 145-146
91 Ind AS 23 Capitalisation of Dividend Distribution Tax(DDT) 13 1 NA Ind AS 109 147-148
as borrowing costs of the qualifying asset Ind AS 23
92 Ind AS 23 Capitalising of the processing fees as borrowing 14 1 NA Ind AS 109 149-150
costs when the loans are specifically borrowed for Ind AS 23
the purpose of a qualifying asset
93 Ind AS 24 Whether sitting fees paid to independent director 11 9 NA Ind AS 24 151-152
and Non-executive director is required to be
disclosed in the financial statements prepared as
per Ind AS
94 Ind AS 27 Post Ind AS adoption accounting treatment of 5 8 NA Ind AS 111 153-154
Compendium of ITFG Clarification Bulletins
profit share from investment in limited liability Ind AS 27
partnership which is under joint control ( in Ind AS 109
separate financial statements)
95 Ind AS 27 Measurement of investment in subsidiaries at cost 3 12 Para Ind AS 27 154-155
if valued at fair value on date of transition D15 Ind AS 109
96 Ind AS 32 Computation of financial liability in case of 13 10 NA Ind AS 32 156-157
convertible debentures sharing same coupon rate
and market rate
97 Ind AS 32 Treatment of dividend on financial instruments 7 6 NA Ind AS 32 157-158
declared after the end of the reporting period Ind AS 10
98 Ind AS 32 Treatment of optionally convertible preference 14 7 NA Ind AS 32, 158-160
xx
shares in Standalone financial statements and Ind AS 27,
consolidated financial statements Ind AS 110
99 Ind AS 33 Presentation of earning per share for separate and 11 3 NA Ind AS 33 161-162
consolidated financial statements
100 Ind AS 33 Treatment of Foreign Currency Monetary Item 10 5 Ind AS 33 162-163
Translation Difference Account for the purpose of Para
calculation of basic earnings per share (EPS) 46/46A of
AS 11
101 Ind AS 37 Whether provision for unspent Corporate Social 8 1 NA Ind AS 37 164
Responsibility expenditure is required to be made
as per Ind AS
102 Ind AS 38 Applicability of revenue based amortisation for 3 13 Para D22 Ind AS 165-166
Tabulation of Issues: Topic-wise
intangible assets arising service concession 38(Para
arrangements in respect of toll roads for new 7AA)
arrangements entered after the date of transition
103 Schedule III Disclosure of operating profit on the face of 13 5 NA NA 167-168
Statement of Profit and Loss in accordance with
Ind AS based Schedule III
104 Schedule III Applicability of Ind AS based Schedule III on 3 1 NA NA 168-169
voluntary adoption of Ind AS
xxi
Applicability related Issues: Roadmap
Applicability of Ind AS- Subsidiaries of Listed Company (different
scenario)
Issue 1: Company A is a listed company and has three Subsidiaries
Company X, Company Y and Company Z. As on 31st March 2014, the
net worth of Company A is ` 600 Crores, net worth of Company X is `
100 Crores, Company Y is ` 400 Crores and Company Z is ` 210 Crores.
All the three subsidiaries are non-listed public companies.
Case A During the financial year 2014-15, Company A has sold off its entire
investment in Company X on 31st December 2014. Therefore, Company X is
no longer a subsidiary of Company A for the purposes of preparation of
financial statements as on 31st March 2015. Should Company X prepare its
financial statements as per the Companies (Accounting Standards) Rules,
2006 or the Companies (Indian Accounting Standards) Rules, 2015?
Case B During the financial year 2015-16, Company A has sold off its
investment in Company Y on 31st December, 2015. Therefore, Company Y is
no longer a subsidiary of Company A for the purposes of preparation of
financial statements as on 31 March 2016. Should Company Y prepare its
financial statements as per the Companies (Accounting Standards) Rules,
2006 or the Companies (Indian Accounting Standards) Rules, 2015?
Case C During the financial year 2016-17, Company A has sold off its
investment in Company Z on 31st December 2016, therefore company Z is
no longer a subsidiary of Company A for the purposes of preparation of
financial statements as on 31 March 2017. Should Company Z prepare its
financial statements as per the Companies (Accounting Standards) Rules,
2006 or the Companies (Indian Accounting Standards) Rules, 2015?
Response: Rule 4(1)(ii)(c) of the Companies (Indian Accounting Standards)
Rules, 2015, states as under:
(4) (1) The Companies and their auditors shall comply with the Indian
Accounting Standards (Ind AS) specified in Annexure to these rules in
preparation of their financial statements and audit respectively, in the
following manner, namely:-
(ii) the following companies shall comply with the Indian Accounting
Standards (Ind AS) for the accounting periods beginning on or after
1
Compendium of ITFG Clarification Bulletins
1st April, 2016, with the comparatives for the periods ending on
31st March, 2016, or thereafter, namely:-
(a) companies whose equity or debt securities are listed or are in the
process of being listed on any stock exchange in India or outside
India and having net worth of rupees five hundred crore or more;
(b) companies other than those covered by sub-clause (a) of clause (ii)
of sub-rule(1) and having net worth of rupees five hundred crore or
more;
(c) holding, subsidiary, joint venture or associate companies of
companies covered by sub-clause (a) of clause (ii) of sub- rule (1)
and sub-clause (b) of clause (ii) of sub- rule (1) as the case may
be;
Rule 4(2) of the Companies (Indian Accounting Standards) Rules, 2015,
states as under:
2) For the purposes of calculation of net worth of companies under sub-
rule (1), the following principles shall apply, namely:-
(a) the net worth shall be calculated in accordance with the stand-
alone financial statements of the company as on 31st March, 2014
or the first audited financial statements for accounting period which
ends after that date;
(b) for companies which are not in existence on 31st March, 2014 or
an existing company falling under any of thresholds specified in
sub-rule (1) for the first time after 31st March, 2014, the net worth
shall be calculated on the basis of the first audited financial
statements ending after that date in respect of which it meets the
thresholds specified in sub-rule (1).
Explanation.- For the purposes of sub-clause (b), the companies meeting the
specified thresholds given in sub-rule (1) for the first time at the end of an
accounting year shall apply Indian Accounting Standards (Ind AS) from the
immediate next accounting year in the manner specified in sub-rule (1).
Rule (9) of the Companies (Indian Accounting Standards) Rules, 2015, states
that:
"Once a company starts following the Indian Accounting Standards (Ind AS)
either voluntarily or mandatorily on the basis of criteria specified in sub-rule
(1), it shall be required to follow the Indian Accounting Standards (Ind AS) for
all the subsequent financial statements even if any of the criteria specified in
this rule does not subsequently apply to it".
2
Applicability related Issues: Roadmap
In view of the above requirements, Company A meets the criteria as
specified in the Rule 4(2) (a) of the Companies (Indian Accounting
Standards) Rules, 2015, on 31st March, 2014. Accordingly, the Companies
(Indian Accounting Standards) Rules, 2015, will become applicable to the
Company on mandatory basis from accounting periods commencing 1st
April, 2016.
As per the Rule 4(1)(ii)(c) of the Companies (Indian Accounting Standards)
Rules, 2015, a holding, subsidiary, joint venture or associate company of a
Company to which the Companies (Indian Accounting Standards) Rules,
2015 applies will be required to follow the Companies (Indian Accounting
Standards) Rules, 2015 for preparing and presenting its financial statements.
In the abovementioned case, Company A has net worth of more than ` 500
crore in the financial year ending 31 March 2014. Therefore, ordinarily
Company A along with its subsidiaries will have to apply Indian Accounting
Standards (Ind ASs) for preparing financial statements for the accounting
periods commencing 1st April, 2016, except in situations covered by Case A
and Case B as discussed below.
Case A
Company A has sold off its entire investment in Company X on 31st
December, 2014; Company X is no longer a subsidiary of Company A as at
the beginning of 1st April, 2016. Therefore, in this case, Company X would
continue to prepare financial statements for the accounting periods
commencing 1st April, 2016, as per the Companies (Accounting Standards)
Rules, 2006.
Case B
Company A has sold its investment in subsidiary Company Y on 31st
December, 2015, in consequence of which Company Y is no longer
subsidiary of Company A as at the beginning of 1st April, 2016. Therefore,
the Companies (Indian Accounting Standards) Rules, 2015 will not be
applicable to Company Y. Therefore, Company Y would continue to prepare
financial statements for accounting periods commencing April 1, 2016 under
the Companies (Accounting Standards) Rules, 2006.
Case C
In the given case, Company A has sold its investment in subsidiary Company
Z on 31st December, 2016; therefore, Company Z was a subsidiary of
Company A as at the beginning of 1st April, 2016. Company Z being
3
Compendium of ITFG Clarification Bulletins
subsidiary of Company A as at the beginning of 1st April, 2016, would have
to prepare financial statements for the accounting periods commencing 1st
April, 2016 as per the Companies (Indian Accounting Standards) Rules,
2015.
(ITFG Clarification Bulletin 1, Issue 2)
(Date of finalisation: January 16, 2016)
Applicability of Ind AS to NBFCs in case not registered with RBI
Issue 2: A Company ABC Ltd. performs role of NBFC and has applied
for the registration as NBFC which is awaited from the Reserve Bank of
India (RBI).
Whether roadmap for the applicability of Ind AS as applicable to NBFCs
also applies to the Company ABC Ltd., which performs role of NBFC
however, it is not registered with the RBI?
Response: Rule 4(1)(iii) of the Companies (Indian Accounting Standards)
(Amendments) Rules, 2016 lays down the roadmap for the applicability of Ind
AS to NBFCs. As per the said rules, "Non-Banking Financial Company"
means a Non-Banking Financial Company as defined in clause (f) of section
45-I of the Reserve Bank of India Act, 1934 and includes Housing Finance
Companies, Merchant Banking companies, Micro Finance Companies,
Mutual Benefit Companies, Venture Capital Fund Companies, Stock Broker
or Sub-Broker Companies, Nidhi Companies, Chit Companies, Securitisation
and Reconstruction Companies, Mortgage Guarantee Companies, Pension
Fund Companies, Asset Management Companies and Core Investment
Companies.
In view of the above, it is pertinent to note that the above definition covers a
company which is carrying on the activity of Non-Banking Financial
Company. The definition of NBFC is given under the RBI Act, 1934. Hence
the company which is carrying on the activity of NBFC but not registered with
RBI will also be subject to the roadmap for the applicability of Ind AS as
applicable to any other NBFC. However, the requirements with regard to
registration, eligibility of a company to operate as NBFC (pending
registration) etc. are governed by the Reserve Bank of India Act, 1934 and
Rules laid down thereon and should be evaluated by the entity based on its
own facts and circumstances separately.
(ITFG Clarification Bulletin 13, Issue 4)
(Date of finalisation: January 16, 2018)
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Applicability related Issues: Roadmap
Applicability of Ind AS to India branch office of foreign company
Issue 3: ABC & Company incorporated in US with limited liability, has
established a branch office in India, with the permission of the Reserve
Bank of India (RBI), to provide consultancy services in India. The
branch office remits the amounts earned by it to ABC & Co. (i.e. Head
office) net of applicable Indian taxes and subject to RBI guidelines.
As on April 1, 2016, it has more than 500 crore balance as "Head office
account". Whether the India branch office of ABC Co. will be required to
comply with Ind AS?
Response: As per the roadmap issued by the MCA, "company" as defined in
clause (20) of section 2 of the Companies Act, 2013 is required to comply
with Ind AS. Section 2(20) of the Act defines company as follows:
"company" means a company incorporated under this Act or under any
previous company law;
The branch office of a foreign company established in India is not
incorporated under the Act. It is only an establishment of a foreign company
in India. The Branch office is just an extension of the foreign company in
India.
Further, as per Rule 6 of the Companies (Indian Accounting Standards)
Rules, 2015, "Indian company which is a subsidiary, associate, joint venture
and other similar entities of a foreign company shall prepare its financial
statements in accordance with the Indian Accounting Standards (Ind AS) if it
meets the criteria as specified in sub-rule (1)."
In accordance with the above, it may be noted that Branch office of a foreign
company is not covered under rule 6 as mentioned above. Accordingly, in the
given case, the branch office of ABC& Co. is not required to comply with Ind
AS.
(ITFG Clarification Bulletin 12, Issue 6)
(Date of finalisation: October 23, 2017)
Applicability of Ind AS to non-corporate entities
Issue 4: A Ltd. is a first-time adopter of Ind AS. It had incorporated a
partnership firm with B Ltd. namely, M/s A&B Associates. Whether Ind
AS will be applicable to M/s A & B Associates by virtue of the fact that
Ind AS is applicable to A Ltd?
5
Compendium of ITFG Clarification Bulletins
Also clarify, whether Ind AS will be applicable to non-corporate
entities?
Response: The applicability of Ind AS has been specified for classes of
companies specified in Rule 4 of Companies (Indian Accounting Standards)
Rules, 2015. Indian Accounting Standards notified under the Companies
(Indian Accounting Standards) Rules, 2015, are applicable for the corporates
only. Non- corporates are required to follow the accounting standards issued
by the Institute of Chartered Accountants of India. They cannot be applied by
non-corporate entities even voluntarily.
However, in case, a relevant regulator specifically provides for
implementation of Ind AS, the non-corporate entities shall apply Ind AS, for
example, SEBI has mandated implementation of Ind AS for Infrastructure
Investment Trusts (InvITs) and Real Estate Investment Trusts (REITs).
Similarly, if Central Government notifies certain body corporate under clause
(1)(4)(f) of Companies Act, 2013, such entities will be required to apply Ind
AS. For other non-company entities, Accounting Standards issued by the
ICAI shall be applicable and there will be no option to follow Ind AS to such
entities.
Accordingly, in the given case, Ind AS is not applicable to partnership firms.
However, for the purpose of consolidation, the partnership firm will be
required to provide financial statements data prepared as per Ind AS to A Ltd
provided the partnership qualifies as a subsidiary/joint venture/associate of A
Ltd.
(ITFG Clarification Bulletin 11, Issue 7)
(Date of finalisation: July 31, 2017)
Applicability of Ind AS to holding company (NBFC) of the subsidiary
which is covered under the criteria of Ind AS roadmap
Issue 5: Company X is falling under Phase II of MCA roadmap for
companies and hence Ind AS are applicable to it from the financial year
2017-18. Company X is a subsidiary of Company Y. Company Y is an
unlisted NBFC company having net worth of ` 285 crores. What will be
the date of applicability of Ind AS for company X and company Y? If Ind
AS applicability date for parent NBFC is different from the applicability
date of corporate subsidiary, then, how will the consolidated financial
statements of parent NBFC be prepared?
Response: Rule 4(1)(iv)(b) of Companies (Indian Accounting Standards)
6
Applicability related Issues: Roadmap
Rules, 2015 read with Companies (Indian Accounting Standards)
(Amendment) Rules, 2016 states as under:
" ....
(b) The following NBFCs shall comply with the Indian Accounting Standards
(Ind AS) for accounting periods beginning on or after the 1st April, 2019, with
comparatives for the periods ending on 31st March, 2019, or thereafter-
(A) NBFCs whose equity or debt securities are listed or in the process
of listing on any stock exchanges in India or outside India and having
net worth less than rupees five hundred crore;
(B) NBFCs, that are unlisted companies, having net worth of rupees
two-hundred and fifty crore or more but less than rupees five hundred
crore; and
(C) holding, subsidiary, joint venture or associate companies of
companies covered under item (A) or item (B) of sub-clause (b), other
than those already covered in clauses (i), (ii) and (iii) of sub-rule (1) or
item (B) of sub-clause (a) of clause (iv)."
In accordance with the above, it may be noted that NBFCs having net worth
of less than 500 crore shall apply Ind AS from 1.4.2019 onwards. Further, the
holding, subsidiary, joint venture or associate company of such an NBFC
other than those covered by corporate roadmap shall also apply Ind AS from
1.4.2019.
Further, explanation to clause (iv), states as under:
"Explanation. For the purposes of clause (iv), if in a group of
Companies, some entities apply Accounting Standards specified in the
Annexure to the Companies (Accounting Standards) Rules, 2006 and
others apply accounting standards as specified in the Annexure to these
rules, in such cases, for the purpose of individual financial statements,
the entities should apply respective standards applicable to them. For
preparation of consolidated financial statements, the following
conditions are to be followed, namely:-
(i) where an NBFC is a parent (at ultimate level or at intermediate
level), and prepares consolidated financial statements as per
Accounting Standards specified in the Annexure to the Companies
(Accounting Standards) Rules, 2006, and its subsidiaries,
associates and joint ventures, if covered by clause (i), (ii) and (iii)
of sub-rule (1) has to provide the relevant financial statement data
7
Compendium of ITFG Clarification Bulletins
in accordance with the accounting policies followed by the parent
company for consolidation purposes (until the NBFC is covered
under clause (iv) of sub-rule (1);
(ii) where a parent is a company covered under clause (i), (ii) and (iii)
of sub-rule (1) and has an NBFC subsidiary, associate or a joint
venture, the parent has to prepare Ind AS- compliant consolidated
financial statements and the NBFC subsidiary, associate or a joint
venture has to provide the relevant financial statement data in
accordance with the accounting policies followed by the parent
company for consolidation purposes (until the NBFC is covered
under clause (iv) of sub-rule (1)."
Accordingly, in the given case, Company Y (NBFC) shall apply Ind AS from
1.4.2019. Company X shall apply Ind AS in its individual financial statements
from financial year 2017-18 (as per the corporate roadmap) and for the
financial year 2017-18 and 2018-19, Company X shall also prepare its
individual financial statements as per the Companies (Accounting Standards)
Rules, 2006 to facilitate the preparation of consolidated financial statement
by parent Company Y (NBFC).
(ITFG Clarification Bulletin 6, Issue 3)
(Date of finalisation: November 19, 2016)
Applicability of Ind AS - Section 8 Company
Issue 6: Company X Ltd. is being covered under Phase I of Ind AS and
needs to apply Ind AS from financial year 2016-17. Company Y which is
an associate company of Company X Ltd. is a charitable organisation
and registered under section 8 of the Companies Act, 2013.
Whether Company Y is required to comply with Ind AS from financial
year 2016-17?
Response: Rule 4(1)(ii) of Companies (Indian Accounting Standards) Rules,
2015, states as under:
(ii) the following companies shall comply with the Indian Accounting
Standards (Ind AS) for the accounting periods beginning on or after
1st April, 2016, with the comparatives for the periods ending on 31st
March, 2016, or thereafter, namely:-
(a) companies whose equity or debt securities are listed or are in the
process of being listed on any stock exchange in India or outside India
and having net worth of rupees five hundred crore or more;
8
Applicability related Issues: Roadmap
(b) companies other than those covered by sub-clause (a) of clause (ii) of
sub-rule (1) and having net worth of rupees five hundred crore or
more;
(c) holding, subsidiary, joint venture or associate companies of companies
covered by sub-clause (a) of clause (ii) of sub-rule (1) and sub-clause
(b) of clause (ii) of sub- rule (1) as the case may be; and".
In accordance with the above, it may be noted that holding, subsidiary, joint
venture, associate companies of companies falling under any of the
thresholds specified in Rule 4(1)(ii) are required to comply with Ind AS from
financial year 2016-17.
Further, it may be noted that the companies covered under Section 8 are
required to comply the provisions of the Companies Act, 2013, unless and
until any exemption is provided. Section 8 companies are not exempted from
the requirements of section 133 and section 129 of the Companies Act, 2013.
In view of the above, in the given case, Company Y will be required to apply
Ind AS from financial year 2016-17.
(ITFG Clarification Bulletin 6, Issue 2)
(Date of finalisation: November 19, 2016)
Applicability of Ind AS- Date of Transition
Issue 7: A company covered under Phase I, having net worth of ` 600
crores, decides to give comparatives for F.Y. 2015-16 and F.Y. 2014-15.
What should be date of transition in this case?
Response: Appendix A to Ind AS 101, First- time Adoption of Indian
Accounting Standards, defines date of transition as follows:
"The beginning of the earliest period for which an entity presents full
comparative information under Ind ASs in first Ind AS financial
statements"
The definition of the date of transition as stated above therefore permits an
entity to select its date of transition. However, Rule 4(1)(i) and (ii) of the
Companies (Indian Accounting Standards) Rules, 2015, state as under:
"The Companies and their auditors shall comply with the Indian
Accounting Standards (Ind AS) specified in Annexure to these rules in
preparation of their financial statements and audit respectively, in the
following manner, namely:-
9
Compendium of ITFG Clarification Bulletins
(i) any company may comply with the Indian Accounting Standards
(Ind AS) for financial statements for accounting periods beginning
on or after 1st April, 2015, with the comparatives for the periods
ending on 31st March, 2015, or thereafter;
(ii) the following companies shall comply with the Indian Accounting
Standards (Ind AS) for the accounting periods beginning on or
after 1st April, 2016, with the comparatives for the periods ending
on 31st March, 2016, or thereafter, namely...".
In the given case, the Company is required to mandatorily adopt Ind AS from
April 1, 2016, i.e., for the period 2016-17, and with comparatives as per Ind
AS for 2015-16. Accordingly, the beginning of the comparative period will be
April 1, 2015, which will be considered as the date of transition as per Ind
AS. Therefore, the date of transition to Ind AS shall be April 1, 2015. The
company cannot have the date of transition at April 1, 2014.
(ITFG Clarification Bulletin 4, Issue 4)
(Date of finalisation: August 19, 2016)
Applicability of Ind AS - change in status of listed company
Issue 8: As on March 31, 2014, Company A is a listed company and has
a net worth of 50 crore. As on March 31, 2015, the company is no more
a listed company. Whether Company A is required to comply with Ind
AS from financial year 2017-18.
Response: Rule 4(1)(iii) of the Companies (Indian Accounting Standards)
Rules, 2015, states as under:
"(iii) the following companies shall comply with the Indian Accounting
Standards (Ind AS) for the accounting periods beginning on or after 1st April,
2017, with the comparatives for the periods ending on 31st March, 2017, or
thereafter, namely:-
(a) companies whose equity or debt securities are listed or are in the
process of being listed on any stock exchange in India or outside India
and having net worth of less than rupees five hundred crore;
(b) companies other than those covered in clause (ii) of sub- rule (1) and
sub clause (a) of clause (iii) of sub-rule (1), that is, unlisted companies
having net worth of rupees two hundred and fifty crore or more but
less than rupees five hundred crore.
(c) holding, subsidiary, joint venture or associate companies of companies
10
Applicability related Issues: Roadmap
covered under sub-clause (a) of clause (iii) of sub- rule (1) and sub-
clause (b) of clause (iii) of sub- rule (1), as the case may be".
Further, Rule 4(2) of the Companies (Indian Accounting Standards) Rules,
2015, states as under:
"(2) For the purposes of calculation of net worth of companies under sub-rule
(1), the following principles shall apply, namely:-
(a) the net worth shall be calculated in accordance with the stand-alone
financial statements of the company as on 31st March, 2014 or the
first audited financial statements for accounting period which ends
after that date;
(b) for companies which are not in existence on 31st March, 2014 or an
existing company falling under any of thresholds specified in sub-rule
(1) for the first time after 31st March, 2014, the net worth shall be
calculated on the basis of the first audited financial statements ending
after that date in respect of which it meets the thresholds specified in
sub-rule (1).
Explanation. - For the purposes of sub-clause (b), the companies meeting
the specified thresholds given in sub-rule (1) for the first time at the end of an
accounting year shall apply Indian Accounting Standards (Ind AS) from the
immediate next accounting year in the manner specified in sub-rule (1)."
In view of the above requirements, it may be noted that immediately before
the mandatory applicability date, if the threshold criteria for a company are
not met, then it shall not be required to comply with Ind AS, irrespective of
the fact that as on March 31, 2014, the criteria was met.
In the given case, before the mandatory applicable date (i.e. 2017-18),
Company A ceases to be a listed company. Accordingly, it will not be
required to apply Ind AS from FY 2017-18.
(ITFG Clarification Bulletin 3, Issue 8)
(Date of finalisation: June 22, 2016)
Applicability of Ind AS to holding company when subsidiary
meets the criteria for applicability of Ind AS
Issue 9: Company X (Listed entity) has a net worth of above ` 500 crore
and hence required to comply with Ind AS from financial year 2016-17.
Company Y (Unlisted entity), on a standalone basis, has net worth
below ` 250 crore and hence it is not required to comply with Ind AS.
11
Compendium of ITFG Clarification Bulletins
Company Y acquires shares of Company X during financial year 2016-
17, whereby Company Y becomes the holding company of Company X.
Whether Company Y will be required to comply with Ind AS from
financial year 2016-17, given that it has now become a holding company
of Company X during FY 2016-17?
Response: Rule 4(1) (ii) of Companies (Indian Accounting Standards) Rules,
2015, states as under:
(ii) the following companies shall comply with the Indian Accounting
Standards (Ind AS) for the accounting periods beginning on or after 1st April,
2016, with the comparatives for the periods ending on 31st March, 2016, or
thereafter, namely:-
(a) companies whose equity or debt securities are listed or are in the
process of being listed on any stock exchange in India or outside India
and having net worth of rupees five hundred crore or more;
(b) companies other than those covered by sub-clause (a) of clause (ii) of
sub-rule (1) and having net worth of rupees five hundred crore or
more;
(c) holding, subsidiary, joint venture or associate companies of companies
covered by sub- clause (a) of clause (ii) of sub-rule (1) and sub-clause
(b) of clause (ii) of sub- rule (1) as the case may be; and".
In accordance with the above, it may be noted that holding, subsidiary, joint
venture, associate companies of companies falling under any of threshold
specified Rule 4(1)(ii) are required to comply with Ind AS from financial year
2016-17 or 2017-18, as the case may be.
In the given case, Company X is required to adopt Ind AS from financial year
2016-17, since net worth of Company X is more than ` 500 crore. Company
Y has acquired shares of Company X resulting in Company Y becoming
holding company of Company X during the financial year 2016-17.
Accordingly, Company Y will prepare Ind AS financial statements for the year
ending March 31, 2017.
(ITFG Clarification Bulletin 3, Issue 7)
(Date of finalisation: June 22, 2016)
12
Applicability related Issues: Roadmap
Applicability of Ind AS - associate company In case of quarterly
results
Issue 10: Company X, on a standalone basis, has a net worth of above `
500 crore and hence required to comply with Ind AS from financial year
2016-17. Company Y (listed entity), on a standalone basis, has net worth
of above ` 250 crore but below ` 500 crore and therefore required to
comply with Ind AS from financial year 2017-18.
Company X acquires shares of Company Y resulting in Company Y
becoming an associate of Company X on October 31, 2016, but before
approval of the results for the quarter ended September 2016.`
Whether Company Y will be required to comply with Ind AS from
financial year 2016-17 or it will comply from financial year 2017-18? If
the response is that compliance is from the financial year 2016-17,
would the financial results of Company Y for the quarter ended
September 30, 2016 be prepared in accordance with Ind AS?
Response: Rule 4(1) (ii) of Companies (Indian Accounting Standards) Rules,
2015, states as under:
(ii) the following companies shall comply with the Indian Accounting
Standards (Ind AS) for the accounting periods beginning on or after
1st April, 2016, with the comparatives for the periods ending on 31st
March, 2016, or thereafter, namely:-
(a) companies whose equity or debt securities are listed or are in
the process of being listed on any stock exchange in India or
outside India and having net worth of rupees five hundred crore
or more;
(b) companies other than those covered by sub-clause (a) of clause
(ii) of sub-rule (1) and having net worth of rupees five hundred
crore or more;
(c) holding, subsidiary, joint venture or associate companies of
companies covered by sub- clause (a) of clause (ii) of sub-rule
(1) and sub-clause (b) of clause (ii) of sub- rule (1) as the case
may be;
In accordance with the above, it may be noted that holding, subsidiary, joint
venture, associate companies of companies falling under any of the
thresholds specified in Rule 4(1)(ii) are required to comply with Ind AS from
financial year 2016-17 or 2017-18, as the case may be.
13
Compendium of ITFG Clarification Bulletins
In the given case, Company X is required to adopt Ind AS from financial year
2016-17, since net worth of Company X is more than ` 500 crore. Company
X has acquired shares of Company Y resulting in Company Y becoming an
associate of Company X during the financial year 2016-17. Accordingly,
Company Y will prepare Ind AS financial statements for the year ending
March 31, 2017.
As far as the quarterly results are concerned, since, Company Y has become
an associate as on October 31, 2016, Company Y will prepare Ind AS
financial statements from the quarter ending December 2016 onwards.
(ITFG Clarification Bulletin 3, Issue 6)
(Date of finalisation: June 22, 2016)
Applicability of Ind AS to Core Investment Company (CIC)
Issue 11: Company A is a Core Investment Company (CIC) having net
worth of more than 500 crore as on March 31, 2014. During the year
2014-15, the Reserve Bank of India (RBI) had exempted Company A
from certain regulations/directions governing CIC in India.
Whether Company A (exempted CIC) will be regarded as Non-Banking
Financial Company (NBFC) for the purpose of applicability of Ind AS?
Response: Rule 2(g) of Companies (Indian Accounting Standards) Rules,
2015, read with Companies (Indian Accounting Standards) (Amendment)
Rules, 2016, states as follows:
"(g) "Non-banking Financial Company" means a Non-Banking Financial
Company as defined in clause (f) of section 45-I of the Reserve Bank of India
Act, 1934 and includes Housing Finance Companies, Merchant Banking
Companies, Micro Finance Companies, Mutual Benefit Companies, Venture
Capital Fund Companies, Stock Broker or Sub-broker Companies, Nidhi
Companies and Chit Companies, Securitisation and Reconstruction
Companies, Mortgage Guarantee Companies, Pension Fund Companies,
Asset Management Companies and Core Investment Companies."
It may be noted from above, that core investment companies are specifically
included in the definition of NBFC. Accordingly, exempted CIC will be
regarded as `NBFC' for the purpose of roadmap for implementation of Ind AS
irrespective of the fact that RBI may have given some exemptions to certain
class of core investment companies from its regulations.
Further, as per rule 4 of Companies (Indian Accounting Standards) Rules,
14
Applicability related Issues: Roadmap
2015, read with the Companies (Indian Accounting Standards) (Amendment)
Rules, 2016, NBFCs having net worth of more than 500 crore shall comply
with Ind AS for accounting periods beginning on or after the 1st April, 2018,
with comparatives for the periods ending on 31st March, 2018.
In view of the above, in the given case, Company A will be required to apply
Ind AS from the financial year 2018-19. It may further be noted that it cannot
voluntarily adopt Ind AS before 1st April 2018.
(ITFG Clarification Bulletin 3, Issue 2)
(Date of finalisation: June 22, 2016)
Date of Transition in case a company is already preparing
financials as per IFRS
Issue 12: Company X Ltd. has prepared its financial statements under
IFRS for the first time for year ended March 31, 2016. It had adopted its
date of transition to IFRS as April 1, 2014. As per the Companies (Indian
Accounting Standards) Rules, 2015, Company X Ltd. is mandatorily
required to prepare its financial statements as per Ind AS for the year
ended March 31, 2017 and hence under Ind AS, the date of transition
would be April 1, 2015.
Whether Company X Ltd. can select date of transition under Ind AS as
April 1, 2014 instead of April 1, 2015 since it has already carried out
exercise of transition on April 1, 2014 for the purposes of IFRS.
Response: Appendix A to Ind AS 101, First- time Adoption of Indian
Accounting Standards, defines date of transition as follows:
"The beginning of the earliest period for which an entity presents full
comparative information under Ind ASs in first Ind AS financial statements"
The definition of date of transition as stated above therefore permits an entity
to select its date of transition. However, Rule 4(1) (i) and (ii) of the
Companies (Indian Accounting Standards) Rules, 2015, states as under:
"The Companies and their auditors shall comply with the Indian Accounting
Standards (Ind AS) specified in Annexure to these rules in preparation of
their financial statements and audit respectively, in the following manner,
namely:-
(i) any company may comply with the Indian Accounting Standards (Ind
AS) for financial statements for accounting periods beginning on or
15
Compendium of ITFG Clarification Bulletins
after 1st April, 2015, with the comparatives for the periods ending on
31st March, 2015, or thereafter;
(ii) the following companies shall comply with the Indian Accounting
Standards (Ind AS) for the accounting periods beginning on or after
1st April, 2016, with the comparatives for the periods ending on 31st
March, 2016, or thereafter, namely...".
As per the above rule, the date of transition for X Ltd. will be April 1, 2015
being the beginning of the earliest comparative period presented. To explain
it further, X Ltd. is required to mandatorily adopt Ind AS from April 1, 2016,
i.e. for the period 2016-17, and it will give comparatives as per Ind AS for
2015-16. Accordingly, the beginning of the comparative period will be April 1,
2015 which will be considered as the date of transition as per Ind AS.
Although Company X Ltd. has already carried out exercise of transition on
April 1, 2014 for the purposes of IFRS, Company X Ltd. cannot select date of
transition under Ind AS as April 1, 2014.
(ITFG Clarification Bulletin 2, Issue 3)
(Date of finalisation: April 12, 2016)
Applicability of Ind AS to an Indian subsidiary of a foreign
company
Issue 13: Company X Ltd. and Company Y Ltd. registered in India
having net worth of ` 600 crores and 100 crores respectively are
subsidiaries of a Foreign Company viz., ABC Inc., which has net worth
of more than ` 500 crores in financial year 2015-16. Whether Company X
Ltd. and Y Ltd. are required to comply with Ind AS from financial year
2016-17 on the basis of net worth of the parent Foreign Company or on
the basis of their own net worth?
Response: Rule 4(1) (ii) (a) of the Companies (Indian Accounting Standards)
Rules, 2015, states as under:
"The Companies and their auditors shall comply with the Indian Accounting
Standards (Ind AS) specified in Annexure to these rules in preparation of
their financial statements and audit respectively, in the following manner,
namely:-
(i) any company may comply with the Indian Accounting Standards (Ind
AS) for financial statements for accounting periods beginning on or
after 1st April, 2015, with the comparatives for the periods ending on
31st March, 2015, or thereafter;
16
Applicability related Issues: Roadmap
(ii) the following companies shall comply with the Indian Accounting
Standards (Ind AS) for the accounting periods beginning on or after
1st April, 2016, with the comparatives for the periods ending on 31st
March, 2016, or thereafter, namely:-
(a) companies whose equity or debt securities are listed or are in
the process of being listed on any stock exchange in India or
outside India and having net worth of rupees five hundred crore
or more;"
As per Rule 4(1)(ii)(a) of the Companies (Indian Accounting Standards)
Rules, 2015, Company X having net worth of Rs.600 crores in the year 2015-
16, would be required to prepare its financial statements for the accounting
periods commencing from 1st April, 2016, as per the Companies (Indian
Accounting Standards) Rules, 2015.
Company Y Ltd. having net worth of Rs.100 crores in the year 2015-16,
would be required to prepare its financial statements as per the Companies
(Accounting Standards) Rules, 2006.
Since, the Foreign company ABC Inc., is not a company incorporated under
the Companies Act, 2013 or the earlier Companies Act, 1956, it is not
required to prepare its financial statements as per the Companies (Indian
Accounting Standards) Rules, 2015. As the foreign company is not required
to prepare financial statements based on Ind AS, the net worth of foreign
company ABC would not be the basis for deciding whether Indian Subsidiary
Company X Ltd. and Company Y Ltd. are required to prepare financial
statements based on Ind AS.
(ITFG Clarification Bulletin 2, Issue 2)
(Date of finalisation: April 12, 2016)
Applicability of Ind AS - associate company Consideration of
share warrants which are convertible into equity shares
Issue 14: Company A Ltd. has invested 26% in Company B Ltd. and
accounted Company B as an associate under Companies (Accounting
Standards) Rule, 2006. Company A Ltd. is required to comply with Ind
AS from financial year 2016-17.
Company C Ltd. owns share warrants that are convertible into equity
shares of Company B Ltd. that have potential, if exercised, to give
additional voting power to Company C Ltd. over the financial and
17
Compendium of ITFG Clarification Bulletins
operating policies of Company B Ltd. As per the requirements of Ind AS
28, it has been concluded that Company B Ltd. is an associate company
of Company C Ltd.
Company A concluded that it has no more significant influence over
Company B Ltd under Ind AS.
The above assessments have been done as on April 1, 2015.
However, Company A Ltd. reported Company B Ltd. as an associate
company as on March 31, 2016 for statutory reporting requirements
under previous GAAP.
Company B Ltd. and Company C Ltd. as a standalone entity does not
meet any criteria given in Ind AS roadmap. Whether Company B is
required to comply with Ind AS?
Response: Sub-rule (2) of Rule 2 of the Companies (Indian Accounting
Standards) Rules, 2015, provides as follows:
"Words and expressions used herein and not defined in these rules but
defined in the Act shall have the same meaning respectively assigned to
them in the Act".
The term `associate' has been defined in Ind AS 28 which is notified as the
part of the Companies (Indian Accounting Standards) Rules, 2015.
As per paragraph 3 of Ind AS 28, Investments in Associates and Joint
Ventures, an associate is an entity over which the investor has significant
influence.
Ind AS 28 defines `Significant influence' as the power to participate in the
financial and operating policy decisions of the investee but is not control or
joint control of those policies.
Paragraph 5 of Ind AS 28, states as follows:
"5 If an entity holds, directly or indirectly (e.g. through subsidiaries), 20 per
cent or more of the voting power of the investee, it is presumed that the
entity has significant influence, unless it can be clearly demonstrated that
this is not the case. Conversely, if the entity holds, directly or indirectly (e.g.
through subsidiaries), less than 20 per cent of the voting power of the
investee, it is presumed that the entity does not have significant influence,
unless such influence can be clearly demonstrated. A substantial or majority
ownership by another investor does not necessarily preclude an entity from
having significant influence."
18
Applicability related Issues: Roadmap
Paragraph 7 of Ind AS 28 provide as follows:
"7 An entity may own share warrants, share call options, debt or equity
instruments that are convertible into ordinary shares, or other similar
instruments that have the potential, if exercised or converted, to give
the entity additional voting power or to reduce another party's voting
power over the financial and operating policies of another entity (i.e.
potential voting rights). The existence and effect of potential voting
rights that are currently exercisable or convertible, including potential
voting rights held by other entities, are considered when assessing
whether an entity has significant influence. Potential voting rights are
not currently exercisable or convertible when, for example, they cannot
be exercised or converted until a future date or until the occurrence of
a future event."
As per Notification G.S.R 680(E) dated 4th September 2015, issued by the
Ministry of Corporate Affairs (MCA), after rule 4 of Companies (Accounts)
Rules, 2014, the following rule has been inserted:
"4A Forms and items contained in financial statements The financial
statements shall be in the form specified in Schedule III to the Act and
comply with Accounting Standards or Indian Accounting Standards as
applicable:
Provided that the items contained in the financial statements shall be
prepared in accordance with the definitions and other requirements
specified in the Accounting Standards or the Indian Accounting
Standards, as the case may be."
In view of above requirements, consistent approach would be to consider the
definitions given in Ind AS both for the purpose of preparing financial
statements and determining the relationship with another entity (i.e.
subsidiary, associate, joint venture etc.) for the purpose of applicability of Ind
AS.
In the present case, by applying the relevant requirements of Ind AS 28, it
has been concluded that Company B Ltd. is an associate company of
Company C Ltd. since Company C Ltd. has potential voting rights over
Company B Ltd.
In the given scenario, in accordance with Ind AS, Company B Ltd. also
ceases to be an associate of Company A Ltd. Therefore, Company B Ltd.
need not to comply with Ind AS from the financial year 2016-17 though the
company was an associate company of Company A Ltd. under previous
reporting framework.
19
Compendium of ITFG Clarification Bulletins
If Company C Ltd. voluntarily complies with Ind AS or meets any specified
criteria on standalone basis, then Company B Ltd. being its associate
company as per Ind AS 28 shall comply Ind AS from the same financial year
from which Company C Ltd. starts preparing financial statements as per Ind
AS.
(ITFG Clarification Bulletin 3, Issue 5)
(Date of finalisation: June 22, 2016)
Applicability of Ind AS to holding, subsidiary, joint venture and
associate company through direct or indirect association in case
of voluntary adoption by the parent company
Issue 15: Company B Ltd. is an associate company of Company A Ltd.
Company X Ltd. is the holding company of Company A Ltd. Company X
Ltd. has decided to adopt Ind AS voluntarily from 2015-16.
Whether Company A Ltd. and Company B Ltd. are statutorily required to
comply with Ind AS from financial year 2015-16?
Response: As per the Companies (Indian Accounting Standards) Rules,
2015, read with the Companies (Indian Accounting Standards) (Amendment)
Rules, 2016, dated 30th March, 2016, any company and its holding,
subsidiary, joint venture or associate company may comply with the
Indian Accounting Standards (Ind AS) for financial statements for accounting
periods beginning on or after 1st April, 2015, with the comparatives for the
periods ending on 31st March, 2015, or thereafter.
Since, Company X Ltd. has adopted Ind AS voluntarily from financial year
2015-16, Company A Ltd. being subsidiary of Company X Ltd. shall comply
with Ind AS from the financial year 2015-16 as per the roadmap.
As per paragraph 3 of Ind AS 28, Investments in Associates and Joint
Ventures, an associate is an entity over which the investor has significant
influence.
Ind AS 28 defines `Significant influence' as the power to participate in the
financial and operating policy decisions of the investee but is not control or
joint control of those policies.
Paragraph 5 of Ind AS 28, states as follows:
"If an entity holds, directly or indirectly (e.g. through subsidiaries), 20 per
cent or more of the voting power of the investee, it is presumed that the
entity has significant influence, unless it can be clearly demonstrated that
20
Applicability related Issues: Roadmap
this is not the case. Conversely, if the entity holds, directly or indirectly (e.g.
through subsidiaries), less than 20 per cent of the voting power of the
investee, it is presumed that the entity does not have significant influence,
unless such influence can be clearly demonstrated. A substantial or majority
ownership by another investor does not necessarily preclude an entity from
having significant influence."
In the given case, Company B Ltd. is a direct associate company of
Company A Ltd. but not of Company X Ltd. However, Company X Ltd,
through its subsidiary (i.e., Company B Ltd.), has significant influence over
Company B Ltd., indirectly.
In view of the above requirements, Company B Ltd. shall also comply with
Ind AS from the financial year 2015-16.
In other words, if a parent company voluntarily or mandatorily adopts Ind AS
then its holding, subsidiary, joint venture or associate company whether
through direct or indirect association shall comply Ind AS from the financial
year in which the parent company starts complying with Ind AS.
(ITFG Clarification Bulletin 3, Issue 4)
(Date of finalisation: June 22, 2016)
Applicability of Ind AS to holding company, if subsidiary company
incorporated for divestment purpose complies with Ind AS.
Issue 16: ABC Ltd. is a listed company. The net worth of ABC Ltd. as on
31st March, 2014 was ` 200 crores.
ABC Ltd. had a subsidiary, namely, XYZ Ltd. as at 31st March, 2015
whose net worth, consisting only of share capital as at that date, was
` 600 crores. XYZ Ltd. was incorporated in January, 2015. It was
incorporated only for the purposes of its divestment. The financial
statements of XYZ Ltd. were not consolidated with that of ABC Ltd. as
at 31st March, 2015 in view of requirements of paragraph 11 of
Accounting Standard (AS) 21, Consolidated Financial Statements.
ABC Ltd. entered into agreement with a proposed acquirer of the
subsidiary, i.e., PQR Ltd., in September, 2015. The entire ownership of
XYZ Ltd. was finally transferred to the said acquirer in the first fortnight
of April, 2016.
In the given case, whether the ABC Ltd. is required to comply with Ind
AS from the financial year 2016-17?
21
Compendium of ITFG Clarification Bulletins
Response: Rule 4(1)(ii) of the Companies (Indian Accounting Standards)
Rules, 2015, states as under:
"......
(ii) the following companies shall comply with the Indian Accounting
Standards (Ind AS) for the accounting periods beginning on or after 1st
April, 2016, with the comparatives for the periods ending on 31st March,
2016, or thereafter, namely:-
(a) companies whose equity or debt securities are listed or are in the
process of being listed on any stock exchange in India or outside India
and having net worth of rupees five hundred crore or more;
(b) companies other than those covered by sub-clause (a) of clause (ii)
of sub-rule (1) and having net worth of rupees five hundred crore or
more;
(c) holding, subsidiary, joint venture or associate companies of
companies covered by sub- clause (a) of clause (ii) of sub-rule (1) and
sub-clause (b) of clause (ii) of sub- rule (1) as the case may be; and....".
In accordance with the above, it may be noted that holding, subsidiary, joint
venture, associate companies of companies falling under any of threshold
specified Rule 4(1)(ii) are required to comply with Ind AS from financial year
2016-17.
Further, Rule 4(2) (b) of the Companies (Indian Accounting Standards)
Rules, 2015, states as under:
"(2) For the purposes of calculation of net worth of companies under
sub-rule (1), the following principles shall apply, namely:-
.........
(b) for companies which are not in existence on 31st March, 2014 or an
existing company falling under any of thresholds specified in sub-rule
(1) for the first time after 31st March, 2014, the net worth shall be
calculated on the basis of the first audited financial statements ending
after that date in respect of which it meets the thresholds specified in
sub-rule (1).
Explanation- For the purposes of sub-clause (b), the companies meeting the
specified thresholds given in sub-rule (1) for the first time at the end of an
accounting year shall apply Indian Accounting Standards (Ind AS) from the
immediate next accounting year in the manner specified in sub-rule (1).
22
Applicability related Issues: Roadmap
Illustration - (i) The companies meeting threshold for the first time as on 31st
March, 2017 shall apply Ind AS for the financial year 2017-18 onwards.
(ii) The companies meeting threshold for the first time as on 31st March,
2018 shall apply Ind AS for the financial year 2018-19 onwards and so on."
On a combined reading of Rule 4(1) and (2) of the Companies (Indian
Accounting Standards) Rules, 2015, if an existing company meets the net
worth criteria before mandatory applicability dates laid down in the roadmap,
the company would be required to follow Ind AS as per the dates for
implementation of Ind AS prescribed in the roadmap, i.e., 2016-17 or 2017-
18, as the case may be.
In the given case, Ind AS will be mandatorily applicable to XYZ Ltd. from
financial year, 2016-17, since its net worth as on 31st March, 2015 is more
than ` 500 crores.
As already clarified in ITFG Clarification Bulletin 3 as Issue No. 5, consistent
approach would be followed to consider the definitions given in Ind AS both
for the purpose of preparing financial statements and determining the
relationship with another entity (i.e. subsidiary, associate, joint venture etc.)
for the purpose of applicability of Ind AS. Therefore, the relationship between
ABC Ltd. and XYZ Ltd. should be determined in accordance with Indian
Accounting Standards (Ind AS). Hence, it is irrelevant to consider the fact
that XYZ Ltd. was not a subsidiary company of ABC Ltd. as per the previous
GAAP.
In view of the above ITFG clarification, whether ABC Ltd. is a holding
company of XYZ Ltd. or not shall be determined as per Ind AS 110,
Consolidated Financial Statements, i.e., evaluating whether ABC Ltd.
controls XYZ Ltd. or not.
If ABC Ltd. was a holding company of XYZ Ltd. in accordance with Ind AS
110 as at 31st March, 2015, then ABC Ltd. should comply with Ind AS from
the financial year 2016-17, since Ind AS are applicable to XYZ Ltd. from
financial year 2016-17.
(ITFG Clarification Bulletin 5, Issue 1)
(Date of finalisation: September 19, 2016)
23
Net Worth Criteria
Applicability of Ind AS - Net worth Criteria Treatment of ESOP
Reserve
Issue 17: Whether ESOP reserve is required to be included while
computing net worth of a company to assess applicability of Ind AS on
the company?
Response: As per Rule 2(1) (f) of Companies (Indian Accounting Standards)
Rules, 2015, "net worth" shall have the meaning assigned to it as in clause
(57) of section 2 of the Act.
Further, as per Section 2(57) of the Companies Act, 2013, "net worth means
the aggregate value of the paid-up share capital and all reserves created out
of the profits and securities premium account, after deducting the aggregate
value of the accumulated losses, deferred expenditure and miscellaneous
expenditure not written off, as per the audited balance sheet, but does not
include reserves created out of revaluation of assets, write-back of
depreciation and amalgamation."
It may be noted that the Guidance Note on Accounting for Employee Share-
based Payments, inter alia, provides that an enterprise should recognise as
an expense (except where service received qualifies to be included as a part
of the cost of an asset) the services received in an equity-settled employee
share-based payment plan when it receives the services, with a
corresponding credit to an appropriate equity account, say, `Stock Options
Outstanding Account'. This account is transitional in nature as it gets
ultimately transferred to another equity account such as share capital,
securities premium account and/or general reserve as recommended in the
subsequent paragraphs of this Guidance Note.
In accordance with the above, ESOP reserve is required to be included while
calculating the net worth of a company.
However, this clarification is only for the purpose of Ind AS applicability and
should not be applied by analogy for determining net worth under other
provisions of the Companies Act, 2013.
(ITFG Clarification Bulletin 11, Issue 1)
(Date of finalisation: July 31, 2017)
24
Net Worth Criteria
Computation of net worth for Ind AS applicability- Government
Grant to be considered as capital reserve
Issue 18: A company received grant from government which is in the
nature of promoter's contribution and the same was included in capital
reserve. This grant has been accounted as per AS 12, Accounting for
Government Grants. Is such capital reserve required to be included for
computation of net worth to assess Ind AS applicability?
Response: As per Rule 2(1) (f) of Companies (Indian Accounting Standards)
Rules, 2015 "net worth" shall have the meaning assigned to it in clause (57)
of section 2 of the Act. Section 2(57) of Companies Act, 2013, defines `net
worth' as follows:
"net worth" means the aggregate value of the paid-up share capital and
all reserves created out of the profits and securities premium account,
after deducting the aggregate value of the accumulated losses, deferred
expenditure and miscellaneous expenditure not written off, as per the
audited balance sheet, but does not include reserves created out of
revaluation of assets, write-back of depreciation and amalgamation;
From the definition of Section 2(57), it may be noted that all reserves created
out of the profits are included in calculation of `net worth'.
In the given case, the capital reserve has arisen pursuant to grant received
from government, which is in the nature of promoter's contribution. On a
literal interpretation of the definition, it may be concluded that capital reserve
in the nature of promoter's contribution should not be included to calculate
net worth as the same is not explicitly mentioned in the definition of net
worth. However, in substance, the capital reserve in the nature of promoter's
contribution is a capital contribution by promoters and should be included in
the calculation of net worth. Further, Accounting Standard (AS) 12 also
states that government grants in the nature of promoter's contribution are
recognised in shareholders' funds. Therefore, such a capital reserve should
be included for computation of `net worth'.
However, it may be noted that capital reserve in the nature of promoter's
contribution should be included in the net worth only for the purpose of Ind
AS applicability. This definition should not be applied by analogy for
determining net worth under other provisions of the Companies Act, 2013.
(ITFG Clarification Bulletin 6, Issue 4)
(Date of finalisation: November 29, 2016)
25
Compendium of ITFG Clarification Bulletins
Applicability of Ind AS - Net worth criteria
Issue 19: A debt-listed company has net worth for the last 3 years as
follows:
(i) Net worth as on 31.03.2014 is ` 1260.83 crores
(ii) Net worth as on 31.03.2015 is ` 1411.43 crores
(iii) Net worth as on 31.03.2016 is ` 485.22 crores
Whether Company A is required to comply with Ind AS from financial
year 2017-18?
Response: Rule 4(1) (ii) of Companies (Indian Accounting Standards) Rules,
2015, states as under:
"(ii) the following companies shall comply with the Indian Accounting
Standards (Ind AS) for the accounting periods beginning on or after 1st April,
2016, with the comparatives for the periods ending on 31st March, 2016, or
thereafter, namely:-
(a) companies whose equity or debt securities are listed or are in the
process of being listed on any stock exchange in India or outside India
and having net worth of rupees five hundred crore or more;
(b) companies other than those covered by sub-clause (a) of clause (ii) of
sub-rule (1) and having net worth of rupees five hundred crore or
more;
(c) holding, subsidiary, joint venture or associate companies of companies
covered by sub-clause (a) of clause (ii) of sub-rule (1) and sub-clause
(b) of clause (ii) of sub- rule (1) as the case may be; and".
Further, Rule 4(2) of the Companies (Indian Accounting Standards) Rules,
2015, states as under:
"(2) For the purposes of calculation of net worth of companies under sub-rule
(1), the following principles shall apply, namely:-
(a) the net worth shall be calculated in accordance with the stand-alone
financial statements of the company as on 31st March, 2014 or the
first audited financial statements for accounting period which ends
after that date;
(b) for companies which are not in existence on 31st March, 2014 or an
existing company falling under any of thresholds specified in sub-rule
(1) for the first time after 31st March, 2014, the net worth shall be
26
Net Worth Criteria
calculated on the basis of the first audited financial statements ending
after that date in respect of which it meets the thresholds specified in
sub-rule (1).
Explanation - For the purposes of sub-clause (b), the companies meeting the
specified thresholds given in sub-rule (1) for the first time at the end of an
accounting year shall apply Indian Accounting Standards (Ind AS) from the
immediate next accounting year in the manner specified in sub-rule (1)."
In view of the above requirements, it may be noted that the net worth shall be
calculated in accordance with the stand-alone financial statements of the
company as on 31st March, 2014. Accordingly, if the net worth threshold
criteria for a company are once met, then it shall be required to comply with
Ind AS, irrespective of the fact that as on later date its net worth falls below
the criteria specified.
In view of the above, the Company A will be required to follow Ind AS from
financial year 2016-17.
It may be noted that Issue 8 of ITFG Clarification Bulletin 3 addressed an
issue wherein as on March 31, 2014 an entity was listed, however
subsequently the entity got delisted before the mandatory applicability date.
In the said issue, it was clarified that immediately before the mandatory
applicability date, if the threshold criteria for a company are not met, then it
shall not be required to comply with Ind AS, irrespective of the fact that as on
March 31, 2014, the criteria was met. In this regard, it may be clarified the
above guidance was related to only listing criteria and the same is not related
to net worth criteria.
(ITFG Clarification Bulletin 6, Issue 1)
(Date of finalisation: November 29, 2016)
Applicability of Ind AS - In Case of Negative net worth
Issue 20: Will the following companies with negative net worth need to
comply with Ind AS?
(a) Company A (listed) having negative net worth of ` 600 crore.
(b) Company B (unlisted) having negative net worth of ` 300 crore.
Response: Rule 4(1) (ii) and Rule 4(1) (iii) of Companies (Indian Accounting
Standards) Rules, 2015, state as follows:
(ii) the following companies shall comply with the Indian Accounting
27
Compendium of ITFG Clarification Bulletins
Standards (Ind AS) for the accounting periods beginning on or after
1st April, 2016, with the comparatives for the periods ending on 31st
March, 2016, or thereafter, namely:-
(a) companies whose equity or debt securities are listed or are in
the process of being listed on any stock exchange in India or
outside India and having net worth of rupees five hundred crore
or more;
(b) companies other than those covered by sub-clause (a) of clause
(ii) of sub- rule (1) and having net worth of rupees five hundred
crore or more;
(c) holding, subsidiary, joint venture or associate companies of
companies covered by sub-clause (a) of clause (ii) of sub-rule
(1) and sub-clause (b) of clause (ii) of sub- rule (1) as the case
may be; and
(iii) the following companies shall comply with the Indian Accounting
Standards (Ind AS) for the accounting periods beginning on or after
1st April, 2017, with the comparatives for the periods ending on 31st
March, 2017, or thereafter, namely:-
(a) companies whose equity or debt securities are listed or are in
the process of being listed on any stock exchange in India or
outside India and having net worth of less than rupees five
hundred crore;
(b) companies other than those covered in clause (ii) of sub- rule
(1) and sub- clause (a) of clause (iii) of sub-rule (1), that is,
unlisted companies having net worth of rupees two hundred and
fifty crore or more but less than rupees five hundred crore.
(c) holding, subsidiary, joint venture or associate companies of
companies covered under sub-clause (a) of clause (iii) of sub-
rule (1) and sub-clause (b) of clause (iii) of sub- rule (1), as the
case may be:
As per Rule 2(1) (f) of Companies (Indian Accounting Standards) Rules,
2015, "net worth" shall have the meaning assigned to it in clause (57) of
section 2 of the Act.
Section 2(57) of Companies Act, 2013, defines `net worth' as follows:
"net worth" means the aggregate value of the paid-up share capital and
all reserves created out of the profits and securities premium account,
28
Net Worth Criteria
after deducting the aggregate value of the accumulated losses, deferred
expenditure and miscellaneous expenditure not written off, as per the
audited balance sheet, but does not include reserves created out of
revaluation of assets, write-back of depreciation and amalgamation;
In accordance with above provisions, it is clear that Ind AS will be applicable
to companies (both listed and unlisted) from financial year 2016-17, if net
worth is ` 500 crore or more. Therefore, if the net worth of the listed or
unlisted company is negative, then Ind AS will not be applicable from F.Y.
2016-17. Accordingly, Ind AS will not be applicable to Company A (listed)
and Company B (unlisted) from F.Y. 2016-17.
However, as per the roadmap, Ind AS will be applicable from financial year
2017-18 to all listed companies having net worth less ` 500 crore and
unlisted companies having net worth ` 250 crore or more but less than
rupees 500 crore. Accordingly, Ind AS will be applicable to Company A
(listed) from F.Y. 2017-18, whereas Ind AS will not be applicable to Company
B (unlisted) unless net worth criteria being met by Company B subsequently
or Ind AS becoming applicable as part of the Group (e.g. holding of Company
B is covered under Ind AS) or Company B voluntarily decides to apply Ind
AS.
(ITFG Clarification Bulletin 4, Issue 3)
(Date of finalisation: August 19, 2016)
Applicability of Ind AS- Net worth Criteria
Issue 21: Company X, on standalone basis, had a net worth of above `
250 crore but below ` 500 crore in financial year 2013-14 as well as
financial year 2014-15 and is expected to exceed ` 500 crore in financial
year 2015-16.
Whether the Company X be required to comply with Ind AS from
financial year 2017-18 i.e. under Phase II, given that the net worth as on
31st March 2014 was below ` 500 Crore and the Company X was a
company existing as on 31st March 2014 and was already falling under
the threshold as on 31st March 2014 itself irrespective of the fact that
the net-worth as on 31st March 2016 might be above ` 500 crore.
Response: Rule 4(2) of the Companies (Indian Accounting Standards)
Rules, 2015, states as under:
29
Compendium of ITFG Clarification Bulletins
"For the purposes of calculation of net worth of companies under sub-rule
(1), the following principles shall apply, namely:-
(a) the net worth shall be calculated in accordance with the stand-alone
financial statements of the company as on 31st March, 2014 or the
first audited financial statements for accounting period which ends
after that date;
(b) for companies which are not in existence on 31st March, 2014 or an
existing company falling under any of thresholds specified in sub-rule
(1) for the first time after 31st March, 2014, the net worth shall be
calculated on the basis of the first audited financial statements ending
after that date in respect of which it meets the thresholds specified in
sub-rule (1).
Explanation. For the purposes of sub-clause (b), the companies meeting the
specified thresholds given in sub-rule (1) for the first time at the end of an
accounting year shall apply Indian Accounting Standards (Ind AS) from the
immediate next accounting year in the manner specified in sub-rule (1)".
In view of the requirement at (b) above, any company that meets the
thresholds as specified in the Rules in a particular financial year, The
Companies (Indian Accounting Standards) Rules, 2015, will become
applicable to such company in immediately next financial year.
Therefore, in the given case, company X which had net worth of above ` 250
crore but below ` 500 crore in financial year 2013-14 as well as financial
year 2014-15 and is expected to exceed ` 500 crore in financial year 2015-
16, will have to prepare financial statements on the basis of Indian
Accounting Standards (Ind AS), from the financial year beginning on April 1,
2016.
(ITFG Clarification Bulletin 1, Issue 1)
(Date of finalisation: January 16, 2016)
30
Ind AS 101, First-time Adoption of
Indian Accounting Standards
Date of Transition to Ind AS
Issue 22: Ind AS 101, First-time Adoption of Indian Accounting
Standards, requires presentation of balance sheet at the date of
transition to Ind AS. For a company, the date of transition is April 1,
2016. Normally, a balance sheet represents the end of day position. Is
the balance sheet required to be prepared on the date of transition at
the end of the day or the start of the day? (e.g. if the transition date is
April 1, 2016, then balance sheet to be prepared will be close of day of
April 1 or start of day of April 1 (i.e. closing of March 31).
Response: As per paragraph 6 of Ind AS 101, An entity shall prepare and
present an opening Ind AS Balance Sheet at the date of transition to Ind
ASs. This is the starting point for its accounting in accordance with Ind ASs
subject to the requirements of paragraphs D13AA and D22. Further an
example is provided under paragraph 8 of Ind AS 101 which provides as
follows:
The end of entity A's first Ind AS reporting period is 31 March 2017. Entity A
decides to present comparative information in those financial statements for
one year only (see paragraph 21). Therefore, its date of transition to Ind
ASs is the beginning of business on 1 April 2015 (or, equivalently, close
of business on 31 March 2015). Entity A presented financial statements in
accordance with its previous GAAP annually to 31 March each year up to,
and including, 31 March 2016.
As per the relevant paragraph and example given in Ind AS 101, balance
sheet will be prepared as on date of transition to Ind AS, i.e. the beginning of
business on 1 April 2016 (or, equivalently, close of business on 31 March
2016).
(ITFG Clarification Bulletin 8, Issue 3)
(Date of finalisation: May 05, 2017)
31
Compendium of ITFG Clarification Bulletins
Adjustments due to other Ind AS if deemed cost exemption
availed
Issue 23: On the date of transition, an entity has elected to measure its
assets and liabilities at its deemed cost in accordance with previous
GAAP carrying value as permitted under Ind AS 101 First-time Adoption
of Indian Accounting Standards in the opening Ind AS Financial
Statements.
Whether any adjustments arising due to application of other Ind AS is
to be made to the previous GAAP carrying amount on the date of
transition, if this exemption is availed?
Response: Ind AS 101 defines `Deemed Cost' as an amount used as a
surrogate for cost or depreciated cost at a given date. Subsequent
depreciation or amortisation assumes that the entity had initially recognised
the asset or liability at the given date and that its cost was equal to the
deemed cost.
Further, paragraph 10 of Ind AS 101, provides as follows:
"Except as described in paragraphs 1319 and Appendices BD, an entity
shall, in its opening Ind AS Balance Sheet:
(a) recognise all assets and liabilities whose recognition is required by Ind
ASs;
(b) not recognise items as assets or liabilities if Ind ASs do not permit
such recognition;
(c) reclassify items that it recognised in accordance with previous GAAP
as one type of asset, liability or component of equity, but are a
different type of asset, liability or component of equity in accordance
with Ind ASs; and
(d) apply Ind ASs in measuring all recognised assets and liabilities.
In view of the above, except any specific exemption /exception as laid out in
Ind AS 101, all the assets and liabilities are required to be recognised in
accordance with the principles of Ind AS 101.
There may be certain situations where no exemption /exception has been
provided in respect of an item of asset and/or liability; however, application of
Ind AS principles has a corresponding impact on another item of asset and/or
liability in respect of which Ind AS 101 permits carry forward of previous
GAAP amounts as at the transition date. In such situations, since the
32
Ind AS 101, First-time Adoption of Indian Accounting Standards
adjustment to assets /liabilities is only consequential and arising because of
application of the transition requirements of Ind AS 101, the previous GAAP
carrying amount needs to be adjusted only to this extent. It may be noted
that except such situations, no further adjustment should be made due to
application of other Ind AS, if an entity measure its assets and liabilities at its
deemed cost in accordance with previous GAAP carrying value as permitted
under Ind AS 101 on the date of transition. Please also refer Issue No. 4 and
Issue No. 5 of ITFG Clarification Bulletin 5 and Issue no. 1 of ITFG
Clarification Bulletin 10.
(ITFG Clarification Bulletin 12, Issue 10)
(Date of finalisation: October 23, 2017)
Date for assessment of functional currency
Issue 24: ABC Ltd. having net worth of ` 500 crores as on March 31,
2014 wants to assess its functional currency. From which date should
company ABC Ltd. assess its functional currency, i.e. whether from
date of transition or retrospectively as per paragraph 10 of Ind AS 101,
First-time Adoption of Indian Accounting Standards?
Response: Paragraphs 13-19 of Ind AS 101 First-time Adoption of Indian
Accounting Standards provide `Exceptions to the retrospective application of
other Ind ASs' and Appendices B-C of Ind AS 101 First-time Adoption of
Indian Accounting Standards, provide certain `Exceptions to retrospective
application of other Ind ASs' and `Exemptions for Business Combination'
respectively.
Paragraphs 13-19 and Appendices B-C are silent on the assessment of
functional currency by an entity, i.e., from date of transition or retrospectively.
Since neither any exception nor any exemption has been specified for
assessment of functional currency, an entity will have to assess its functional
currency retrospectively as per paragraph 10 of Ind AS 101 stated as below.
Paragraph 10 of Ind AS 101, First-time Adoption of Indian Accounting
Standards, states as follows:
"Except as described in paragraphs 1319 and Appendices BD, an
entity shall, in its opening Ind AS Balance Sheet:
(a) recognise all assets and liabilities whose recognition is required
by Ind ASs;
(b) not recognise items as assets or liabilities if Ind ASs do not
permit such recognition;
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Compendium of ITFG Clarification Bulletins
(c) reclassify items that it recognised in accordance with previous
GAAP as one type of asset, liability or component of equity, but
are a different type of asset, liability or component of equity in
accordance with Ind ASs; and
(d) apply Ind ASs in measuring all recognised assets and liabilities".
(ITFG Clarification Bulletin 1, Issue 5)
(Date of finalisation: January 16, 2016)
Accounting treatment of the balance outstanding in the
"Revaluation Reserve" and deferred tax on this transition
revaluation reserve
Issue 25: A company is a first-time adopter of Ind AS. It has opted for
exemption under paragraph D7AA of Ind AS 101, First-time Adoption of
Indian Accounting Standards and also elected the cost model under Ind
AS 16, Property, Plant and Equipment for subsequent measurement. On
the date of transition to Ind AS:
(i) What will be the accounting treatment of the balance outstanding
in the "Revaluation Reserve" created as per previous GAAP?
(ii) What will be the treatment of deferred tax on this transition
revaluation reserve?
Response: Paragraph 10 of Ind AS 101, First-time Adoption of Indian
Accounting Standards provides as follows:
"Except as described in paragraphs 1319 and Appendices BD, an entity
shall, in its opening Ind AS Balance Sheet:
(a) recognise all assets and liabilities whose recognition is required by Ind
ASs;
(b) not recognise items as assets or liabilities if Ind ASs do not permit
such recognition;
(c) reclassify items that it recognised in accordance with previous GAAP
as one type of asset, liability or component of equity, but are a
different type of asset, liability or component of equity in accordance
with Ind ASs; and
(d) apply Ind ASs in measuring all recognised assets and liabilities.
Further paragraph11 of Ind AS 101 provides that, the accounting policies that
34
Ind AS 101, First-time Adoption of Indian Accounting Standards
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.
Therefore, an entity shall recognise those adjustments directly in retained
earnings (or, if appropriate, another category of equity) at the date of
transition to Ind ASs.
Accordingly, as per the above requirements in the given case balance
outstanding in the revaluation reserve should be transferred to retained
earnings or if appropriate, another category of equity disclosing the
description of the nature and purpose of such amount in accordance with the
requirements of paragraph 79(b), Ind AS 1, Presentation of Financial
Statements. This is because after transition, the Company is no longer
applying the revaluation model of Ind AS 16, instead it has elected to apply
the cost model approach.
It may be noted that the requirements of Companies Act, 2013 for declaration
of dividend will be required to be evaluated separately.
Further, it may also be noted that in accordance with Ind AS 12, Income
Taxes, deferred tax would need to be recognised on any difference between
the carrying amount and tax base of assets and liabilities. No deferred tax is
created on equity components. However, since the asset has been revalued,
there will be difference for the amount between carrying value and tax base.
Hence, deferred tax will have to be recognised on such asset.
(ITFG Clarification Bulletin 8, Issue 7)
(Date of finalisation: May 05, 2017)
Applicability of Ind AS 109, Financial Instruments, if financial
instruments have been acquired as part of the business
combinations and the exemption under paragraph C1 of Ind AS
101 availed
Issue 26: Company A is covered under Phase II of Ind AS roadmap and
is required to apply Ind AS from financial Year 2017-18. Company A
acquired Company B as per the scheme of amalgamation sanctioned
under the provisions of the Companies Act, 2013. The amalgamation
was effective from 1st April, 2015 and was accounted for in the financial
year 2015-16 under Indian GAAP.
As per the Scheme, the entire undertaking of Company B including all
its assets, liabilities and reserves and surplus stood transferred in
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Compendium of ITFG Clarification Bulletins
Company A. As a result, Company A has taken over assets /liabilities
including certain financial instruments.
Under Ind AS, Company A has opted for option under paragraph C1 of
Ind AS 101, First-time Adoption of Indian Accounting Standards, not to
apply Ind AS 103 retrospectively to past business combinations
(business combinations that occurred before the date of transition to
Ind AS).
Whether Company A would be required to apply Ind AS 109, Financial
Instruments retrospectively (i.e. from the date of origination of the
financial instrument by Company B) to such financial instruments
acquired as part of the business combination?
Response: Paragraphs C1 and C4 of Ind AS 101, First-time Adoption of
Indian Accounting Standards, state as follows:
"C1 - A first-time adopter may elect not to apply Ind AS 103 retrospectively to
past business combinations (business combinations that occurred before the
date of transition to Ind ASs). However, if a first-time adopter restates any
business combination to comply with Ind AS 103, it shall restate all later
business combinations and shall also apply Ind AS 110 from that same date.
C4 - If a first-time adopter does not apply Ind AS 103 retrospectively to a
past business combination, this has the following consequences for that
business combination:
(a) The first-time adopter shall keep the same classification (as an
acquisition by the legal acquirer, a reverse acquisition by the legal
acquiree, or a uniting of interests) as in its previous GAAP financial
statements.
(b) The first-time adopter shall recognise all its assets and liabilities at the
date of transition to Ind ASs that were acquired or assumed in a past
business combination, other than:
(i) some financial assets and financial liabilities derecognised in
accordance with previous GAAP (see paragraph B2); and
(ii) assets, including goodwill, and liabilities that were not
recognised in the acquirer's consolidated Balance Sheet in
accordance with previous GAAP and also would not qualify for
recognition in accordance with Ind ASs in the separate Balance
Sheet of the acquiree (see (f)(i) below).
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Ind AS 101, First-time Adoption of Indian Accounting Standards
The first-time adopter shall recognise any resulting change by
adjusting retained earnings (or, if appropriate, another category of
equity), unless the change results from the recognition of an intangible
asset that was previously subsumed within goodwill (see (g) (i) below).
(c) The first-time adopter shall exclude from its opening Ind AS Balance
Sheet any item recognised in accordance with previous GAAP that
does not qualify for recognition as an asset or liability under Ind ASs.
.........."
In accordance with the above, it may be noted that Ind AS 101 provides an
optional exemption not to apply Ind AS retrospectively to business
combinations that occurred before the date of transition to Ind AS. If previous
business combinations are not restated, the previous acquisition accounting
remains unchanged. Carrying amount under previous GAAP of assets
acquired and liabilities assumed in an un-restated business combination
immediately after the business combination becomes their deemed cost at
that date.
Paragraph C4(e)of Ind AS 101, states that, "Immediately after the business
combination, the carrying amount in accordance with previous GAAP of
assets acquired and liabilities assumed in that business combination shall be
their deemed cost in accordance with Ind ASs at that date. If Ind ASs require
a cost-based measurement of those assets and liabilities at a later date that
deemed cost shall be the basis for cost-based depreciation or amortisation
from the date of the business combination."
In preparing its opening Ind AS Balance sheet, an entity applies the criteria in
Ind AS 109 to classify financial instruments on the basis of the facts and
circumstances that exist at the date of transition to Ind AS. The resulting
classifications are applied retrospectively.
For those financial assets and financial liabilities measured at amortised cost
in the opening Ind AS balance sheet, an entity determines the cost of the
financial assets and the financial liabilities on the basis of circumstances
existing when the assets and liabilities first satisfied the recognition criteria in
Ind AS 109. However, if the entity acquired those financial assets and
financial liabilities in a past business combination, their carrying
amount in accordance with previous GAAP immediately following the
business combination is their deemed cost in accordance with Ind AS
at that date.
In accordance with the above, unless there is a transitional relief under Ind
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Compendium of ITFG Clarification Bulletins
AS 101 for financial instruments, the requirements of Ind AS 109 need to be
applied retrospectively. it is pertinent to note that although Ind AS 101 does
not provide for any transitional relief for financial instruments and requires
applying requirements of Ind AS 109 retrospectively. However, Ind AS 101
specifically provides guidance with regard to treatment to be done if entity
elects to opt not to restate past business combinations. Accordingly, if
financial instruments have been acquired as part of the business
combinations, then requirements of Appendix C to Ind AS 101 shall apply.
In the given case, for the financial instruments acquired as part of the
business combination carrying amount as per the previous GAAP shall be
their deemed cost at the date of business combination. Fair value or
amortised cost (as required by Ind AS 109) shall be determined from the date
of business combination and not from the date of origination of such financial
instrument by Company B. If financial instruments are classified as
FVTPL/FVOCI, then these should be measured at fair value at the date of
transition to Ind AS. If these instruments are classified at amortised cost,
then the entity determine the carrying amount on the transition date by taking
the carrying amount of the loan at the date of business combination under
previous GAAP and apply the effective interest rate which is determined after
considering the amount and timing of expected settlement of such financial
instrument.
(ITFG Clarification Bulletin 12, Issue 9)
(Date of finalisation: October 23, 2017)
Accounting Treatment of the government grant received before
the date of transition and measurement of property, plant and
equipment at the date of transition to Ind AS
Issue 27: ABC Ltd. is a first-time adopter of Ind AS from the financial
year 2016-17. It had received the government grant from the Central
Government during the financial year 2012-13 to purchase a fixed asset.
The grant received from the Government was deducted from the
carrying amount of fixed asset as permitted under previous GAAP, i.e.
AS 12, Accounting for Government Grants. ABC Ltd. has opted for the
option under paragraph D5 of Ind AS 101, First-time Adoption of Indian
Accounting Standards and chosen to measure the item of PPE at its fair
value and use that as its deemed cost on the date of transition to Ind
AS. As per Ind AS 20, Accounting for Government Grants and
Disclosure of Government Assistance, such a grant is required to be
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Ind AS 101, First-time Adoption of Indian Accounting Standards
accounted by setting up the grant as deferred income on the date of
transition and deducting the grant in arriving at the carrying amount of
the asset is not allowed.
In this situation, whether ABC Ltd. is required to adjust the carrying
amount of fixed assets as per previous GAAP to reflect accounting
treatment of the government grant as per Ind AS 20?
Response: Paragraph D5 of Ind AS 101 states that, "An entity may elect to
measure an item of property, plant and equipment at the date of transition to
Ind ASs at its fair value and use that fair value as its deemed cost at that
date."
Further, as per paragraph 24 of Ind AS 113, Fair Value Measurement, "Fair
value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction in the principal (or most advantageous)
market at the measurement date under current market conditions (i.e. an exit
price) regardless of whether that price is directly observable or estimated
using another valuation technique."
In accordance with the above, it is pertinent to note that the fair value of the
asset that will be derived as per Ind AS 113 will be the exit price that would
be received to sell an asset in an orderly transaction and which is a market-
based measurement, not an entity-specific measurement.
Accordingly, in the given case, fair value of the asset is independent of the
government grant received on the asset and no adjustment with regard to the
government grant should be made to the fair value of the property, plant and
equipment taken as deemed cost on the date of transition to Ind AS.
Further, Ind AS 101 provides certain mandatory exceptions and voluntary
exemptions from retrospective application of some aspects/requirements of
Ind AS.
In absence of any mandatory exception applicable in this case, the company
shall recognise the asset-related government grants outstanding on the
transition date as deferred income in accordance with the requirements of
Ind AS 20, Accounting for Government Grants and Disclosure of Government
Assistance and the resultant adjustment will be made in retained earnings or,
if appropriate, another category of equity at the date of transition to Ind AS.
(ITFG Clarification Bulletin 12, Issue 2)
(Date of finalisation: October 23, 2017)
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Reversal of the impairment provision recognised in books as at
the date of transition when exemption under paragraph D6 of Ind
AS 101 availed
Issue 28: MNC Ltd. is a first-time adopter of Ind AS. It has elected to
measure its property, plant and equipment at deemed cost measured as
per paragraph D6 of Ind AS 101, i.e. at its previous GAAP revaluation
amount measured before the date of transition (assuming the
revaluation is broadly comparable to cost in accordance with Ind AS).
Whether it can reverse the impairment provision recognised in books as
at the date of transition.
Would the answer be different if the company has not opted for the
deemed cost exemption given under Ind AS 101 and has elected to
apply Ind AS 16 retrospectively?
Response: Ind AS 101, First-time Adoption of Indian Accounting Standards
defines deemed cost as, "An amount used as a surrogate for cost or
depreciated cost at a given date. Subsequent depreciation or amortisation
assumes that the entity had initially recognised the asset or liability at the
given date and that its cost was equal to the deemed cost."
As per paragraph D6 of Ind AS 101, "A first-time adopter may elect to use a
previous GAAP revaluation of an item of property, plant and equipment at, or
before, the date of transition to Ind ASs as deemed cost at the date of the
revaluation, if the revaluation was, at the date of the revaluation, broadly
comparable to:
(a) fair value; or
(b) cost or depreciated cost in accordance with Ind ASs, adjusted to
reflect, for example, changes in a general or specific price index."
In accordance with the above, an entity may elect to measure its property,
plant and equipment at its deemed cost measured as per previous GAAP
revaluation on or before the date of transition, if the revaluation was broadly
comparable to fair value or cost or depreciated cost in accordance with Ind
AS. The amount so elected as deemed cost is the cost and any accumulated
depreciation and provision for impairment under previous GAAP have no
relevance. Accordingly, provision for impairment provided before the date of
such measurement as per previous GAAP cannot be reversed in later years.
It may be noted that FAQ on deemed cost of property, plant and equipment
under Ind AS 101, First-time Adoption of Indian Accounting Standards issued
by the Accounting Standards Board of ICAI also, inter alia, provides that from
40
Ind AS 101, First-time Adoption of Indian Accounting Standards
the date of transition, the deemed cost, i.e., carrying values of PPE as per
the previous GAAP is the cost and any accumulated depreciation and
provision for impairment under previous GAAP have no relevance as would
be the case if fair value were to be taken as deemed cost as per paragraph
D5.
Accordingly, provision for impairment provided before the date of transition
as per previous GAAP cannot be reversed in later years.
However, from the deemed cost determination date to the date of transition,
the entity shall apply appropriate Ind AS accounting policies and depreciation
policies to that asset. The depreciation policy applied during the intervening
period from the deemed cost determination date to the date of transition
would have to be in accordance with the requirements of applicable Ind AS.
Accordingly, the impairment loss for the period between the deemed cost
determination date to the date of transition can be reversed, if permitted as
per the provisions of Ind AS 36, Impairment of Assets.
However, if it follows that if Ind AS 16 was applied retrospectively in
accordance with paragraphs 7 and 10 of Ind AS 101, then impairment loss
can be reversed, if permitted as per the provisions of Ind AS 36, Impairment
of Assets.
(ITFG Clarification Bulletin 8, Issue 5)
(Date of finalisation: May 05, 2017)
Availment of deemed cost exemption for the assets classified as
`Assets held for sale' but which do not fulfill the criteria for
classifying as held for sale in accordance with Ind AS 105 on the
date of transition
Issue 29: Company X is a first-time adopter of Ind AS from the financial
year 2017-18 with the transition date being 1 April 2016. On 1 January
2016, Company X has classified a group of assets as `Assets held for
sale' in accordance with AS 10, Property, Plant and Equipment and
stated it at lower of their net book value and net realisable value under
previous GAAP. Company X has presented these assets separately
from other fixed assets in the previous GAAP financial statements for
the year ended 31 March 2016 and did not provide depreciation
subsequently on the same.
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Compendium of ITFG Clarification Bulletins
On transition to Ind AS, these assets could not fulfill the criteria for
classifying as held for sale in accordance with Ind AS 105, Non-current
Assets Held for Sale and Discontinued Operations and accordingly,
would be reclassified as `Property, plant and equipment'.
Whether deemed cost exemption under paragraph D7AA of Ind AS 101
will be available for these assets?
Response: Under previous GAAP, i.e., AS 10, Property, Plant and
Equipment, the Company X presented items of fixed assets retired from
active use and held for sale separately. In this regard, paragraphs 73 and 74
of AS 10 may be noted:
"73 Items of property, plant and equipment retired from active use and
held for disposal should be stated at the lower of their carrying amount
and net realisable value. Any write-down in this regard should be
recognised immediately in the statement of profit and loss.
74 The carrying amount of an item of property, plant and equipment
should be derecognised
(a) on disposal; or
(b) when no future economic benefits are expected from its use or
disposal."
In accordance with the above, it may be noted that such fixed assets are
shown separately and are not derecognised from financial statements; these
are eliminated from the financial statements only if they are disposed off or
no future economic benefits are expected from its use or disposal.
Paragraph D7AA of Ind AS 101, First-time Adoption of Indian Accounting
Standards, provides that, "Where there is no change in its functional currency
on the date of transition to Ind ASs, a first-time adopter to Ind ASs may elect
to continue with the carrying value for all of its property, plant and equipment
as recognised in the financial statements as at the date of transition to Ind
ASs, measured as per the previous GAAP and use that as its deemed cost
as at the date of transition after making necessary adjustments in
accordance with paragraph D21 and D21A, of Ind AS 101."
In accordance with above, the exemption as per paragraph D7AA is available
to all property, plant and equipment as recognised in the financial statements
as at the date of transition to Ind AS irrespective of whether these were
disclosed separately. Under the previous GAAP, Company X has only
presented the assets as held for sale separately. Accordingly, the Company
42
Ind AS 101, First-time Adoption of Indian Accounting Standards
X can avail the deemed cost exemption for such type of assets which were
presented separately as held for sale as per previous GAAP but on transition
did not meet the criteria of assets held for sale given under Ind AS 105, Non-
current Assets Held for Sale and Discontinued Operations.
(ITFG Clarification Bulletin 10, Issue 4)
(Date of finalisation: July 05, 2017)
Applicability of paragraph D7AA for capital work in progress
Issue 30: Can a company elect the option available under Para D7AA of
Ind AS 101 for capital work in progress items?
Response: Para D7AA of Ind AS 101, First-time Adoption of Indian
Accounting Standards, states as under:
"Where there is no change in its functional currency on the date of transition
to Ind ASs, a first-time adopter to Ind ASs may elect to continue with the
carrying value for all of its property, plant and equipment as recognised in the
financial statements as at the date of transition to Ind ASs, measured as per
the previous GAAP and use that as its deemed cost as at the date of
transition after making necessary adjustments in accordance with paragraph
D21 and D21A, of this Ind AS. For this purpose, if the financial statements
are consolidated financial statements, the previous GAAP amount of the
subsidiary shall be that amount used in preparing and presenting
consolidated financial statements. Where a subsidiary was not consolidated
under previous GAAP, the amount required to be reported by the subsidiary
as per previous GAAP in its individual financial statements shall be the
previous GAAP amount. If an entity avails the option under this paragraph,
no further adjustments to the deemed cost of the property, plant and
equipment so determined in the opening balance sheet shall be made for
transition adjustments that might arise from the application of other Ind ASs.
This option can also be availed for intangible assets covered by Ind AS 38,
Intangible Assets and investment property covered by Ind AS 40, Investment
Property."
In accordance with the above, it may be noted that a company may elect to
choose previous GAAP carrying value for all the items of PPE as its deemed
cost when there is no change in its functional currency on the date of
transition to Ind AS.
Capital work in progress is in the nature of property, plant and equipment
under construction and accordingly, provisions of Ind AS 16, Property, Plant
and Equipment apply to it.
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Compendium of ITFG Clarification Bulletins
Accordingly, in the given case, option under paragraph D7AA of Ind AS 101
is available with regard to capital work in progress also.
(ITFG Clarification Bulletin 3, Issue 11)
(Date of finalisation: June 22, 2016)
Deemed cost exemption under paragraph D7AA (Treatment of
intragroup profits)
Issue 31: XYZ Ltd. is a first-time adopter of Ind AS from financial year
2016-17. ABC Ltd. was an associate company of XYZ Ltd. under the
previous GAAP and the same was accounted under equity method in
the consolidated financial statements of XYZ Ltd. ABC Ltd. became its
subsidiary considering the principles of de-facto control as per the
requirements of Ind AS 110, Consolidated Financial Statements.
Before transition to Ind AS, XYZ Ltd. had sold goods to ABC Ltd. at
profit margin of 10%, which is being used by ABC Ltd for its operation,
i.e., represents property, plant and equipment for ABC Limited. XYZ Ltd.
has chosen to avail deemed cost exemption provided in paragraph
D7AA of Ind AS 101, First-time Adoption of Indian Accounting
Standards, i.e., to continue with carrying value of property, plant and
equipment as per the previous GAAP which requires the values
appearing in the subsidiary's financial statements to be taken without
any adjustment.
Will such unrealised profits existing in the property, plant and
equipment at consolidated level require elimination?
Response: Paragraph D7AA of Ind AS 101 states that, "where there is no
change in its functional currency on the date of transition to Ind ASs, a first-
time adopter to Ind ASs may elect to continue with the carrying value for all
of its property, plant and equipment as recognised in the financial statements
as at the date of transition to Ind ASs, measured as per the previous GAAP
and use that as its deemed cost as at the date of transition after making
necessary adjustments in accordance with paragraph D21 and D21A, of this
Ind AS. For this purpose, if the financial statements are consolidated
financial statements, the previous GAAP amount of the subsidiary shall be
that amount used in preparing and presenting consolidated financial
statements. Where a subsidiary was not consolidated under previous GAAP,
the amount required to be reported by the subsidiary as per previous GAAP
in its individual financial statements shall be the previous GAAP amount. If
44
Ind AS 101, First-time Adoption of Indian Accounting Standards
an entity avails the option under this paragraph, no further adjustments to the
deemed cost of the property, plant and equipment so determined in the
opening balance sheet shall be made for transition adjustments that might
arise from the application of other Ind ASs."
Further, paragraph B86 of Ind AS 110, Consolidated Financial Statements,
inter alia, states that:
(c) eliminate in full intra group assets and liabilities, equity, income,
expenses and cash flows relating to transactions between entities of the
group (profits or losses resulting from intra group transactions that are
recognised in assets, such as inventory and fixed assets, are eliminated
in full). Intra group losses may indicate an impairment that requires
recognition in the consolidated financial statements. Ind AS 12, Income
Taxes, applies to temporary differences that arise from the elimination of
profits and losses resulting from intra group transactions.
Accordingly, in the given case XYZ Ltd. in its consolidated financial
statements will first eliminate the intra group profit of 10% recognised in
separate financial statements of ABC Ltd. and then will apply the deemed
cost exemption under paragraph D7AA of Ind AS 101.
(ITFG Clarification Bulletin 12, Issue 5)
(Date of finalisation: October 23, 2017)
Reversal of impact of paragraph 46A of AS 11 when exemption as
per paragraph D7AA of Ind AS 101 availed
Issue 32: Company X had opted the option available under paragraph
46/46A of AS 11, The Effects of Changes in Foreign Exchange Rates
notified under the Companies (Accounting Standards) Rules, 2006.
Accordingly, exchange gain/loss on foreign currency borrowings had
been added to or deducted from the cost of property, plant and
equipment (PPE).
Company X is a first-time adopter of Ind AS and has availed the
exemption given under paragraph D7AA of Ind AS 101 First-time
Adoption of Indian Accounting Standards, however, it wishes to
retrospectively reverse the effect of paragraph 46/46A from its PPE.
Whether Company X is allowed to do so?
Response: Paragraph D7AA of Ind AS 101 states as follows:
"Where there is no change in its functional currency on the date of transition
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Compendium of ITFG Clarification Bulletins
to Ind ASs, a first-time adopter to Ind ASs may elect to continue with the
carrying value for all of its property, plant and equipment as recognised in the
financial statements as at the date of transition to Ind ASs, measured as per
the previous GAAP and use that as its deemed cost as at the date of
transition after making necessary adjustments in accordance with paragraph
D21 and D21A, of this Ind AS. For this purpose, if the financial statements
are consolidated financial statements, the previous GAAP amount of the
subsidiary shall be that amount used in preparing and presenting
consolidated financial statements. Where a subsidiary was not consolidated
under previous GAAP, the amount required to be reported by the subsidiary
as per previous GAAP in its individual financial statements shall be the
previous GAAP amount. If an entity avails the option under this paragraph,
no further adjustments to the deemed cost of the property, plant and
equipment so determined in the opening balance sheet shall be made for
transition adjustments that might arise from the application of other Ind ASs.
This option can also be availed for intangible assets covered by Ind AS 38,
Intangible Assets and investment property covered by Ind AS 40, Investment
Property."
In accordance with the above, it may be noted that when an entity opts for
deemed cost exemption under paragraph D7AA of Ind AS 101 then it cannot
make any adjustments to the carrying amount of PPE. Thus, once the entity
avails the exemption provided in paragraph D7AA, it will be carrying forward
the previous GAAP carrying amount for all of its property, plant and
equipment.
Accordingly, in the given case, Company X cannot reverse the impact of
paragraph 46A of AS 11 from its PPE as it has opted for the deemed cost
exemption provided under D7AA.
(ITFG Clarification Bulletin 7, Issue 3)
(Date of finalisation: March 30, 2017)
Selective adoption of deemed cost exemption under paragraph
D7AA
Issue 33: Ind AS has given the option to consider previous GAAP
carrying value of property, plant and equipment (PPE) as deemed cost
for assets acquired before the transition date. Whether an entity has the
option of fair valuing few items of PPE and taking carrying amounts of
the remaining items of PPE as the deemed cost on the date of
transition?
46
Ind AS 101, First-time Adoption of Indian Accounting Standards
Response: No. In accordance with paragraph D7AA of Ind AS 101, The
First-time Adoption of Indian Accounting Standards, where there is no
change in its functional currency on the date of transition to Ind AS, a first-
time adopter of Ind AS has the option to elect to continue with the carrying
value of all of its property, plant and equipment as at the date of transition
measured as per the previous GAAP and use that as its deemed cost at the
date of transition after making necessary adjustments in accordance with
paragraph D21 and D21A of Ind AS 101. If a first time adopter chooses this
option, then the option of applying this on selective basis to some of the
items of property, plant and equipment and using fair value for others is not
available.
(ITFG Clarification Bulletin 5, Issue 3)
(Date of finalisation: September 19, 2016)
Treatment of Government Grant on the date of transition- In case
of deemed cost exemption
Issue 34: ABC Ltd. is a first-time adopter of Ind AS from the financial
year 2016-17. It had received government grant from the Central
Government during the financial year 2012-13 to purchase a fixed asset.
The grant received from the Government was deducted from the
carrying amount of fixed asset as permitted under previous GAAP, i.e.
AS 12, Accounting for Government Grants. ABC Ltd. has chosen to
continue with carrying value of property, plant and equipment as per
the previous GAAP as provided in paragraph D7AA of Ind AS 101. As
per Ind AS 20, Accounting for Government Grants and Disclosure of
Government Assistance, such a grant is required to be accounted by
setting up the grant as deferred income on the date of transition and
deducting the grant in arriving at the carrying amount of the asset is
not allowed.
In this situation, whether ABC Ltd. is required to adjust the carrying
amount of fixed assets as per previous GAAP to reflect accounting
treatment of the government grant as per Ind AS 20?
Response: Paragraph D7AA of Ind AS 101, First-time Adoption of Indian
Accounting Standards, states as under:
"Where there is no change in its functional currency on the date of transition
to Ind ASs, a first-time adopter to Ind ASs may elect to continue with the
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carrying value for all of its property, plant and equipment as recognised in the
financial statements as at the date of transition to Ind ASs, measured as per
the previous GAAP and use that as its deemed cost as at the date of
transition after making necessary adjustments in accordance with paragraph
D21 and D21A, of this Ind AS. For this purpose, if the financial statements
are consolidated financial statements, the previous GAAP amount of the
subsidiary shall be that amount used in preparing and presenting
consolidated financial statements. Where a subsidiary was not consolidated
under previous GAAP, the amount required to be reported by the subsidiary
as per previous GAAP in its individual financial statements shall be the
previous GAAP amount. If an entity avails the option under this
paragraph, no further adjustments to the deemed cost of the property,
plant and equipment so determined in the opening balance sheet shall
be made for transition adjustments that might arise from the application
of other Ind ASs. This option can also be availed for intangible assets
covered by Ind AS 38, Intangible Assets and investment property covered by
Ind AS 40, Investment Property."
In accordance with the above, when the option of deemed cost exemption is
availed for property, plant and equipment under paragraph D7AA of Ind AS
101, no further adjustments to the deemed cost of the property, plant and
equipment shall be made for transition adjustments that might arise from the
application of other Ind AS.
However paragraph 10 of Ind AS 101, inter alia, provides that Ind AS will be
applied in measuring all recognised assets and liabilities except for
mandatory exceptions and voluntary exemptions from other Ind AS as
prescribed under Ind AS 101.
In absence of any other mandatory exception or voluntary exemption
applicable in this case, the company shall recognise the asset related
government grants outstanding on the transition date as deferred income in
accordance with the requirements of Ind AS 20, Accounting for Government
Grants and Disclosure of Government Assistance. In the current case, the
company has already deducted the amount of grant from the cost of the fixed
assets. As a consequence, to recognise the amount of unamortised deferred
income as at the date of the transition in accordance with paragraph 10 of
Ind AS 101, the corresponding adjustment should be made to the carrying
amount of property, plant and equipment (net of cumulative depreciation
impact) and retained earnings, respectively, as the grant is directly linked to
the property, plant and equipment. This treatment would reflect the correct
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Ind AS 101, First-time Adoption of Indian Accounting Standards
economic reality and result in faithful representation of the effects of these
transactions on transition in accordance with the requirements of Ind AS.
Since the adjustment to the property, plant and equipment is only
consequential and arising because of applying the transition requirements of
Ind AS 101, it would not be construed as an adjustment to the deemed cost
of property, plant and equipment as envisaged under paragraph D7AA of Ind
AS.
(ITFG Clarification Bulletin 5, Issue 5)
(Date of finalisation: April 08, 2017)
Treatment of unadjusted processing of fees on loans taken before
the date of transition -In case of deemed cost exemption
Issue 35: PQR Ltd. had obtained a loan prior to April 1, 2015. The
processing fees on the loan were capitalised as part of the relevant
fixed assets as per the previous GAAP. PQR Ltd. is required to adopt
Ind AS from financial year 2016-17. It has chosen to avail deemed cost
exemption provided in paragraph D7AA of Ind AS 101, i.e., to continue
with carrying value of property, plant and equipment as per the
previous GAAP. The loan needs to be accounted for as per amortised
cost method in accordance with Ind AS 109, Financial Instruments.
Whether PQR Ltd. is required to adjust the carrying amount of fixed
assets as per the previous GAAP to reflect accounting treatment of
processing fees as per Ind AS 109?
Response: Paragraph D7AA of Ind AS 101, First-time Adoption of Indian
Accounting Standards, states as under:
"Where there is no change in its functional currency on the date of transition
to Ind ASs, a first-time adopter to Ind ASs may elect to continue with the
carrying value for all of its property, plant and equipment as recognised in the
financial statements as at the date of transition to Ind ASs, measured as per
the previous GAAP and use that as its deemed cost as at the date of
transition after making necessary adjustments in accordance with paragraph
D21 and D21A, of this Ind AS. For this purpose, if the financial statements
are consolidated financial statements, the previous GAAP amount of the
subsidiary shall be that amount used in preparing and presenting
consolidated financial statements. Where a subsidiary was not consolidated
under previous GAAP, the amount required to be reported by the subsidiary
as per previous GAAP in its individual financial statements shall be the
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Compendium of ITFG Clarification Bulletins
previous GAAP amount. If an entity avails the option under this
paragraph, no further adjustments to the deemed cost of the property,
plant and equipment so determined in the opening balance sheet shall
be made for transition adjustments that might arise from the application
of other Ind ASs. This option can also be availed for intangible assets
covered by Ind AS 38, Intangible Assets and investment property covered by
Ind AS 40, Investment Property."
In accordance with the above, when the option of deemed cost exemption is
availed for property, plant and equipment under paragraph D7AA of Ind AS
101, no further adjustments to the deemed cost of the property, plant and
equipment shall be made for transition adjustments that might arise from the
application of other Ind AS.
However paragraph 10 of Ind AS 101, inter alia, provides that Ind AS will be
applied in measuring all recognised assets and liabilities except for
mandatory exceptions and voluntary exemptions from other Ind AS as
prescribed under Ind AS 101.
In absence of any other mandatory exception or voluntary exemption
applicable in this case, the carrying amount of loan is required to be restated
to its amortised cost in accordance with the requirements of Ind AS 109 as at
the date of the transition. Accordingly, the unamortised amount of processing
cost as at the date of the transition should be adjusted from the carrying
amount of loan to arrive at its amortised cost. In the current case, the
Company has already capitalised the processing cost as a part of the cost of
the fixed assets. As a consequence, to restate the carrying amount of loan in
accordance with paragraph 10 of Ind AS 101, the carrying amount of fixed
assets as at the date of the transition should also be reduced by the amount
of processing cost (net of cumulative depreciation impact). The difference
between the adjustments to the carrying amount of loan and to fixed assets,
respectively should be recognised in the retained earnings as at the date of
the transition. This treatment would reflect the correct economic reality and
result in faithful representation of the effects of these transactions on
transition in accordance with the requirements of Ind AS. Since the
adjustment to fixed assets is only consequential and arising because of
applying the transition requirements of Ind AS 101, it would not be construed
as an adjustment to the deemed cost of property, plant and equipment as
envisaged under paragraph D7AA of Ind AS.
(ITFG Clarification Bulletin 5, Issue 4)
(Date of finalisation: April 08, 2017)
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Ind AS 101, First-time Adoption of Indian Accounting Standards
Applicability of paragraph D13AA on long term foreign exchange
contracts
Issue 36: ABC Ltd. is a first time adopter of Ind AS. It has been
exercising the option provided in paragraph 46/46A of AS 11, The
Effects of Changes in Foreign Exchange Rates notified under the
Companies (Accounting Standards) Rules, 2006 and intends to continue
the same accounting policy in accordance with paragraph D13AA of Ind
AS 101, First-time Adoption of Indian Accounting Standards . The entity
used to apply the provisions of paragraph of 46/46A of AS 11 to long-
term forward exchange contracts as such contracts were also covered
by paragraph 36 of AS 11. Whether ABC Ltd. can continue the
accounting policy for exchanges differences to long term forward
exchange contracts?
Response: Paragraph D13AA of Ind AS 101 states as follows:
"A first-time adopter may continue the policy adopted for accounting for
exchange differences arising from translation of long-term foreign currency
monetary items recognised in the financial statements for the period ending
immediately before the beginning of the first Ind AS financial reporting period
as per the previous GAAP."
The exemption in D13AA relates to accounting for foreign exchange
differences on long term foreign currency monetary items recognised in the
financial statement only, and it does not relate to the accounting for long term
forward exchange contracts (as these contracts are not within scope of Ind
AS 21 and are treated in accordance with Ind AS 109). Therefore, an entity
cannot continue to apply the provisions of paragraph 46/46A of AS 11 to
long-term forward exchange contracts by virtue of availing exemption given
in paragraph D13AA of Ind AS 101.
Further, following paragraphs of Ind AS 21 would be relevant when
accounting for long term forward exchange contracts:
Paragraph 3 of Ind AS 21, inter alia, states that Ind AS 21 shall be applied in
accounting for transactions and balances in foreign currencies, except for
those derivative transactions and balances that are within the scope of Ind
AS 109, Financial Instruments.
Paragraph 4 of Ind AS 21 states as follows:
"Ind AS 109 applies to many foreign currency derivatives and, accordingly,
these are - excluded from the scope of this Standard. However, those foreign
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Compendium of ITFG Clarification Bulletins
currency derivatives that are not within the scope of Ind AS 109 (e.g. some
foreign currency derivatives that are embedded in other contracts) are within
the scope of this Standard. In addition, this Standard applies when an entity
translates amounts relating to derivatives from its functional currency to its
presentation currency."
Long term forward exchange contracts generally meet the definition of
`Derivatives' which are within the scope of Ind AS 109, Financial Instruments.
Therefore, ABC Ltd has to follow the accounting requirements of Ind AS 109
for accounting long term forward exchange contracts.
(ITFG Clarification Bulletin 7, Issue 4)
(Date of finalisation: March 30, 2017)
Capitalisation of exchange differences arising from long term
foreign currency monetary items (In case of first-time adoption of
Ind AS and when change in functional currency)
Issue 37: Company ZED Ltd., having net worth of ` 600 crores as on
March 31, 2014, has assessed that its functional currency as per the
requirements of Ind AS 21, The Effects of Changes in Foreign Exchange
Rates, is USD. The Company has taken loans in USD as well as in ` for
importing fixed assets before 1st March 2014. The Company follows the
policy of recognising the exchange differences arising from long term
foreign currency monetary items in the cost of fixed assets where such
monetary item has arisen for purchase of fixed assets. Considering the
requirements of paragraph D13AA of Ind AS 101, First-time Adoption of
Indian Accounting Standards, whether the company can continue to
recognise the exchange differences arising from the above said loans
in the cost of Property, Plant and Equipment, when adopting Ind AS for
the first time?
Response: Paragraph D13AA of Ind AS 101, First-time Adoption of Indian
Accounting Standards states as follows:
"A first-time adopter may continue the policy adopted for accounting for
exchange differences arising from translation of long-term foreign currency
monetary items recognised in the financial statements for the period ending
immediately before the beginning of the first Ind AS financial reporting period
as per the previous GAAP."
Paragraph D13AA as stated above provides an option to continue the policy
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Ind AS 101, First-time Adoption of Indian Accounting Standards
of recognising the exchange differences on long term foreign currency
monetary items as per paragraph 46/46A of AS 11, The Effects of Changes
in Foreign Exchange Rates, only for those long term foreign currency
monetary items which were recognised in the financial statements before the
beginning of first Ind AS reporting period. Therefore, the option given in
paragraph D13AA of Ind AS 101, will be available in case of those long term
foreign currency monetary items which were recognised in the financial
statements ending on or before 31st March, 2016 and are regarded as
foreign currency monetary items under Ind AS 21.
In the given case, the functional currency of Company ZED has changed
from ` to USD. Therefore, the USD loans will no longer be regarded as
foreign currency monetary items under Ind AS. Hence, such a company
cannot continue the policy of recognising the exchange differences, arising
from USD loans, in the cost of fixed assets.
(ITFG Clarification Bulletin 1, Issue 4)
(Date of finalisation: January 16, 2016)
Exemption under paragraph D13AA to foreign currency loan
drawn after Ind AS applicability to the entity
Issue 38: Company ABC Ltd. is required to mandatorily comply with Ind
AS from financial year 2016-17. It had entered into a foreign currency
loan agreement for USD 100 million on March 31, 2010 for construction
of its property, plant and equipment (PPE). It had drawn USD 70 million
upto March 31, 2016. The company had availed the option given under
paragraph 46/46A of AS 11, The Effects of Changes in Foreign
Exchange Rates notified under the Companies (Accounting Standards)
Rules, 2006. Accordingly, exchange gain/loss on such foreign currency
loan had been added to or deducted from the cost of PPE. The
Company has opted for the exemption given under paragraph D13AA of
Ind AS 101, First-time Adoption of Indian Accounting Standards.
The balance amount of USD 30 million will be drawn after 1st April,
2016. Whether the exemption under paragraph D13AA is also available
for the balance loan amount of USD 30 million to be drawn after 1st
April, 2016?
Response: Paragraph D13AA of Ind AS 101 states as follows:
"A first-time adopter may continue the policy adopted for accounting for
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Compendium of ITFG Clarification Bulletins
exchange differences arising from translation of long-term foreign currency
monetary items recognised in the financial statements for the period ending
immediately before the beginning of the first Ind AS financial reporting period
as per the previous GAAP."
As stated above, it may be noted that the exemption under paragraph D13AA
is available only for the exchange differences arising from translation of long-
term foreign currency monetary items recognised in the financial statements
immediately before the beginning of the first Ind AS financial reporting
period.
Accordingly, in the given case, the exemption under paragraph D13AA for
the exchange gain/loss on foreign currency loan amount of USD 70 million is
available to ABC Ltd. However, it cannot avail the exemption under
paragraph D13AA for the exchange gain/loss on balance amount of loan, i.e.,
USD 30 million, as the same will be drawn after 1st April, 2016.
(ITFG Clarification Bulletin 7, Issue 1)
(Date of finalisation: March 30, 2017)
Applicability of paragraph D13AA on foreign currency swaps in
case of hedged items
Issue 39: XYZ Ltd. had obtained a long term foreign currency loan and
had availed option given in paragraph 46/46A of AS 11, The Effects of
Changes in Foreign Exchange Rates under previous GAAP.
Accordingly, exchange gain/loss on such foreign currency loan had
been added to or deducted from the cost of fixed assets.
XYZ Ltd. is a first time adopter of Ind AS from April 1, 2016. The
Company wants to avail the option available under paragraph D13AA of
Ind AS 101, i.e., to continue the policy adopted for accounting for
exchange difference arising from translation of long-term foreign
currency monetary items recognised in the previous GAAP financial
statements.
The entity has also entered into foreign currency swap transaction for
such long term foreign currency items. The swaps fall within the
definition of cash flow hedge. As per Ind AS 109, Financial Instruments,
in case of cash flows hedge, portion of gain or loss on the hedging
instrument that is determined to be an effective hedge shall be
recognized in the Other Comprehensive Income (OCI) and
ineffectiveness gain or loss shall be recognized in the profit or loss.
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Ind AS 101, First-time Adoption of Indian Accounting Standards
How to give the effect of swaps in the financial statements, as gain/loss
on hedged item is considered in the fixed assets whereas gain/loss on
hedging instrument as per Ind AS 109 is either recognised in OCI or in
profit and loss?
Response: Paragraph D13AA of Ind AS 101 provides that a first-time
adopter may continue the policy adopted for accounting for exchange
differences arising from translation of long-term foreign currency monetary
items recognised in the financial statements for the period ending
immediately before the beginning of the first Ind AS financial reporting period
as per the previous GAAP.
Paragraph 6.1.1 of Ind AS 109 states as under:
"The objective of hedge accounting is to represent, in the financial
statements, the effect of an entity's risk management activities that use
financial instruments to manage exposures arising from particular risks that
could affect profit or loss (or other comprehensive income, in the case of
investments in equity instruments for which an entity has elected to present
changes in fair value in other comprehensive income in accordance with
paragraph 5.7.5)."
In the present case, the entity has decided to avail the option available under
paragraph D13AA of Ind AS 101. It may be noted that if an entity avails the
exemption specified in paragraph D13AA then it has no corresponding
foreign currency exposure that affects profit or loss as it capitalizes the
exchange differences to the cost of the asset.
In view of the above, hedge accounting under Ind AS 109 will not be
applicable for foreign currency swaps against an item, if for that item, the
entity avails the option available under paragraph D13AA of Ind AS 101.
Hence, such derivatives will be considered as held for trading and any
change in fair value will be recognised in profit or loss.
(ITFG Clarification Bulletin 3, Issue 10)
(Date of finalisation: June 22, 2016)
Revision of balance of Foreign Currency Monetary Item
Translation Difference Account (FCMITDA) at the time of first time
adoption of Ind AS on account of finance cost
Issue 40: A Company has opted for the accounting treatment under
paragraph 46A of AS 11, The Effects of Changes in Foreign Exchange
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Rates, under the Companies (Accounting Standards) Rules, 2006, in
respect of purchase of other than depreciable assets and accordingly,
exchange difference on account of long term foreign currency loans is
accumulated and amortised over the balance period of such loan. The
company has taken a long term loan of ` 1000 crores and incurred
upfront / processing fee of ` 40 crores. Under the Companies
(Accounting Standards) Rules, 2006, ` 40 crores had been charged off
as finance cost in the statement of profit and loss in the year of loan
and Rs.1000 crores is carried as long term loan. The loan which is
outstanding on the balance sheet date (for simplicity it is assumed that
repayment of loan has not yet started) is translated at the rate of
exchange prevailing at the date of balance sheet and the exchange
difference is parked in Foreign Currency Monetary Item Translation
Difference Account (FCMITDA), which is being amortised over the term
of loan.
Under the Companies (Indian Accounting Standards) Rules, 2015, on
the date of transition, the effective rate of interest will be worked out
based on the net inflow of loan amount i.e. ` 960 crores in this case.
Whether the balance of FCMITDA based on loan inflow of ` 960 crores
or ` 1000 crores be continued as per Ind AS on date of transition as per
the Paragraph D13AA of Ind AS 101, First time Adoption of Indian
Accounting Standards.
Response: As per paragraph D13AA of Ind AS 101, First time Adoption of
Indian Accounting Standards, "A first-time adopter may continue the policy
adopted for accounting for exchange differences arising from translation of
long-term foreign currency monetary items recognised in the financial
statements for the period ending immediately before the beginning of the first
Ind AS financial reporting period as per the previous GAAP".
Long term loan taken by Company is a financial liability under Ind AS 109,
Financial Instruments. Paragraphs 4.2.1 and 4.2.2 of Ind AS 109 provide for
classification and subsequent measurement of financial liability as follows:
"4.2.1 An entity shall classify all financial liabilities as subsequently
measured at amortised cost, except for:
(a) financial liabilities at fair value through profit or loss. Such liabilities,
including derivatives that are liabilities, shall be subsequently
measured at fair value.
(b) financial liabilities that arise when a transfer of a financial asset does
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Ind AS 101, First-time Adoption of Indian Accounting Standards
not qualify for derecognition or when the continuing involvement
approach applies. Paragraphs 3.2.15 and 3.2.17 apply to the
measurement of such financial liabilities.
(c) financial guarantee contracts. After initial recognition, an issuer of
such a contract shall (unless paragraph 4.2.1(a) or (b) applies)
subsequently measure it at the higher of:
(i) the amount of the loss allowance determined in accordance with
section 5.5 and
(ii) the amount initially recognised (see paragraph 5.1.1) less, when
appropriate, the cumulative amount of income recognised in
accordance with the principles of Ind AS 18.
(d) commitments to provide a loan at a below-market interest rate. An
issuer of such a commitment shall (unless paragraph 4.2.1(a) applies)
subsequently measure it at the higher of:
(i) the amount of the loss allowance determined in accordance with
Section 5.5 and
(ii) the amount initially recognised (see paragraph 5.1.1) less, when
appropriate, the cumulative amount of income recognised in
accordance with the principles of Ind AS 18.
(e) contingent consideration recognised by an acquirer in a business
combination to which Ind AS 103 applies. Such contingent
consideration shall subsequently be measured at fair value with
changes recognised in profit or loss.
Option to designate a financial liability at fair value through profit or loss
4.2.2 An entity may, at initial recognition, irrevocably designate a financial
liability as measured at fair value through profit or loss when permitted by
paragraph 4.3.5, or when doing so results in more relevant information,
because either:
(a) it eliminates or significantly reduces a measurement or recognition
inconsistency (sometimes referred to as `an accounting mismatch')
that would otherwise arise from measuring assets or liabilities or
recognising the gains and losses on them on different bases (see
paragraphs B4.1.29 B4.1.32); or
(b) a group of financial liabilities or financial assets and financial liabilities
is managed and its performance is evaluated on a fair value basis, in
accordance with a documented risk management or investment
strategy, and information about the group is provided internally on that
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basis to the entity's key management personnel (as defined in Ind AS
24 Related Party Disclosures), for example, the entity's board of
directors and chief executive officer (see paragraphs B4.1.33
B4.1.36)".
In view of the above, the first time adopter needs to revise the balance of
FCMITDA based on the loan at amortised cost of ` 960 crores
retrospectively if the loan is not designated as at fair value through profit or
loss (FVTPL).
(ITFG Clarification Bulletin 2, Issue 6)
(Date of finalisation: April 12, 2016)
Amortisation of balance of Foreign Currency Monetary Item
Translation Difference Account (FCMITDA)
Issue 41: Y Ltd. is a first time adopter of Ind AS. The date of transition
is April 1, 2015. On April 1, 2010, it obtained a 7 year US$ 1,00,000 loan.
It has been exercising the option provided in Paragraph 46/46A of AS 11
and has been amortising the exchange differences in respect of this
loan over the balance period of such loan. On the date of transition, the
company intends to continue the same accounting policy with regard to
amortising of exchange differences. Whether the Company is permitted
to do so? Whether amortisation of balance of Foreign Currency
Monetary Item Translation Difference Account (FCMITDA) be routed
through profit or loss or through Other Comprehensive Income (OCI).
Response: Ind AS 101 includes an optional exemption to continue the
existing policy as per the previous GAAP, i.e., existing AS 11 in respect of
the long-term foreign currency monetary items recognised in the financial
statements for the period ending immediately before the beginning of the first
Ind AS financial reporting period.
Paragraph D13AA of Ind AS 101 provides that a first-time adopter may
continue the policy adopted for accounting for exchange differences arising
from translation of long-term foreign currency monetary items recognised in
the financial statements for the period ending immediately before the
beginning of the first Ind AS financial reporting period as per the previous
GAAP. Therefore, if an entity opts to follow the aforesaid paragraph of Ind
AS 101, it has to continue to apply the accounting policy followed for such
long-term foreign currency monetary item.
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Ind AS 101, First-time Adoption of Indian Accounting Standards
In view of the above, Company Y can continue to follow the existing
accounting policy of amortising the exchange differences in respect of this
loan over the balance period of such long term liability.
Since the amortisation of exchange differences under the existing policy as
per the previous GAAP would be to recognise periodic amortised amount in
the statement of profit and loss affecting the profit or loss for the period,
amortisation of balance of Foreign Currency Monetary Item Translation
Difference Account (FCMITDA) shall be routed through profit or loss and not
through Other Comprehensive Income (OCI).
(ITFG Clarification Bulletin 2, Issue 1)
(Date of finalisation: April 12, 2016)
Capitalisation of exchange differences arising from long term
foreign currency monetary items in case of fixed assets (In case
of first time adoption of Ind AS)
Issue 42: Company XYZ ltd. having net worth of ` 600 crores as on
March 31, 2014 has taken a loan having term of 5 years for importing
fixed assets as on July 1, 2014, February 1, 2016 and May 3, 2016. The
Company has followed the policy of recognising the exchange
differences arising from long term foreign currency monetary items in
the cost of fixed assets where such monetary item has arisen for
purchase of fixed assets pursuant to paragraph 46/46 A of AS 11, The
Effects of Changes in Foreign Exchange Rates, notified under the
Companies (Accounting Standards) Rules, 2006. Considering the
requirements of paragraph D13AA of Ind AS 101, First-time adoption of
Indian Accounting Standards, whether the company can continue to
recognise the exchange differences arising from the above-said loans
in the cost of Property, Plant and Equipment, when adopting Ind AS for
the first time?
Response: Paragraph D13AA of Ind AS 101, First-time Adoption of Indian
Accounting Standards states as follows:
"A first-time adopter may continue the policy adopted for accounting for
exchange differences arising from translation of long-term foreign currency
monetary items recognised in the financial statements for the period ending
immediately before the beginning of the first Ind AS financial reporting period
as per the previous GAAP."
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Paragraph D13AA of Ind AS 101, First-time adoption of Indian Accounting
Standards, provides an option to continue the policy of recognising the
exchange differences on long term foreign currency monetary items as per
paragraph 46/46A of AS 11, The Effects of Changes in Foreign exchange
Rates, only for those long term foreign currency monetary items which were
recognised in the financial statements before the beginning of first Ind AS
reporting period.
In the above case, the beginning of the first Ind AS reporting period for
company XYZ is April 1, 2016. Therefore, the option given in paragraph
D13AA of Ind AS 101 will be available for loans taken as on July 1, 2014 and
February 1, 2016 and will not be available for the loan taken after March 31,
2016.
(ITFG Clarification Bulletin 1, Issue 3)
(Date of finalisation: January 16, 2016)
Accounting Treatment of interest free loan to subsidiary company
when exemption under paragraph D15 of Ind AS 101 availed
Issue 43: A Ltd. has given an interest free loan to its subsidiary
company B Ltd. Both companies are covered under Phase I of Ind AS
roadmap. B Ltd. has recognised the differential of present value of loan
amount and its carrying amount as per previous GAAP as `Equity' in its
standalone financial statements prepared as per Ind AS. A Ltd. has
elected to measure the investment in subsidiary at its previous GAAP
carrying amount at that date in accordance with paragraph D15 of Ind
AS 101, First-time Adoption of Indian Accounting Standards.
What will be the accounting treatment of the differential in the carrying
value of loan under previous GAAP and its present value in the
standalone financial statements of A Ltd. prepared as per Ind AS?
Response: Paragraphs D14 and D15 of Ind AS 101 state as follows:
"D14 When an entity prepares separate financial statements, Ind AS 27
requires it to account for its investments in subsidiaries, joint ventures and
associates either:
(a) at cost; or
(b) in accordance with Ind AS 109."
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Ind AS 101, First-time Adoption of Indian Accounting Standards
D15 If a first-time adopter measures such an investment at cost in
accordance with Ind AS 27, it shall measure that investment at one of the
following amounts in its separate opening Ind AS Balance Sheet:
(a) cost determined in accordance with Ind AS 27; or
(b) deemed cost. The deemed cost of such an investment shall be its:
(i) fair value at the entity's date of transition to Ind ASs in its
separate financial statements; or
(ii) previous GAAP carrying amount at that date.
A first-time adopter may choose either (i) or (ii) above to measure its
investment in each subsidiary, joint venture or associate that it elects to
measure using a deemed cost."
Paragraph 10 of Ind AS 101 states as follows:
Except as described in paragraphs 1319 and Appendices BD, an entity
shall, in its opening Ind AS Balance Sheet:
(a) recognise all assets and liabilities whose recognition is required by Ind
ASs;
(b) not recognise items as assets or liabilities if Ind ASs do not permit
such recognition;
(c) reclassify items that it recognised in accordance with previous GAAP
as one type of asset, liability or component of equity, but are a
different type of asset, liability or component of equity in accordance
with Ind ASs; and
(d) apply Ind ASs in measuring all recognised assets and liabilities.
In accordance with the above, it may be noted that if the entity exercises the
option under D15 (b) (ii) to measure the investment in subsidiary at previous
GAAP carrying amount, then the differential in the carrying value of the loan
under previous GAAP and present value shall be added to the investment in
subsidiary measured at cost as required by paragraph 10 of Ind AS 101.
(ITFG Clarification Bulletin 10, Issue 1)
(Date of finalisation: July 05, 2017)
Measurement of Investment in subsidiary when exemption under
paragraph D15 of Ind AS 101 availed
Issue 44: MNC Ltd is a first-time adopter of Ind AS. At the date of
transition to Ind AS, it has opted to measure its investment in
subsidiary at deemed cost as per paragraph D15 of Ind AS 101, First-
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time Adoption of Indian Accounting Standards. Whether in its first Ind
AS financial statements prepared as at the end of the reporting period,
MNC Ltd. is required to measure its investment in subsidiary at cost
only or it has the option to measure the investment as per Ind AS 109 in
accordance with paragraph 10 of Ind AS 27?
Response: Paragraph D14 and D 15 of Ind AS 101 states as follows:
"D14 When an entity prepares separate financial statements, Ind AS 27
requires it to account for its investments in subsidiaries, joint ventures and
associates either:
(a) at cost; or
(b) in accordance with Ind AS 109.
D15 If a first-time adopter measures such an investment at cost in
accordance with Ind AS 27, it shall measure that investment at one of the
following amounts in its separate opening Ind AS Balance Sheet:
(a) cost determined in accordance with Ind AS 27; or
(b) deemed cost. The deemed cost of such an investment shall be its:
(i) fair value at the entity's date of transition to Ind ASs in its
separate financial statements; or
(ii) previous GAAP carrying amount at that date.
A first-time adopter may choose either (i) or (ii) above to measure its
investment in each subsidiary, joint venture or associate that it elects to
measure using a deemed cost."
In accordance with the above, it may be noted that deemed cost exemption
under paragraph D15 is available to an entity when it chooses to measure
the investment at cost in accordance with Ind AS 27. Accordingly, an entity
may in its opening Ind AS balance sheet measure its investment in
subsidiaries as at the date of transition at its deemed cost measured in
accordance with paragraph D15 provided it adopts to measure its investment
in subsidiaries at cost in accordance with Ind AS 27.
Further, paragraph 7 of Ind AS 101 states that, "An entity shall use the same
accounting policies in its opening Ind AS Balance Sheet and throughout
all periods presented in its first Ind AS financial statements. Those
accounting policies shall comply with each Ind AS effective at the end of its
first Ind AS reporting period, except as specified in paragraphs 1319 and
Appendices BD."
Accordingly, if an entity has opted to measure its investments in subsidiaries
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Ind AS 101, First-time Adoption of Indian Accounting Standards
at cost for its opening Ind AS balance sheet, then the same accounting policy
will be applied for its closing Ind AS balance sheet as well. Accordingly, if a
company chooses to measure its investment in subsidiary at the date of
transition at deemed cost measured as per paragraph D15, then it shall carry
such investment at that amount (i.e. deemed cost as per paragraph D15) in
its first Ind AS financial statements prepared as at the end of the reporting
period.
The requirements in D14 and D15 applies to investments held in subsidiaries
as at the date of transition. However, for all investment in subsidiaries, joint
ventures and associates made subsequent to the date of transition, the
requirements of paragraph 10 of Ind AS 27 as stated below shall apply:
"When an entity prepares separate financial statements, it shall account for
investments in subsidiaries, joint ventures and associates either:
(a) at cost, or
(b) in accordance with Ind AS 109."
The entity shall apply the same accounting for each category of investments.
Investments accounted for at cost shall be accounted for in accordance with
Ind AS 105, Non-current Assets Held for Sale and Discontinued Operations,
when they are classified as held for sale (or included in a disposal group that
is classified as held for sale). The measurement of investments accounted
for in accordance with Ind AS 109 is not changed in such circumstances."
In accordance with the above, if the entity has opted to measure the
investments at deemed cost on the date of transition to Ind AS in its opening
Ind AS balance sheet, then all subsequent investments made in that category
should be measured at cost in accordance with Ind AS 27 in its financial
statements prepared as at the end of the reporting period. However, for the
investment made in different category (e.g. associate or joint venture), the
entity has an option to account for those investments at cost or in
accordance with Ind AS 109.
(ITFG Clarification Bulletin 11, Issue 4)
(Date of finalisation: July 31, 2017)
Exemption of paragraph D15 on investment in debentures of
subsidiary company
Issue 45: XYZ Ltd. is a holding company of ABC Ltd. and owns 60%
voting share of ABC Ltd. Apart of equity investments, XYZ Ltd. has
investment in debentures of subsidiary company. Whether such an
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Compendium of ITFG Clarification Bulletins
investment in debenture of subsidiary company would be covered
under the scope of paragraph 10 of Ind AS 27, Separate Financial
Statements and exemptions provided under D15 of Ind AS 101, First-
time Adoption of Indian Accounting Standards.
Response: According to paragraph 2.1(a) of Ind AS 109, the standard is not
applicable to those interests in subsidiaries, associates and joint ventures
that are accounted for in accordance with Ind AS 110, Consolidated Financial
Statements, Ind AS 27, Separate Financial Statements or Ind AS 28,
Investments in Associates and Joint Ventures.
However, in some cases, Ind AS 110, Ind AS 27 or Ind AS 28 require or
permit an entity to account for an interest in a subsidiary, associate or joint
venture in accordance with some or all of the requirements of this Standard
i.e. Ind AS 109.
Paragraph 10 of Ind AS 27, Separate Financial Statements, inter alia, states
as follows:
"10 When an entity prepares separate financial statements, it shall
account for investments in subsidiaries, joint ventures and associates
either:
(a) at cost, or
(b) in accordance with Ind AS 109."
Further, paragraph D15 of Ind AS 101 provides exemption with regard to
investments in subsidiaries, joint ventures and associates.
Paragraph D15 of Ind AS states as follows:
"If a first-time adopter measures such an investment at cost in
accordance with Ind AS 27, it shall measure that investment at one of
the following amounts in its separate opening Ind AS Balance Sheet:
(a) cost determined in accordance with Ind AS 27; or
(b) deemed cost. The deemed cost of such an investment shall be
its:
(i) fair value at the entity's date of transition to Ind ASs in its
separate financial statements; or
(ii) previous GAAP carrying amount at that date.
A first-time adopter may choose either (i) or (ii) above to measure its
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Ind AS 101, First-time Adoption of Indian Accounting Standards
investment in each subsidiary, joint venture or associate that it elects
to measure using a deemed cost."
The Company needs to assess the terms of the debentures to determine
whether the instrument can be considered as an investment in subsidiary as
per Ind AS 27 or a financial asset as per Ind AS 109. If the debentures meet
the definition of equity as per Ind AS 32 from the issuer's perspective (i.e.
subsidiary), then it can be considered to be part of parent's investment in
subsidiary and hence accounted for under Ind AS 27. However, where the
instrument fails to meet the definition of equity from issuer's perspective (i.e.
a liability of the subsidiary), it shall be classified as a financial asset and
accounted for under Ind AS 109.
Investments covered by Ind AS 110 are those interests that give an entity
right to control over the other entity, which are normally in the form of equity
investments. An entity may have other investments commonly referred as
long term investments which are not excluded from the scope of Ind AS 109.
Accordingly, in the given case, presuming that investment in debentures is
not within the scope of Ind AS 110, it will not be covered under Ind AS 27
and therefore, should be accounted as financial asset under Ind AS 109.
(ITFG Clarification Bulletin 7, Issue 8)
(Date of finalisation: March 30, 2017)
Exemption under paragraph D22 of Ind AS 101 in respect of
intangible assets arising from service concession arrangements
(toll roads) which are in progress.
Issue 46: A Ltd. is a first-time adopter of Ind AS from financial year
2016-17. It had entered into a service concession arrangement with
government in respect of toll roads in the year 2014. Paragraph 7AA of
Ind AS 38, Intangible Assets read with paragraph D22 of Ind AS 101,
First-time Adoption of Indian Accounting Standards permits revenue
based amortisation for the intangible assets arising from service
concession arrangements in respect of toll roads recognised in the
financial statements for the period ending immediately before the
beginning of the first Ind AS reporting period. As on 1st April 2016, the
construction of toll road is in progress. Can A Ltd. avail the above
exemption in respect of toll roads under construction/development as
on 1st April, 2016?
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Response: Paragraph D22 of Ind AS 101, inter alia, states as follows:
"D22 A first-time adopter may apply the following provisions while applying
the Appendix A to Ind AS 11:
(i) Subject to paragraph (ii), changes in accounting policies are
accounted for in accordance with Ind AS 8, i.e. retrospectively, except
for the policy adopted for amortisation of intangible assets arising from
service concession arrangements related to toll roads recognised in
the financial statements for the period ending immediately before the
beginning of the first Ind AS financial reporting period as per the
previous GAAP................"
Further, paragraph 7AA of Ind AS 38, Intangible Assets, states as follows:
"7AA The amortisation method specified in this Standard does not apply
to an entity that opts to amortise the intangible assets arising from
service concession arrangements in respect of toll roads recognised in
the financial statements for the period ending immediately before the
beginning of the first Ind AS reporting period as per the exception given
in paragraph D22 of Appendix D to Ind AS 101."
In accordance with the above, it may be noted that the exemption can be
availed in respect of intangible assets arising from service concession
arrangements in respect of toll roads recognised in the financial statements
before the beginning of first Ind AS reporting period. In the given case, A Ltd.
cannot avail the exemption because the intangible asset is in progress and
the same have has not been recognised before 1st April, 2016 and
amortisation has not begun.
(ITFG Clarification Bulletin 7, Issue 9)
(Date of finalisation: March 30, 2017)
Accounting treatment of non-controlling interest in case of
business combinations in its consolidated financial statements as
on the date of transition
Issue 47: Company A has multiple subsidiaries. All subsidiary
companies have a negative net worth as at 31st March 2015. Company A
is required to apply Ind AS from 1st April, 2016. How will the company
account for accumulated losses as at 31st March 2015 pertaining (under
the earlier GAAP) to the non-controlling interest in its consolidated
financial statements as on the date of transition-
(i) If Company A decides to avail the exemption for all business
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Ind AS 101, First-time Adoption of Indian Accounting Standards
combination before the date of transition as per Appendix C of
Ind AS 101, First-time Adoption of Indian Accounting Standards?
(ii) If Company A elects to apply Ind AS 103, Business Combinations,
retrospectively to past business combinations i.e., restating the
business combinations that occurred before the date of transition
to Ind AS from the date of its choice ?
Response: Paragraph B7 of Ind AS 101, First-time Adoption of Indian
Accounting Standards on transition states:
"A first-time adopter shall apply the following requirements of Ind AS 110
prospectively from the date of transition to Ind ASs:
(a) the requirement in paragraph B94 that total comprehensive income is
attributed to the owners of the parent and to the non-controlling
interests even if this results in the non-controlling interests having a
deficit balance;
(b) .....
(c) .......
However, if a first-time adopter elects to apply Ind AS 103 retrospectively to
past business combinations, it shall also apply Ind AS 110 in accordance
with paragraph C1 of this Ind AS."
Paragraph C1 of Ind AS 101 further states:
"A first-time adopter may elect not to apply Ind AS 103 retrospectively to
past business combinations (business combinations that occurred
before the date of transition to Ind ASs). However, if a first-time adopter
restates any business combination to comply with Ind AS 103, it shall
restate all later business combinations and shall also apply Ind AS 110
from that same date."
For example, if a first-time adopter elects to restate a business
combination that occurred on 30 June 2010, it shall restate all business
combinations that occurred between 30 June 2010 and the date of
transition to Ind ASs, and it shall also apply Ind AS 110 from 30 June
2010.
Further paragraph C4 of Appendix C of Ind AS 101, states as follows:
C4 If a first-time adopter does not apply Ind AS 103 retrospectively to a
past business combination, this has the following consequences for that
business combination:
.......
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(c) The first-time adopter shall exclude from its opening Ind AS Balance
Sheet any item recognised in accordance with previous GAAP that does
not qualify for recognition as an asset or liability under Ind ASs. The
first-time adopter shall account for the resulting change as follows:
(ii) the first-time adopter shall recognise all other resulting changes in
retained earnings.
............
(k) The measurement of non-controlling interests and deferred tax
follows from the measurement of other assets and liabilities. Therefore,
the above adjustments to recognised assets and liabilities affect non-
controlling interests and deferred tax."
In accordance with above, if a company elects to apply a date prior to the
transition date for the purpose of applying Ind AS 103, non-controlling
interests should be calculated after all assets acquired, liabilities assumed
and deferred taxes have been adjusted under Ind AS 103, Business
Combinations.
So, as per above paragraph, in the given case (i), if Company A decides to
avail the exemption for business combination as per Appendix C of Ind AS
101, in respect of all business combinations that occurred before the date of
transition, then the company shall apply the requirement in paragraph B94 of
Ind AS 110 of attributing the total comprehensive income to the owners of the
parent and to the non-controlling interests prospectively.
However, if Company A elects to apply Ind AS 103, Business Combinations
retrospectively to past business combinations i.e., restating the business
combinations that occurred before the date of transition to Ind AS from the
date of its choice, then the company should account for attribution of losses
to the non-controlling interest in accordance with paragraph B94 of Ind AS
110, retrospectively from the date of application of Ind AS 103, in its
consolidated financial statements as on the date of transition.
(ITFG Clarification Bulletin 8, Issue 6)
(Date of finalisation: May 05, 2017)
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Ind AS 103, Business Combinations
Date of acquisition (i.e. date of obtaining control) under two
scenario in case of court scheme, whether business combination
is or is not under common control.
Issue 48: Company A holds 100% shareholding of Company B.
Company B holds 100% shareholding of Company C since 1 April 2000.
Pursuant to a court scheme, to be filed in February 2018, Entity C will
merge with Entity B during the financial year 2018-19 (i.e. the scheme is
expected to be approved during the financial year 2018-2019). All
companies (A, B and C) are covered under Phase II of Ind AS and will
prepare financial statements for year ending 31 March 2018 as per Ind
AS.
In case the appointed date in the scheme is 1 April 2016, would it have
any impact on the certificate to be issued by the auditors on
compliance of the scheme with Ind AS 103?
Would the response be different in case the transferor and transferee
entities are not under common control?
Response: Paragraph 8 and 9 of Ind AS 103, Business Combinations states
as follows:
"Determining the acquisition date
8 The acquirer shall identify the acquisition date, which is the date on
which it obtains control of the acquiree.
The date on which the acquirer obtains control of the acquiree is generally
the date on which the acquirer legally transfers the consideration, acquires
the assets and assumes the liabilities of the acquiree--the closing date.
However, the acquirer might obtain control on a date that is either earlier or
later than the closing date. For example, the acquisition date precedes the
closing date if a written agreement provides that the acquirer obtains control
of the acquiree on a date before the closing date. An acquirer shall consider
all pertinent facts and circumstances in identifying the acquisition date."
Ind AS 103, Business Combinations, prescribes significantly different
accounting for business combinations which are not under common control
and those under common control. Hence, it is pertinent to note that entity is
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required to assess whether the business combination is under common
control or not.
Business Combination is under common control
Paragraph 8 and 9 of Appendix C to Ind AS 103, Business Combinations
states as follows:
"8 Business combinations involving entities or businesses under common
control shall be accounted for using the pooling of interests method.
9 The pooling of interest method is considered to involve the following:
(i) The assets and liabilities of the combining entities are reflected at their
carrying amounts.
(ii) No adjustments are made to reflect fair values, or recognise any new
assets or liabilities. The only adjustments that are made are to
harmonise accounting policies.
(iii) The financial information in the financial statements in respect of
prior periods should be restated as if the business combination
had occurred from the beginning of the preceding period in the
financial statements, irrespective of the actual date of the combination.
However, if business combination had occurred after that date, the
prior period information shall be restated only from that date.
(Emphasis added)"
In accordance with paragraph 9(iii) above, the entity will be required to
restate its financial statements as if the business combination had occurred
from the beginning of the preceding period in the financial statements.
In cases, where the auditor is of the view that as per the proposed
accounting treatment, the date from which the amalgamation is effected in
the books of accounts of the amalgamated company is different from the
acquisition date as per the Standard i.e. the date on which control has been
actually transferred, then the auditor shall state the same in the certificate as
required to be issued as per the proviso to Section 232 (3) of the Companies
Act, 2013. If the NCLT approves the scheme with a different appointed date
as compared to the acquisition date as per Ind AS 103, the appointed date
as approved by the NCLT under the scheme will be the acquisition date. In
this situation, the company should provide appropriate disclosures and the
auditor should consider the requirements of relevant auditing standards.
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Ind AS 103, Business Combinations
Business Combination is not under common control
For business combinations other than under common control, the date of
acquisition is the date from which the acquirer obtains control of the
acquiree.
In cases where the auditor is of the view that as per the proposed accounting
treatment, the date from which the amalgamation is effected in the books of
accounts of the amalgamated company is different from the acquisition date
as per the standard i.e., the date on which control has been actually
transferred, then the auditor shall state the same in the certificate as required
to be issued as per the proviso to Section 232 (3) of the Companies Act,
2013. However, if the NCLT approves the scheme with a different appointed
date as compared to the acquisition date as per Ind AS 103, the appointed
date as approved by NCLT under the scheme will be the acquisition date. In
this situation, the company should provide appropriate disclosures and the
auditor should consider the requirements of relevant auditing standards.
(ITFG Clarification Bulletin 12, Issue 8)
(Date of finalisation: October 23, 2017)
Business Combinations of entities under common control
Issue 49: As per Appendix C, Business Combinations of Entities under
Common Control of Ind AS 103, Business Combinations, in case of
common control business combinations, the assets and liabilities of the
combining entities are reflected at their carrying amounts.
(A) For this purpose, should the carrying amount of assets and
liabilities of the combining entities be reflected as per the books
of the entities transferred or the ultimate parent in the following
situations:
Situation 1: A Ltd. has two subsidiaries B Ltd. and C Ltd. B Ltd.
merges with C Ltd.
Situation 2: B Ltd. is the subsidiary of A Ltd. B Ltd. merges with A
Ltd.
(B) Further, also state whether the effect of the above business
combination is required to be eliminated in the consolidated
financial statements of A Ltd.
Response: (A) Situation 1: Paragraph 9 of Appendix C of Ind AS 103,
states as follows:
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"9 The pooling of interest method is considered to involve the following:
(i) The assets and liabilities of the combining entities are reflected
at their carrying amounts.
(ii) No adjustments are made to reflect fair values, or recognise any
new assets or liabilities. The only adjustments that are made are
to harmonise accounting policies.
(iii) The financial information in the financial statements in respect
of prior periods should be restated as if the business
combination had occurred from the beginning of the preceding
period in the financial statements, irrespective of the actual date
of the combination. However, if business combination had
occurred after that date, the prior period information shall be
restated only from that date."
Further paragraphs 11 and 12 of Appendix C of Ind AS 103 state as follows:
"11 The balance of the retained earnings appearing in the financial
statements of the transferor is aggregated with the corresponding balance
appearing in the financial statements of the transferee. Alternatively, it is
transferred to General Reserve, if any.
12 The identity of the reserves shall be preserved and shall appear in the
financial statements of the transferee in the same form in which they
appeared in the financial statements of the transferor. Thus, for example, the
General Reserve of the transferor entity becomes the General Reserve of the
transferee, the Capital Reserve of the transferor becomes the Capital
Reserve of the transferee and the Revaluation Reserve of the transferor
becomes the Revaluation Reserve of the transferee. As a result of preserving
the identity, reserves which are available for distribution as dividend before
the business combination would also be available for distribution as dividend
after the business combination. The difference, if any, between the amounts
recorded as share capital issued plus any additional consideration in the
form of cash or other assets and the amount of share capital of the transferor
shall be transferred to capital reserve and should be presented separately
from other capital reserves with disclosure of its nature and purpose in the
notes."
In accordance with the above, it may be noted that the assets and liabilities
of the combining entities are reflected at their carrying amounts. Accordingly,
in accordance with paragraph 9 (a) (i) of Appendix C of Ind AS 103, in the
separate financial statements of C Ltd., the carrying values of the assets and
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Ind AS 103, Business Combinations
liabilities as appearing in the standalone financial statements of the entities
being combined i.e. B Ltd. & C Ltd. in this case shall be recognised.
Situation 2:
In this case, since B Ltd. is merging with A Ltd. (i.e. parent) nothing has
changed and the transaction only means that the assets, liabilities and
reserves of B Ltd. which were appearing in the consolidated financial
statements of Group A immediately before the merger would now be a part of
the separate financial statements of A Ltd. Accordingly, it would be
appropriate to recognise the carrying value of the assets, liabilities and
reserves pertaining to B Ltd as appearing in the consolidated financial
statements of A Ltd. Separate financial statements to the extent of this
common control transaction shall be considered as a continuation of the
consolidated group.
(B) Paragraph B86 of Ind AS 110, Consolidated Financial Statements, states
as follows:
"Consolidation procedures
B86 Consolidated financial statements:
(a) combine like items of assets, liabilities, equity, income, expenses and
cash flows of the parent with those of its subsidiaries.
(b) offset (eliminate) the carrying amount of the parent's investment in
each subsidiary and the parent's portion of equity of each subsidiary
(Ind AS 103 explains how to account for any related goodwill).
(c) eliminate in full intragroup assets and liabilities, equity, income,
expenses and cash flows relating to transactions between entities of
the group (profits or losses resulting from intragroup transactions that
are recognised in assets, such as inventory and fixed assets, are
eliminated in full). Intragroup losses may indicate an impairment that
requires recognition in the consolidated financial statements. Ind AS
12, Income Taxes, applies to temporary differences that arise from the
elimination of profits and losses resulting from intragroup
transactions."
In accordance with the above, all intra-group transactions should be
eliminated in preparing consolidated financial statement in accordance with
Ind AS 110. The legal merger of a subsidiary with the parent or legal merger
of fellow subsidiaries is an intra-group transaction and accordingly, will have
to be eliminated in the Consolidated Financial Statements of the Parent.
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Accordingly, in both the given situations, the effect of legal merger should be
eliminated while preparing consolidated financial statements of A Ltd.
(ITFG Clarification Bulletin 9, Issue 2)
(Date of finalisation: May 15, 2017)
Incorporation of effect of business combination in the standalone
financial statements in case of scheme of arrangement
Issue 50: Entity A and B are fellow subsidiaries (entities under common
control) and filed a scheme of arrangement in April 2017 for merger of
Entity B into Entity A. Both the entities are covered under phase I of Ind
AS. Entity B filed auditor's certificate with NCLT pursuant to Section 230(7)
of Companies Act, 2013 which states that the accounting treatment
proposed in the scheme of compromise or arrangement is in conformity
with the Ind AS.
Entity B gets approval from NCLT in April 2018, which is after the year-
end 31st March, 2018 but before the approval (by the Board of Directors)
of the financial statements for the year ended 31st March 2018. As per
the scheme, the appointed date is 1st April 2017.
Whether the business combination of Entity B shall be incorporated in
the Entity A's standalone financial statements for the year ended 31st
March 2018?
Response: Paragraph 3 of Ind AS 10, Events After the Reporting Period
states as follows:
"Events after the reporting period are those events, favourable and
unfavourable, that occur between the end of the reporting period and the
date when the financial statements are approved by the Board of Directors in
case of a company, and, by the corresponding approving authority in case of
any other entity for issue. Two types of events can be identified:
(a) those that provide evidence of conditions that existed at the end of the
reporting period (adjusting events after the reporting period); and
(b) those that are indicative of conditions that arose after the reporting
period (non-adjusting events after the reporting period)."
It may be noted that although paragraph 22(a) of Ind AS 10 states that a
major business combination after the reporting period is a non-adjusting
event. However, where the court order approves a scheme with retrospective
effect subsequent to the balance sheet date but before the approval of
financial statements, the effective date for accounting is prior to the balance
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Ind AS 103, Business Combinations
sheet date, wherein the courts' approval is an event that provide additional
evidence to assist the estimation of amounts of assets and liabilities that
existed at the balance sheet date. As such, an adjusting event has occurred
which requires adjustment to the assets and liabilities of the transferor
company which are being transferred.
In the given case, since the company has applied for the scheme of
amalgamation and only the order of the court is pending then this indicates
that conditions existed at the end of the reporting period and hence this shall
be treated as an adjusting event. Accordingly, the effect of business
combination of Entity B in Entity A shall be incorporated in the standalone
financial statements of Entity A for the year ending 31st March 2018.
(ITFG Clarification Bulletin 14, Issue 4)
(Date of finalisation: February 01, 2018)
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Ind AS 107, Financial Instruments:
Disclosures
Recognition of the dividend income on an investment in debt
instrument in the books of an investor
Issue 51: How should the dividend income on an investment in debt
instrument be recognised in the books of an investor?
Response: The dividend income on an investment in debt instrument shall
be recognised in the form of interest. The recognition of income will depend
on the category of investment in debt instrument (e.g. amortised cost, fair
value through other comprehensive income or fair value through profit or
loss) determined as per the requirements of Ind AS 109.
Recognition of interest income in case of investment in debt instrument
measured at amortised cost
If the financial asset is measured at amortised cost, then interest revenue on
the same shall be calculated using effective interest rate method in
accordance with the following paragraph of Ind AS 109:
"5.4.1 Interest revenue shall be calculated by using the effective interest
method (see Appendix A and paragraphs B5.4.1B5.4.7). This shall be
calculated by applying the effective interest rate to the gross carrying amount
of a financial asset except for:
(a) purchased or originated credit-impaired financial assets. For those
financial assets, the entity shall apply the credit adjusted effective
interest rate to the amortised cost of the financial asset from initial
recognition.
(b) financial assets that are not purchased or originated credit impaired
financial assets but subsequently have become credit-impaired
financial assets. For those financial assets, the entity shall apply the
effective interest rate to the amortised cost of the financial asset in
subsequent reporting periods.
5.4.2 An entity that, in a reporting period, calculates interest revenue by
applying the effective interest method to the amortised cost of a financial
asset in accordance with paragraph 5.4.1(b), shall, in subsequent reporting
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Ind AS 107, Financial Instruments: Disclosures
periods, calculate the interest revenue by applying the effective interest rate
to the gross carrying amount if the credit risk on the financial instrument
improves so that the financial asset is no longer credit-impaired and the
improvement can be related objectively to an event occurring after the
requirements in paragraph 5.4.1(b) were applied (such as an improvement in
the borrower's credit rating)."
Recognition of interest income in case of investment in debt instrument
measured at fair value through Other Comprehensive Income
Paragraph 5.7.10 and 5.7.11 of Ind AS 109 states as follows:
5.7.10 A gain or loss on a financial asset measured at fair value through
other comprehensive income in accordance with paragraph 4.1.2A shall be
recognised in other comprehensive income, except for impairment gains or
losses (see Section 5.5) and foreign exchange gains and losses (see
paragraphs B5.7.2B5.7.2A), until the financial asset is derecognised or
reclassified. When the financial asset is derecognised the cumulative gain or
loss previously recognised in other comprehensive income is reclassified
from equity to profit or loss as a reclassification adjustment (see Ind AS 1). If
the financial asset is reclassified out of the fair value through other
comprehensive income measurement category, the entity shall account for
the cumulative gain or loss that was previously recognised in other
comprehensive income in accordance with paragraphs 5.6.5 and 5.6.7.
Interest calculated using the effective interest method is recognised in profit
or loss.
5.7.11 As described in paragraph 5.7.10, if a financial asset is measured at
fair value through other comprehensive income in accordance with paragraph
4.1.2A, the amounts that are recognised in profit or loss are the same as the
amounts that would have been recognised in profit or loss if the financial
asset had been measured at amortised cost.
Accordingly, if a financial asset is measured at fair value through Other
Comprehensive income (FVOCI) as per paragraph 4.1.2A of Ind AS 109,
then interest revenue on such an asset calculated using effective interest
rate method is recognised in profit or loss.
Recognition of interest income in case of investment in debt instrument
measured at fair value through profit or loss
Paragraph B5 (e) of Ind AS 107, Financial Instruments: Disclosures, inter
alia, provides as follows:
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Compendium of ITFG Clarification Bulletins
"B5 Paragraph 21 requires disclosure of the measurement basis (or bases)
used in preparing the financial statements and the other accounting policies
used that are relevant to an understanding of the financial statements. For
financial instruments, such disclosure may include:
(a) .....
(e) how net gains or net losses on each category of financial instrument are
determined (see paragraph 20(a)), for example, whether the net gains or net
losses on items at fair value through profit or loss include interest or dividend
income."
Accordingly, the interest income in case of investment in debt instrument can
either form part of fair value gains or losses arising from changes in fair
value of the instrument or can be separately presented. In accordance with
paragraph B5(e) of Ind AS 107, the entity shall disclose its accounting policy.
It may also be noted that in case any statute/ regulatory authority governing
the entity specifically prescribes one of the above mentioned manner of the
presentation, the entity should follow the same.
(ITFG Clarification Bulletin 8, Issue 9)
(Date of finalisation: May 05, 2017)
Foreign currency risk disclosure in case of option taken under
paragraph D13AA of Ind AS 101
Issue 52: If a company has availed the option available under paragraph
D13AA of Ind AS 101, i.e., to continue the policy adopted for accounting
for exchange difference arising from translation of long-term foreign
currency monetary items recognised in the previous GAAP financial
statements, then will the foreign currency risk disclosure of Ind AS 107,
Financial Instruments: Disclosures apply to such exchange differences
so capitalised?
Response: As per paragraph 40(a) of Ind AS 107, Financial Instruments:
Disclosures, amongst other disclosures, an entity is required to disclose a
sensitivity analysis for each type of market risk, (which includes foreign
exchange risk) as to which the entity is exposed at the end of the reporting
period, showing how profit or loss and equity would have been affected by
changes in the relevant risk variable that were reasonably possible at that
date. If the company capitalises the exchange differences in the cost of
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Ind AS 107, Financial Instruments: Disclosures
asset, then too the company is exposed to foreign currency risk exposure
and there could be an indirect impact in the profit and loss or equity, for
example through depreciation. Accordingly, the company should provide
appropriate disclosures where applicable under Ind AS 107 even though the
company has availed the option under paragraph D13AA of Ind AS 101.
(ITFG Clarification Bulletin 13, Issue 8)
(Date of finalisation: January 16, 2018)
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Ind AS 108, Operating Segments
Disclosures by the entity in case it is operating into one segment
Issue 53: Paragraph 34 of Ind AS 108, Operating Segments requires
entities to disclose information about its major customers i.e. those
contributing 10% or more of its total amount of revenue. Whether such
disclosure is required even in case where the company operates into
only one segment?
Response: The scope paragraph of Ind AS 108, Operating Segments, inter
alia, states that this Accounting Standard shall apply to companies to which
Indian Accounting Standards (Ind ASs) notified under the Companies Act
apply.
Further, paragraphs 32-35 of Ind AS 108 provide the entity-wide disclosures
that an entity is required to disclose.
Paragraph 31 of Ind AS 108 states as follows:
"Paragraphs 3234 apply to all entities subject to this Ind AS including
those entities that have a single reportable segment. Some entities'
business activities are not organised on the basis of differences in related
products and services or differences in geographical areas of operations.
Such an entity's reportable segments may report revenues from a broad
range of essentially different products and services, or more than one of its
reportable segments may provide essentially the same products and
services. Similarly, an entity's reportable segments may hold assets in
different geographical areas and report revenues from customers in different
geographical areas, or more than one of its reportable segments may
operate in the same geographical area. Information required by paragraphs
3234 shall be provided only if it is not provided as part of the reportable
segment information required by this Ind AS."
In accordance with the above, it may be noted that disclosure requirements
as specified in paragraphs 32-34 of Ind AS 108 apply to all entities to which
Ind AS applies including entities that have a single reportable segment.
Paragraph 34 of Ind AS 108 states as follows:
"Information about major customers
34 An entity shall provide information about the extent of its reliance on
its major customers. If revenues from transactions with a single
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Ind AS 108, Operating Segments
external customer amount to 10 per cent or more of an entity's
revenues, the entity shall disclose that fact, the total amount of
revenues from each such customer, and the identity of the segment or
segments reporting the revenues. The entity need not disclose the identity
of a major customer or the amount of revenues that each segment reports
from that customer. For the purposes of this Ind AS, a group of entities
known to a reporting entity to be under common control shall be considered a
single customer. However, judgement is required to assess whether a
government (including government agencies and similar bodies whether
local, national or international) and entities known to the reporting entity to be
under the control of that government are considered a single customer. In
assessing this, the reporting entity shall consider the extent of economic
integration between those entities."
Accordingly, in the given case information regarding customers contributing
to more than 10% of total revenue will be required to be disclosed by the
company even though it is operating into a single operating segment. The
entity need not disclose the identity of a major customer or customers, or the
amount of revenues that each segment reports from that customer or those
customers.
(ITFG Clarification Bulletin 13, Issue 3)
(Date of finalisation: January 16, 2018)
81
Ind AS 109, Financial Instruments
Valuation of financial guarantee contract
Issue 54: V Ltd. is covered under Phase II of Ind AS roadmap and is
required to apply Ind AS from financial year 2017-18. It has given
financial guarantee for five years against the loan taken by its associate
company, S Ltd. since 1.4.2014 and charging 1% guarantee
commission.
(a) At what value will the financial guarantee contract be accounted
for in the opening Ind AS balance sheet of V Ltd.
(b) Further, if on 31.3.2016, the guarantee is invoked but V Ltd. has
shown it under contingent liability in financial statement of 2015
and also 2016 contesting that it is confident that liability shall not
devolve on it.
Whether on transition date i.e. 1.4.2016 the impairment need to be
calculated and accordingly fair value of financial guarantee need to be
calculated.
Response: : (a) Presuming that the financial guarantee given by V Ltd.
meets the definition of financial guarantee contracts under Ind AS 109, if the
associate company S Ltd. pays the parent company V Ltd. a guarantee
commission, company V Ltd. is required to determine if this commission
represents the fair value of the financial guarantee contract. If the premium is
equivalent to an amount that company S Ltd. would have paid to obtain a
similar guarantee in a standalone arm's length transaction, then at the initial
recognition the fair value of the financial guarantee contract is likely to equal
the commission received.
(b) Paragraph 4.2.1 of Ind AS 109, Financial Instruments states as follows:
"4.2.1 An entity shall classify all financial liabilities as subsequently
measured at amortised cost, except for:
c) financial guarantee contracts. After initial recognition, an issuer of such a
contract shall (unless paragraph 4.2.1(a) or (b) applies) subsequently
measure it at the higher of:
(i) the amount of the loss allowance determined in accordance with Section
5.5 and
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Ind AS 109, Financial Instruments
(ii) the amount initially recognised (see paragraph 5.1.1) less, when
appropriate, the cumulative amount of income recognised in accordance with
the principles of Ind AS 18"
5.5.1 An entity shall recognise a loss allowance for expected credit losses
on a financial asset that is measured in accordance with paragraphs 4.1.2 or
4.1.2A, a lease receivable, a loan commitment and a financial guarantee
contract to which the impairment requirements apply in accordance with
paragraphs 2.1(g), 4.2.1(c) or 4.2.1(d).
Company V Ltd. should recognise a liability for the amount of premium
received and subsequently measure the financial guarantee contract at the
higher of the amount of loss allowance determined in accordance with Ind AS
109 and the amount initially recognised less cumulative amount of income
recognised in accordance with Ind AS 18, Revenue.
In accordance with the above, at the end of each reporting period the entity
shall estimate and recognise the expected loss in accordance with the
provisions prescribed in the standard.
Accordingly, in the given case V Ltd. shall estimate and recognise the same
in accordance with Ind AS 109.
(ITFG Clarification Bulletin 12, Issue 11)
(Date of finalisation: October 23, 2017)
Accounting Treatment of financial guarantee received from the
Director
Issue 55: Company A Ltd., applied for a term loan from Bank B for
business purposes. As per the loan agreement, the loan required a
personal guarantee of one of the directors of A Ltd. to be executed. In
case of default by A Ltd, the director will be required to compensate for
the loss that Bank B incurs. Mr. P, one of the director had given
guarantee to the bank pursuant to which the loan was sanctioned to
Company A. Company A does not pay premium or fees to its director
for providing this financial guarantee.
Whether Company A is required to account for the financial guarantee
received from its director?
Response: Ind AS 109 Financial Instruments, defines a financial guarantee
contract as `a contract that requires the issuer to make specified payments to
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Compendium of ITFG Clarification Bulletins
reimburse the holder for a loss it incurs because a specified debtor fails to
make payment when due in accordance with the original or modified terms of
a debt instrument.'
Based on this definition, an evaluation is required to be done to ascertain
whether the contract between director and Bank B qualifies as a financial
guarantee contract as defined in Appendix A to Ind AS 109. In the given
case, it does qualify as a financial guarantee contract as:
the reference obligation is a debt instrument (term loan);
the holder i.e. Bank B is compensated only for a loss that it incurs
(arising on account of non-repayment); and
the holder is not compensated for more than the actual loss incurred.
Ind AS 109 provides principles for accounting by the issuer of the guarantee.
However, it does not specifically address the accounting for financial
guarantees by the beneficiary. In an arm's length transaction between
unrelated parties, the beneficiary of the financial guarantee would recognise
the guarantee fee or premium paid as an expense.
It is also pertinent to note that the entity needs to exercise judgment in
assessing the substance of the transaction taking into consideration relevant
facts and circumstances, for example, whether the director is being
compensated otherwise for providing guarantee. Based on such an
assessment, an appropriate accounting treatment based on the principles of
Ind AS should be followed.
In the given case, Company A Ltd, is the beneficiary of the financial
guarantee and it does not pay a premium or fees to its director for providing
this financial guarantee (subject to discussion above). Accordingly, Company
A will not be required to account for such financial guarantee in its financial
statements considering the unit of account as being the guaranteed loan, in
which case the fair value would be expected to be the face value of the loan
proceeds that the Company A received. Nonetheless, the above transaction
needs to be evaluated for disclosure under paragraph 18 of Ind AS 24,
Related Party Disclosures, which states as follows:
"If an entity has had related party transactions during the periods covered by
the financial statements, it shall disclose the nature of the related party
relationship as well as information about those transactions and outstanding
balances, including commitments, necessary for users to understand the
potential effect of the relationship on the financial statements. These
disclosure requirements are in addition to those in paragraph 17. At a
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Ind AS 109, Financial Instruments
minimum, disclosures shall include:
(a) the amount of the transactions;
(b) the amount of outstanding balances, including commitments, and:
(i) their terms and conditions, including whether they are secured,
and the nature of the consideration to be provided in settlement;
and
(ii) details of any guarantees given or received;
(c) provisions for doubtful debts related to the amount of outstanding
balances; and
(d) the expense recognised during the period in respect of bad or doubtful
debts due from related parties."
In the given case based on the limited facts provided, Company A will be
required to make necessary disclosures of such financial guarantee in
accordance with Ind AS 24.
(ITFG Clarification Bulletin 13, Issue 2)
(Date of finalisation: January 16, 2018)
Recognition of renegotiation gain/loss on Financial Instruments
done in subsequent year but before the approval of financial
statements
Issue 56: Ind AS 109, Financial Instruments requires recognition of
renegotiation gain/loss subject to fulfillment of certain conditions as
mentioned in the standard. If there has been a renegotiation of terms of
(defaulted) borrowings subsequent to the year end, but before the date
of approval of financial statements, then should such modification
gain/loss be recognised in the current year financial statements itself or
in the next year when the terms of (defaulted) borrowings have been
renegotiated in accordance with Ind AS 109?
Response: As per paragraph 5.4.3 of Ind AS 109, Financial Instruments,
whenever contractual cash flows of a financial instrument are renegotiated or
otherwise modified and the renegotiation or modification does not result in
the derecognition of that financial asset in accordance with this Standard, an
entity shall recalculate the gross carrying amount of the financial asset and
shall recognise a modification gain or loss in profit or loss.
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Compendium of ITFG Clarification Bulletins
In accordance with the above, modification gain or loss should be recognised
in profit or loss in the period in which the renegotiation has contractually
taken place. Accordingly, in the given case, if the terms of the (defaulted)
borrowings have been renegotiated in the next year, then the related
gain/loss should also be recognised in the next year.
(ITFG Clarification Bulletin 13, Issue 6)
(Date of finalisation: January 16, 2018)
Accounting treatment of processing fees belonging to
undisbursed term loan amount
Issue 57: X Ltd. is a first-time adopter of Ind AS from financial year
2016-17. It had taken 6 year term loan in April 2010 from bank and paid
processing fees at the time of sanction of loan. The term loan is
disbursed in different tranches from April 2010 to April 2016. On the
date of transition to Ind AS, i.e. 1.4.2015, it has calculated the net
present value of term loan disbursed upto 31.03.2015 by using effective
interest rate and proportionate processing fees has been adjusted in
disbursed amount while calculating net present value. What will be the
accounting treatment of processing fees belonging to undisbursed term
loan amount?
Response: Assuming that the undisbursed loan amount will be disbursed in
future, the accounting treatment of the processing fees will be as follows:
Appendix A of Ind AS 109, Financial Instruments, defines `Effective interest
method' as follows:
"The rate that exactly discounts estimated future cash payments or receipts
through the expected life of the financial asset or financial liability to the
gross carrying amount of a financial asset or to the amortised cost of a
financial liability. When calculating the effective interest rate, an entity shall
estimate the expected cash flows by considering all the contractual terms of
the financial instrument (for example, prepayment, extension, call and similar
options) but shall not consider the expected credit losses. The calculation
includes all fees and points paid or received between parties to the contract
that are an integral part of the effective interest rate (see paragraphs B5.4.1
B5.4.3), transaction costs, and all other premiums or discounts. There is a
presumption that the cash flows and the expected life of a group of similar
financial instruments can be estimated reliably. However, in those rare cases
when it is not possible to reliably estimate the cash flows or the expected life
of a financial instrument (or group of financial instruments), the entity shall
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Ind AS 109, Financial Instruments
use the contractual cash flows over the full contractual term of the financial
instrument (or group of financial instruments)."
Paragraph B5.4.1 of Ind AS 109, Financial Instruments, states as follows:
"In applying the effective interest method, an entity identifies fees that are an
integral part of the effective interest rate of a financial instrument. The
description of fees for financial services may not be indicative of the nature
and substance of the services provided. Fees that are an integral part of the
effective interest rate of a financial instrument are treated as an adjustment
to the effective interest rate, unless the financial instrument is measured at
fair value, with the change in fair value being recognised in profit or loss. In
those cases, the fees are recognised as revenue or expense when the
instrument is initially recognised."
Further, Paragraph B5.4.2 of Ind AS 109, inter-alia states that, "fees that are
an integral part of the effective interest rate of a financial instrument include:
(a) origination fees received by the entity relating to the creation or
acquisition of a financial asset. Such fees may include compensation for
activities such as evaluating the borrower's financial condition, evaluating
and recording guarantees, collateral and other security arrangements,
negotiating the terms of the instrument, preparing and processing documents
and closing the transaction. These fees are an integral part of generating an
involvement with the resulting financial instrument."
In accordance with the above, the processing fee is an integral part of the
effective interest rate of a financial instrument and shall be included while
calculating the effective interest rate.
It may be noted that to the extent there is evidence that it is probable that the
undisbursed term loan will be drawn down in the future the processing fee is
accounted for as a transaction cost under Ind AS 109, i.e., the fee is deferred
and deducted from the carrying value of the financial liabilities when the draw
down occurs and considered in the effective interest rate calculations.
However, if it is not probable that the undisbursed term loan will be drawn
down in the future then the fees is recognised as an expense on a straight-
line basis over the term of the loan.
Accordingly, in the given case, assuming that the undisbursed loan amount
will be disbursed in future, the entire processing fees, i.e. processing fee
pertaining to the disbursed as well as to the undisbursed loan amount will be
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Compendium of ITFG Clarification Bulletins
included, while calculating the effective interest rate of the loan at the date of
transition to Ind AS and is recognised as an expense over the term of the
loan.
(ITFG Clarification Bulletin 10, Issue 2)
(Date of finalisation: July 05, 2017)
Accounting Treatment of prepayment premium and processing
fees of obtaining new loan to prepay old loan
Issue 58: PQR Ltd. is covered under phase II of Ind AS Implementation
and is required to adopt Ind AS from financial year 2017-18. It had
obtained term loan from Bank A in 2013-14 and paid loan processing
fees and commitment charges. In May 2017, PQR Ltd. has availed fresh
loan from Bank B as take-over of facility i.e. the new loan is sanctioned
to pay off the old loan taken from Bank A. The company paid
prepayment premium to Bank A to clear the old term loan and paid
processing fees to Bank B for the new term loan.
Whether the prepayment premium and the processing fees both will be
treated as transaction cost (as per Ind AS 109, Financial Instruments) of
obtaining the new loan, in the financial statements of PQR Ltd. prepared
in accordance with Ind AS for the financial year 2017-18.
Response: As per Appendix A of Ind AS 109, Financial Instruments,
transaction costs are "Incremental costs that are directly attributable to the
acquisition, issue or disposal of a financial asset or financial liability (see
paragraph B5.4.8). An incremental cost is one that would not have been
incurred if the entity had not acquired, issued or disposed of the financial
instrument."
Further paragraph B5.4.8 of Ind AS 109 provides that the Transaction costs
include fees and commission paid to agents (including employees acting as
selling agents), advisers, brokers and dealers, levies by regulatory agencies
and security exchanges, and transfer taxes and duties. Transaction costs do
not include debt premiums or discounts, financing costs or internal
administrative or holding costs.
Paragraph B5.4.2 of Ind AS 109, inter alia, provides that fees that are an
integral part of the effective interest rate of a financial instrument include
origination fees paid on issuing financial liabilities measured at amortised
cost. These fees are an integral part of generating an involvement with a
financial liability.
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Ind AS 109, Financial Instruments
It is assumed that the loan processing fees solely relates to the origination of
the new loan (i.e. does not represent loan modification/renegotiation fees). In
accordance with the above, the processing fees paid to avail fresh loan from
Bank B will be considered as transaction cost in the nature of origination fees
of the new loan and will be included while calculating effective interest rate
as per Ind AS 109.
Further, as per paragraph 3.3.3 of Ind AS 109, the difference between the
carrying amount of a financial liability (or part of a financial liability)
extinguished or transferred to another party and the consideration paid,
including any non-cash assets transferred or liabilities assumed, shall be
recognised in profit or loss.
Paragraph B3.3.6 of Ind AS 109, provides that if an exchange of debt
instruments or modification of terms is accounted for as an extinguishment,
any costs or fees incurred are recognised as part of the gain or loss on the
extinguishment.
Since the original loan was prepaid, the prepayment would result in
extinguishment of the original loan. As per paragraph 3.3.3 of Ind AS 109 as
stated above, the difference between the carrying amount of the financial
liability extinguished and the consideration paid shall be recognised in profit
or loss. Further, paragraph B3.3.6 of Ind AS 109 states that where
modification of terms is accounted for as an extinguishment, any costs or
fees incurred are recognised as part of the gain or loss on the
extinguishment. Accordingly, the prepayment premium shall be recognised
as part of the gain or loss on extinguishment of the old loan. Further, the
unamortised processing fee related to the old loan will also be required to be
charged to the statement of profit and loss.
(ITFG Clarification Bulletin 12, Issue 4)
(Date of finalisation: October 23, 2017)
Accounting of Financial Guarantee Contract - Comfort Letter
Issue 59: P Ltd. (parent company) has issued a comfort letter to its
subsidiary company, S ltd. S Ltd. was able to obtain funds from the
banker on the basis of comfort letter issued by P Ltd.
Whether the same will be accounted for as a financial guarantee
contract in accordance with Ind AS 109, Financial Instruments?
Response: As per Ind AS 109, financial guarantee contract is, "A contract
that requires the issuer to make specified payments to reimburse the holder
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Compendium of ITFG Clarification Bulletins
for a loss it incurs because a specified debtor fails to make payment when
due in accordance with the original or modified terms of a debt instrument."
Paragraph B2.5 of Ind AS 109 inter-alia states that, "Financial guarantee
contracts may have various legal forms, such as a guarantee, some types of
letter of credit, a credit default contract or an insurance contract. Their
accounting treatment does not depend on their legal form ."
In accordance with the above, it may be noted that a significant feature of a
financial guarantee contract is the contractual obligation to make specified
payment in case of default by the credit holder. As such, the contract may
not necessarily be called as financial guarantee contract and it may take any
name or legal form, however the treatment will be same as that of a financial
guarantee contract. If a contract legally meets these requirements, then it
would be accounted for as the financial guarantee contract as per Ind AS
109.
Accordingly, in the given case, P Ltd. will be required to evaluate as to
whether it is contractually obliged to make good the loss in case S Ltd. fails
to make the payment. If yes, then such comfort letter would be considered to
be a financial guarantee contract and will be accounted for in accordance
with Ind AS 109.
(ITFG Clarification Bulletin 12, Issue 3)
(Date of finalisation: October 23, 2017)
Accounting treatment of shares held as stock-in trade in accordance
with Ind AS
Issue 60: A share broking company is dealing in sale/purchase of shares
for its own account and therefore is having inventory of shares purchased
by it for trading. The company is covered under Phase II of Ind AS
roadmap. What will be the accounting treatment of such shares held as
stock-in trade in accordance with Ind AS?
Response: Paragraph 2 of Ind AS 2, Inventories, inter-alia, states that this
Standard applies to all inventories, except financial instruments (Ind AS 32,
Financial Instruments: Presentation and Ind AS 109, Financial Instruments).
A financial instrument is any contract that gives rise to a financial asset of
one entity and a financial liability or equity instrument of another entity. Ind
AS 109 applies to all types of financial instruments with certain exceptions as
envisaged in paragraph 2 of Ind AS 109.
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Ind AS 109, Financial Instruments
Accordingly, the principles of recognising and measuring financial
instruments are governed by Ind AS 109, its presentation is governed by Ind
AS 32 and disclosures about them are in Ind AS 107, Financial Instruments:
Disclosures, even if these instruments are held as stock-in trade by a
company.
Further Ind AS 101, First-time Adoption of Indian Accounting Standards does
not provide any transitional relief from the application of the above standards.
Accordingly, in the given case, the relevant requirements of Ind AS 109, Ind
AS 32 and Ind AS 107 shall be applied retrospectively unless otherwise
exempted under Ind AS 101.
(ITFG Clarification Bulletin 14, Issue 5)
(Date of finalisation: February 01, 2018)
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Ind AS 110, Consolidated Financial
Statements
Accounting Treatment of loss of investment in subsidiary
Issue 61: Parent had 70% stake in subsidiary. The other investor
invested additional funds in the subsidiary reducing the parent's stake
to 60%. However, there was no loss of control by the Parent. How this
partial deemed disposal should be accounted in the separate financial
statements of the parent assuming that investment in subsidiary is
measured at cost. Also, state the accounting treatment in the
consolidated financial statements?
Response: Treatment in Separate Financial Statements of the Parent
entity
In the given case, in the separate financial statements of the parent entity
there will not be any impact and investment in the subsidiary will continue to
be recognised at its carrying amount. However, the fact that its shareholding
has been reduced from 70% to 60% should be disclosed appropriately in the
financial statements.
Treatment in Consolidated Financial Statements
As per paragraph 23 of Ind AS 110 Consolidated Financial Statements,
changes in a parent's ownership interest in a subsidiary that do not result in
the parent losing control of the subsidiary are equity transactions (i.e.
transactions with owners in their capacity as owners).
Thus, such transactions have no impact on goodwill or the statement of profit
and loss.
Paragraph B96 of Appendix B to Ind AS 110 further provides that, when the
proportion of the equity held by non-controlling interests changes, an entity
shall adjust the carrying amounts of the controlling and non-controlling
interests to reflect the changes in their relative interests in the subsidiary.
The entity shall recognise directly in equity any difference between the
amount by which the non-controlling interests are adjusted and the fair value
of the consideration paid or received, and attribute it to the owners of the
parent.
Non-controlling interests (NCI) are recorded at fair value (or proportionate
share in the recognised amounts of the acquiree's identifiable net assets, if
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Ind AS 110, Consolidated Financial Statements
chosen) only at the date of the business combination. Subsequent purchases
or sales of ownership interests when control is maintained are recorded at
the non-controlling interest's proportionate share of the net assets.
As per paragraph 18 of Ind AS 112, Disclosure of Interests in Other Entities,
an entity is required to present a schedule that shows the effects on the
equity attributable to owners of the parent of any changes in its ownership
interest in a subsidiary that do not result in a loss of control.
(ITFG Clarification Bulletin 13, Issue 7)
(Date of finalisation: January 16, 2018)
Accounting treatment of dividend distribution tax in the
consolidated financial statements in case of partly-owned
subsidiary - different scenarios
Issue 62: What will be the accounting treatment of dividend distribution
tax in the consolidated financial statements in case of partly-owned
subsidiary in the following scenarios:
Scenario 1: H Limited (holding company) holds 12,000 equity shares in
S Limited (Subsidiary of H Limited) with 60% holding. Accordingly, S
Limited is a partly-owned subsidiary of H Limited. During the year 2017,
S Limited paid a dividend @ ` 10 per share, amounting to ` 200,000 and
DDT @ 20% amounting to ` 40,000.
Should the share of H Limited in DDT paid by S Limited amounting to `
24,000 (60% ` 40,000) be charged as expense in the consolidated profit
and loss of H Limited?
Response: Since H Limited is holding 12,000 shares it has got ` 1,20,000 as
dividend from S Limited. In the consolidated financial statements of H Ltd.,
dividend income earned by H Ltd. and dividend recorded by S Ltd. in its
equity will both get eliminated as a result of consolidation adjustments.
Dividend paid by S Ltd. to the 40% non-controlling interest (NCI)
shareholders will be recorded in the Statement of Changes in Equity as
reduction of NCI balance (as shares are classified as equity as per Ind AS
32).
DDT of ` 40,000 paid to tax authorities has two components- One ` 24,000
(related to H Limited's shareholding and other ` 16,000 belong to non-
controlling interest (NCI) shareholders of S Limited). DDT of ` 16,000
(pertaining to non-controlling interest (NCI) shareholders) will be recorded in
the Statement of Changes in Equity along with dividend. DDT of ` 24,000
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Compendium of ITFG Clarification Bulletins
paid outside the consolidated Group shall be charged as tax expense in the
consolidated statement of profit and loss of H Ltd.
It may be noted that Issue 1 of ITFG Clarification Bulletin 9 provides that-
"In the consolidated financial statements of P Ltd., the dividend income
earned by P Ltd. from S Ltd. and dividend recorded by S Ltd. in its
equity will both get eliminated as a result of consolidation adjustments.
DDT of ` 20,000 paid outside the consolidated Group i.e. to the tax
authorities should be charged as expense in the consolidated statement
of Profit and Loss of P Ltd."
The similar accounting treatment would be done in case of the partly-owned
subsidiary:
In accordance with the above, in the given case, CFS of H limited will be as
under:
Transactions H Ltd. S Ltd. Consol CFS H Ltd
Adjustments
Dividend Income (P&L) 120,000 - (120,000) -
Dividend (in Statement
of Changes in Equity by - (200,000) 120,000 (80,000)
way of reduction of
NCI)
DDT (in Statement of
Changes in Equity by - (40,000) 24,000 (16,000)
way of reduction of
NCI)
DDT (in Statement of - - (24,000) (24,000)
P&L)
Scenario 2 (A): Extending the situation given in scenario 1, H Limited
also pays dividend of ` 300,000 to its shareholders and DDT liability @
20% thereon amounts to ` 60,000. As per the tax laws, DDT paid by S
Ltd. of ` 24,000 is allowed as set off against the DDT liability of H Ltd.,
resulting in H Ltd. paying ` 36,000 (` 60,000 ` 24,000) as DDT to tax
authorities.
Response: If DDT paid by the subsidiary S Ltd. is allowed as a set off
against the DDT liability of its parent H Ltd. (as per the tax laws), then the
amount of such DDT should be recognised in the consolidated statement of
changes in equity of parent H Ltd.
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Ind AS 110, Consolidated Financial Statements
In the given case, share of H Limited in DDT paid by S Limited is ` 24,000
and entire ` 24,000 was utilised by H Limited while paying dividend to its
own shareholders.
Accordingly, DDT of ` 76,000 (` 40,000 of DDT paid by S Ltd. (of which `
16,000 is attributable to NCI) and ` 36,000 of DDT paid by H Ltd.) should be
recognised in the consolidated statement of changes in equity of parent H
Ltd. No amount will be charged to consolidated statement of profit and loss.
The basis for such accounting would be that due to Parent H Ltd's
transaction of distributing dividend to its shareholders (a transaction recorded
in Parent H Ltd's equity) and the related DDT set-off, this DDT paid by the
subsidiary is effectively a tax on distribution of dividend to the shareholders
of the parent company.
In accordance with the above, in the given case, CFS of H limited will be as
under:
Transactions H Ltd S Ltd Consol CFS H
Adjustments Ltd
Dividend Income 120,000 - (120,000) -
(P&L)
Dividend (in Statement (300,000) (200,000) 120,000 (380,000)*
of Changes in Equity)
DDT (in Statement (36,000) (40,000) - (76,000)*
Changes in Equity)
*Dividend of ` 80,000 and DDT of ` 16,000 will be reflected as reduction
from non-controlling interest.
(B) If in (A) above, H Limited pays dividend amounting to ` 100,000 with
DDT liability @ 20% amounting to ` 20,000.
Response: In the given case, share of H Limited in DDT paid by S Limited is
` 24,000 out of which only ` 20,000 was utilised by H Limited while paying
dividend by its own. Therefore, balance ` 4,000 should be charged in the
consolidated statement of profit and loss.
In accordance with the above, in the given case, CFS of H limited will be as
under:
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Transactions H Ltd S Ltd Consol CFS H Ltd
Adjustments
Dividend Income 120,000 - (120,000) -
(P&L)
Dividend (in (100,000) (200,000) 120,000 (180,000)*
Statement of Changes
in Equity)
DDT (in Statement - (40,000) 4,000 (36,000)*
of Changes in Equity)
DDT( in Statement of - - (4000) (4000)
P&L)
*Dividend of ` 80,000 and DDT of ` 16,000 will be reflected as reduction
from non- controlling interest.
Scenario (3): Will the answer be different for the treatment of dividend
distribution tax paid by associate in the consolidated financial
statement of investor, if as per tax laws the DDT paid by associate is
not allowed set-off against the DDT liability of the investor?
Response: Considering that as per tax laws, DDT paid by associate is not
allowed set off against the DDT liability of the investor, the investor's share of
DDT would be accounted by the investor company by crediting its investment
account in the associate and recording a corresponding debit adjustment
towards its share of profit or loss of the associate.
(ITFG Clarification Bulletin 13, Issue 9)
(Date of finalisation: January 16, 2018)
Treatment of depreciation in consolidated financial statements
when different method of depreciation applied by entities
Issue 63: PQR Ltd. is the subsidiary company of MNC Ltd. In the stand-
alone financial statements prepared in accordance with Ind AS, PQR
Ltd. has adopted Straight-line method (SLM) of depreciation and MNC
Ltd. has adopted Written-down value method (WDV) for depreciating its
property, plant and equipment. As per Ind AS 110, Consolidated
Financial Statements, a parent shall prepare consolidated financial
statements using uniform accounting policies for like transactions and
other events in similar circumstances.
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Ind AS 110, Consolidated Financial Statements
How will these property, plant and equipment be depreciated in the
consolidated financial statements of MNC Ltd. prepared as per Ind AS?
Response: Paragraph 19 and paragraph B87 of Ind AS 110, Consolidated
Financial Statements, states as follows:
"19 A parent shall prepare consolidated financial statements using uniform
accounting policies for like transactions and other events in similar
circumstances.
B87 If a member of the group uses accounting policies other than those
adopted in the consolidated financial statements for like transactions and
events in similar circumstances, appropriate adjustments are made to that
group member's financial statements in preparing the consolidated financial
statements to ensure conformity with the group's accounting policies."
It may be noted that the above mentioned paragraphs require an entity to
apply uniform accounting policies for like transactions and events in similar
circumstances. It does not apply to accounting estimates made while
preparing financial statements.
Further, paragraphs 60 & 61 of Ind AS 8, Accounting Policies, Changes in
Accounting Estimates and Errors, state as follows:
"60 The depreciation method used shall reflect the pattern in which the
asset's future economic benefits are expected to be consumed by the entity.
61 The depreciation method applied to an asset shall be reviewed at least at
each financial year-end and, if there has been a significant change in the
expected pattern of consumption of the future economic benefits embodied in
the asset, the method shall be changed to reflect the changed pattern. Such
a change shall be accounted for as a change in an accounting estimate
in accordance with Ind AS 8."(Emphasis added)
In accordance with the above, it may be noted that the selection of the
method of depreciation is an accounting estimate and not an accounting
policy.
Accordingly, the entity should select the method that most closely reflects the
expected pattern of consumption of the future economic benefits embodied in
the asset. That method should be applied consistently from period to period
unless there is a change in the expected pattern of consumption of those
future economic benefits in separate financial statements as well as
consolidated financial statements.
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Compendium of ITFG Clarification Bulletins
Therefore, there can be different methods of estimating depreciation for
property, plant and equipment, if their expected pattern of consumption is
different. The method once selected in the stand-alone financial statements
of the subsidiary should not be changed while preparing the consolidated
financial statements.
Accordingly, in the given case, the property, plant and equipment of PQR
Ltd. (subsidiary company) may be depreciated using straight line method and
property, plant and equipment of parent company (MNC Ltd.) may be
depreciated using written down value method, if such method closely reflects
the expected pattern of consumption of future economic benefits embodied in
the respective assets.
(ITFG Clarification Bulletin 11, Issue 6)
(Date of finalisation: July 31, 2017)
98
Ind AS 8, Accounting Policies,
Changes in Accounting Estimates and
Errors
Disclosure of the new Ind AS which is not yet effective (Ind AS
115)
Issue 64: Whether an entity is required to disclose the impact of Ind AS
115, Revenue from Contracts with Customers (as required by paragraph
30 of Ind AS 8) in its financial statements as prepared as per Ind AS?
Response: Paragraph 30 of Ind AS 8 Accounting Policies, Changes in
Accounting Estimates and Errors, states as follows:
"When an entity has not applied a new Ind AS that has been issued but is not
yet effective, the entity shall disclose:
(a) this fact; and
(b) known or reasonably estimable information relevant to assessing the
possible impact that application of the new Ind AS will have on the
entity's financial statements in the period of initial application."
In accordance with the above, it may be noted that an entity is required to
disclose the impact of Ind AS which has been issued but is not yet effective.
However, it may be noted that Ind AS 115, which was earlier notified under
Companies (Indian Accounting Standards) Rules, 2015, vide MCA
notification dated February 16, 2015 stands withdrawn under Companies
(Indian Accounting Standards) (Amendments) Rules, 2016 vide MCA
notification dated March 30, 2016. Accordingly, an entity is not required to
disclose the impact of Ind AS 115 for the financial year ending March 31,
2017 as Ind AS 115 has been omitted from the Rules.
(ITFG Clarification Bulletin 8, Issue 2)
(Date of finalisation: May 05, 2017)
99
Ind AS 12, Income Taxes
Accounting treatment of Tax Holidays under Ind AS
Issue 65: Under the previous GAAP, ASI 3, Accounting for Taxes on
Income in the situations of Tax Holiday under Sections 80-IA and 80-IB
of the Income-tax Act, 1961 and ASI 6 Accounting for Taxes on Income
in the context of Section 115JB of the Income-tax Act, 1961 provides
guidance on how AS 22, Accounting for Taxes on Income is to be
applied in the situations of tax holiday under section 80-IA and 80-IB of
the Act.
Whether the same treatment can be applied under Ind AS?
Response: The consensus portion of ASI 3, Accounting for Taxes on Income
in the situations of Tax Holiday under Sections 80-IA and 80-IB of the
Income-tax Act, 1961, was included as `Explanation' to the paragraph 13 of
Accounting Standard (AS) 22, Accounting for Taxes on Income, notified
under the Companies (Accounting Standards) Rules, 2006. Accordingly, it
became the part of notified Accounting Standards. The ASIs are also not
effective in context of Indian Accounting Standards notified under Companies
(Indian Accounting Standards) Rules, 2015.
However, under Ind AS, the principles enunciated in Ind AS 12, Income
Taxes are required to be applied. The treatment as per AS 22 may be
applied where such treatment is consistent with the principles of Ind AS 12.
Paragraphs 26-29 of Ind AS 12 can be referred for the recognition of
deferred tax as they provide sufficient guidance in this regard. Ind AS 12
provides that a deferred tax asset can result from unused tax losses and tax
credits as well as from temporary differences. Deferred tax assets can only
be recognised if it is probable that there will be taxable profit available
against which the deductible temporary differences can be utilised/future
taxable profit will be available against which the unused tax losses and
unused tax credits can be utilised. Further, paragraph 47 of Ind AS 12 states
that deferred tax assets and liabilities shall be measured at the tax rates that
are expected to apply to the period when the asset is realised or the liability
is settled, based on tax rates (and tax laws) that have been enacted or
substantively enacted by the end of the reporting period.
Accordingly, the deferred tax in respect of temporary differences which
reverse during the tax holiday period is not recognised to the extent the
entity's gross total income is subject to the deduction during the tax holiday
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Ind AS 12, Income Taxes
period as per the requirements of section 80-IA/80-IB of the Income Tax Act,
1961.
(ITFG Clarification Bulletin 11, Issue 2)
(Date of finalisation: July 31, 2017)
Recognition of deferred tax asset on the tax deductible goodwill
in the consolidated financial statements
Issue 66: A Ltd. has two subsidiaries B Ltd. and C Ltd. and is required
to comply with Ind AS from 1st April, 2017. In August 2015, B Ltd. and C
Ltd. got amalgamated and as a result of the amalgamation, goodwill has
been created in the separate financial statements of the amalgamated
entity. The entity has decided to not restate its past business
combinations in accordance with the exemption available under Ind AS
101, First-time Adoption of Indian Accounting Standards. This goodwill
is allowed as deduction under Income tax laws in the books of the
amalgamated entity. In the consolidated financial statements of A Ltd.,
such accounting goodwill gets eliminated as a result of consolidation
adjustment. However, there is an increase in the tax base of assets in
the consolidated financial statements of A Ltd. resulting from such tax
deductible goodwill.
Whether deferred tax asset on the tax deductible goodwill should be
recognised in the consolidated financial statements of A Ltd. prepared
as per Ind AS when there is no corresponding accounting goodwill in
the consolidated financial statements of A Ltd.?
Response: Paragraph 5 of Ind AS 12, Income Taxes, states that, the tax
base of an asset or liability is the amount attributed to that asset or liability
for tax purposes.
Further, paragraph 7 of Ind AS 12 states that, "The tax base of an asset is
the amount that will be deductible for tax purposes against any taxable
economic benefits that will flow to an entity when it recovers the carrying
amount of the asset. If those economic benefits will not be taxable, the tax
base of the asset is equal to its carrying amount."
Further, paragraph 11 of Ind AS 12, inter alia, states that, the tax base is
determined by reference to the tax returns of each entity in the group.
Accordingly, in the given case, the tax base of the goodwill will be the
amount that will be allowed as deduction in future in accordance with the
Income Tax Act, 1961.
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Compendium of ITFG Clarification Bulletins
Paragraph 9 of Ind AS 12, states as follows:
"Some items have a tax base but are not recognised as assets and
liabilities in the balance sheet. For example, preliminary expenses are
recognised as an expense in determining accounting profit in the
period in which they are incurred but may not be permitted as a
deduction in determining taxable profit (tax loss) until a later period(s).
The difference between the tax base of the preliminary expenses,
being the amount permitted as a deduction in future periods under
taxation laws, and the carrying amount of nil is a deductible temporary
difference that results in a deferred tax asset."
In accordance with the above, a deferred tax asset may be created for assets
or liabilities having a tax base but nil carrying amount in the financial
statements.
As per paragraph 24 of Ind AS 12, "A deferred tax asset shall be recognised
for all deductible temporary differences to the extent that it is probable that
taxable profit will be available against which the deductible temporary
difference can be utilised, unless the deferred tax asset arises from the initial
recognition of an asset or liability in a transaction that:
(a) is not a business combination; and
(b) at the time of the transaction, affects neither accounting profit nor
taxable profit (tax loss).
However, for deductible temporary differences associated with investments
in subsidiaries, branches and associates, and interests in joint arrangements,
a deferred tax asset shall be recognised in accordance with paragraph 44."
Accordingly, in the given case, deferred tax asset on the tax base of goodwill
should be recognised in accordance with Ind AS 12 by crediting the
consolidated statement of profit and loss, to the extent that it is probable that
taxable profit will be available against which the deductible temporary
difference can be utilised, in the consolidated financial statements of A Ltd.
Additionally, this will not qualify for the initial recognition exemption under
paragraph 24 of Ind AS 12 as there is no initial recognition of an asset or
liability arising from the amalgamation of subsidiaries in the consolidated
financial statements of A Ltd (the impact of amalgamation of subsidiaries is
eliminated in the consolidated financial statements of A Ltd).
(ITFG Clarification Bulletin 10, Issue 3)
(Date of finalisation: July 05, 2017)
102
Ind AS 12, Income Taxes
Accounting treatment of dividend distribution tax (DDT) and
deferred tax liability (DTL) on the accumulated undistributed
profits of the subsidiary company
Issue 67: (i) P Ltd. holds 100% equity shares of S Ltd., i.e. S Ltd. is
the wholly-owned subsidiary of P Ltd. During the year 2016, S Ltd. paid
dividend of ` 100,000 to P Ltd. and paid Dividend Distribution Tax (DDT)
of ` 20,000 (as per tax laws) to the taxation authorities.
(a) What would be the accounting treatment of the DDT in the
consolidated financial statement of P Ltd?
(b) Would the answer be different, if P Ltd. in turn pays dividend
of ` 150,000 to its shareholders and DDT liability thereon is
determined to be ` 30,000. As per the tax laws, DDT paid by
S Ltd. of ` 20,000 is allowed as set off against the DDT
liability of P Ltd., resulting in P Ltd. paying ` 10,000 (`
30,000 ` 20,000) as DDT to tax authorities.
(ii) Whether deferred tax liability (DTL) on the accumulated
undistributed profits of the Subsidiary company which may be
distributed in the foreseeable future is required to be recognised
in the consolidated financial statements of the Parent company,
i.e. P Ltd.
Response: It may be noted that the treatment of Dividend Distribution Tax
(DDT) in the standalone financial statements of the parent entity and its
subsidiary has been dealt with in the FAQ issued by the Accounting
Standards Board (ASB) of ICAI on the treatment of Dividend distribution tax.
(i)
(a) In the consolidated financial statements of P Ltd., the dividend income
earned by P Ltd. from S Ltd. and dividend recorded by S Ltd. in its
equity will both get eliminated as a result of consolidation adjustments.
DDT of ` 20,000 paid outside the consolidated Group i.e. to the tax
authorities should be charged as expense in the consolidated
statement of profit and loss of P Ltd.
(b) If DDT paid by the subsidiary S Ltd. is allowed as a set off against the
DDT liability of its parent P Ltd. (as per the tax laws), then the amount
of such DDT should be recognised in the consolidated statement of
changes in equity of parent P Ltd. Accordingly, in the given situation,
DDT of ` 30,000 (` 20,000 of DDT paid by S Ltd. and ` 10,000 of DDT
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Compendium of ITFG Clarification Bulletins
paid by P Ltd.) should be recognised in the consolidated statement of
changes in equity of parent P Ltd. The basis for such accounting would
be that due to Parent P Ltd's transaction of distributing dividend to its
shareholders (a transaction recorded in Parent P Ltd's equity) and the
related DDT set-off, this DDT paid by the subsidiary is effectively a tax
on distribution of dividend to the shareholders of the Parent company.
(ii) Paragraphs 39 & 40 of Ind AS 12, Income Taxes, state as follows:
39 An entity shall recognise a deferred tax liability for all taxable
temporary differences associated with investments in subsidiaries,
branches and associates, and interests in joint arrangements, except
to the extent that both of the following conditions are satisfied:
(a) the parent, investor, joint venturer or joint operator is able to
control the timing of the reversal of the temporary difference;
and
(b) it is probable that the temporary difference will not reverse in the
foreseeable future.
40 As a parent controls the dividend policy of its subsidiary, it is able
to control the timing of the reversal of temporary differences
associated with that investment (including the temporary differences
arising not only from undistributed profits but also from any foreign
exchange translation differences). Furthermore, it would often be
impracticable to determine the amount of income taxes that would be
payable when the temporary difference reverses. Therefore, when the
parent has determined that those profits will not be distributed in the
foreseeable future the parent does not recognise a deferred tax
liability. The same considerations apply to investments in branches.
In accordance with the above, it may be noted that the deferred tax liability
(DTL) is not recognised on the accumulated undistributed profits of the
subsidiary company in the consolidated financial statements of the parent
entity, if it is determined that such accumulated undistributed profits will not
be distributed in the foreseeable future.
However, if based on evaluation of facts and circumstances, it is concluded
that it is probable that the accumulated undistributed profits will be
distributed in the foreseeable future, then DTL on accumulated undistributed
profits of the subsidiary company should be recognised in the consolidated
statement of profit and loss of the parent company. Where DDT paid by the
subsidiary on distribution of its accumulated undistributed profits is allowed
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Ind AS 12, Income Taxes
as a set off against the parent's own DDT liability, then the amount of such
DDT can be recognised in the consolidated statement of changes in equity of
parent by crediting an equivalent amount to deferred tax expense in the
consolidated statement of profit and loss of P Ltd in the period in which the
set-off is availed.
In this regard, it may also be noted that the tax credit is not recognised until
the conditions required to receive the tax credit are met. The tax credit on
account of DDT paid by the subsidiary is recognised in the year in which they
are claimed against parent's DDT liability. This is important because the
payment of dividend by Parent P is decided by its shareholders and,
therefore, not to recognise a DTL or to recognise any tax credit prior to such
shareholder actions may not be appropriate. For example, shareholders of
Parent P Ltd may decide not to distribute or even reduce the amount of
dividends proposed by the Board of Directors of P Ltd.
(ITFG Clarification Bulletin 9, Issue 1)
(Date of finalisation: May 15, 2017)
Recognition of deferred tax asset on land sold as slump sale
Issue 68: A freehold land is held by PQR Ltd. which it expects to sell on
a slump-sale basis and not individually. Whether PQR Ltd. is not
required to recognise deferred tax asset on such land on the basis that
the same will be sold on a slump sale basis and hence a temporary
difference would not exist. PQR Ltd. has entered into similar slump sale
arrangements in the past.
Response: As per paragraph 5 of Ind AS 12, "Temporary differences are
differences between the carrying amount of an asset or liability in the
balance sheet and its tax base. Temporary differences may be either:
(a) taxable temporary differences, which are temporary differences that
will result in taxable amounts in determining taxable profit (tax loss) of
future periods when the carrying amount of the asset or liability is
recovered or settled; or
(b) deductible temporary differences, which are temporary differences that
will result in amounts that are deductible in determining taxable profit
(tax loss) of future periods when the carrying amount of the asset or
liability is recovered or settled.
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Compendium of ITFG Clarification Bulletins
The tax base of an asset or liability is the amount attributed to that asset or
liability for tax purposes."
Further paragraphs 15 and 24 of Ind AS 12, state as follows:
15 A deferred tax liability shall be recognised for all taxable temporary
differences, except to the extent that the deferred tax liability arises
from:
(a) the initial recognition of goodwill; or
(b) the initial recognition of an asset or liability in a transaction which:
(i) is not a business combination; and
(ii) at the time of the transaction, affects neither accounting profit
nor taxable profit (tax loss).
However, for taxable temporary differences associated with
investments in subsidiaries, branches and associates, and interests in
joint arrangements, a deferred tax liability shall be recognised in
accordance with paragraph 39.
24 A deferred tax asset shall be recognised for all deductible temporary
differences to the extent that it is probable that taxable profit will be
available against which the deductible temporary difference can be
utilised, unless the deferred tax asset arises from the initial recognition
of an asset or liability in a transaction that:
(a) is not a business combination; and
(b) at the time of the transaction, affects neither accounting profit
nor taxable profit (tax loss).
However, for deductible temporary differences associated with
investments in subsidiaries, branches and associates, and interests in
joint arrangements, a deferred tax asset shall be recognised in
accordance with paragraph 44.
In view of the above provisions of Ind AS 12, it may be noted that deferred
tax asset/liability is to be created for all deductible/taxable temporary
differences, except in specified situations e.g. if it arises from a transaction
that affects neither accounting profit nor taxable profit (tax loss) at the time of
the transaction (known as initial recognition exemption).
Paragraph 51 of Ind AS 12 further states that, "The measurement of deferred
tax liabilities and deferred tax assets shall reflect the tax consequences that
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Ind AS 12, Income Taxes
would follow from the manner in which the entity expects, at the end of the
reporting period, to recover or settle the carrying amount of its assets and
liabilities."
In accordance with the above, it may be noted that creation of deferred tax is
dependent upon the tax consequences that will follow on the basis of the
expected manner of recovery or settlement of the asset/liability by the entity.
The expectation of the entity at the end of the reporting period with regard to
the manner of recovery or settlement of its assets and liabilities will require
exercise of judgement based on evaluation of facts and circumstances in
each case. It may be relevant to consider that there is substance to
management's expectation of the entity being able to recover the asset
through slump sale or otherwise.
However, it is also important to note the following principle of Ind AS 12:
Paragraph 51B of Ind AS 12 states that, "If a deferred tax liability or deferred
tax asset arises from a non-depreciable asset measured using the
revaluation model in Ind AS 16, the measurement of the deferred tax liability
or deferred tax asset shall reflect the tax consequences of recovering the
carrying amount of the non-depreciable asset through sale, regardless of the
basis of measuring the carrying amount of that asset. Accordingly, if the tax
law specifies a tax rate applicable to the taxable amount derived from the
sale of an asset that differs from the tax rate applicable to the taxable
amount derived from using an asset, the former rate is applied in measuring
the deferred tax liability or asset related to a non-depreciable asset."
In accordance with the above, it may be noted that if a non-depreciable asset
is measured using the revaluation model, then an entity is required to
measure the DTA/DTL considering the tax consequences of recovering the
carrying amount through sale.
In the given case, PQR Ltd. will be required to evaluate facts and
circumstances to assess whether the freehold land will be sold through
slump sale. If it is concluded based on evaluation of facts that the land will be
sold through slump sale, then the tax base of the land will be the same as
the carrying amount of the land, as indexation benefit is not available in case
of slump sale (as per Income Tax Act, 1961) and hence, there will not be any
temporary difference.
(ITFG Clarification Bulletin 7, Issue 7)
(Date of finalisation: March 30, 2017)
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Compendium of ITFG Clarification Bulletins
Recognition of the deferred tax on the differences that are arising
from adjustment of exchange difference to the cost of the asset
Issue 69: MNC Ltd. is a first-time adopter of Ind AS. It had taken a
foreign currency loan for USD 100 million on March 31, 2013 for
construction of its property, plant and equipment (PPE). The company
had availed the option given under paragraph 46/46A of AS 11, The
Effects of Changes in Foreign Exchange Rates notified under the
Companies (Accounting Standards) Rules, 2006 and accordingly,
exchange gain/loss on such foreign currency loan had been added to or
deducted from the cost of PPE. On the date of transition to Ind AS, the
Company has opted for the exemption given under paragraph D13AA of
Ind AS 101, First-time Adoption of Indian Accounting Standards.
As per section 43A of Income Tax Act, 1961 such exchange differences
capitalised are not allowed deduction under the Income Tax.
Whether deferred tax is to be recognised on such differences that are
arising from adjustment of exchange difference to the cost of the asset
or can it be said that these meet the initial recognition exemption under
paragraph 15(b) of Ind AS 12, Income Taxes, and hence no deferred tax
is required to be created on the same?
Response: Paragraph D13AA of Ind AS 101 states as follows:
"A first-time adopter may continue the policy adopted for accounting for
exchange differences arising from translation of long-term foreign currency
monetary items recognised in the financial statements for the period ending
immediately before the beginning of the first Ind AS financial reporting period
as per the previous GAAP."
Further, paragraph 7AA of Ind AS 21 states as follows:
"7AA This Standard does not also apply to long-term foreign currency
monetary items for which an entity has opted for the exemption given in
paragraph D13AA of Appendix D to Ind AS 101. Such an entity may continue
to apply the accounting policy so opted for such long- term foreign currency
monetary items."
As stated above, it may be noted that the exemption under paragraph D13AA
of Ind AS 101 is available only for the exchange differences arising from
translation of long-term foreign currency monetary items recognised in the
financial statements immediately before the beginning of the first Ind AS
financial reporting period.
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Ind AS 12, Income Taxes
As per paragraph 5 of Ind AS 12, "Temporary differences are differences
between the carrying amount of an asset or liability in the balance sheet and
its tax base. Temporary differences may be either:
(a) taxable temporary differences, which are temporary differences that
will result in taxable amounts in determining taxable profit (tax loss) of
future periods when the carrying amount of the asset or liability is
recovered or settled; or
(b) deductible temporary differences, which are temporary differences that
will result in amounts that are deductible in determining taxable profit
(tax loss) of future periods when the carrying amount of the asset or
liability is recovered or settled.
The tax base of an asset or liability is the amount attributed to that asset or
liability for tax purposes."
It may result in deferred tax depending on treatment of such differences
under Income Tax Act, 1961 including Income Computation and Disclosure
Standards (ICDS). Paragraph 15 of Ind AS 12, states as follows:
15 A deferred tax liability shall be recognised for all taxable temporary
differences, except to the extent that the deferred tax liability arises
from:
(a) the initial recognition of goodwill; or
(b) the initial recognition of an asset or liability in a transaction
which:
(i) is not a business combination; and
(ii) at the time of the transaction, affects neither accounting
profit nor taxable profit (tax loss).
However, for taxable temporary differences associated with investments in
subsidiaries, branches and associates, and interests in joint arrangements, a
deferred tax liability shall be recognised in accordance with paragraph 39.
Similarly, paragraph 24 of Ind AS 12 states as follows:
A deferred tax asset shall be recognised for all deductible temporary
differences to the extent that it is probable that taxable profit will be available
against which the deductible temporary difference can be utilised, unless the
deferred tax asset arises from the initial recognition of an asset or liability in
a transaction that:
(a) is not a business combination; and
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Compendium of ITFG Clarification Bulletins
(b) at the time of the transaction, affects neither accounting profit nor
taxable profit (tax loss).
However, for deductible temporary differences associated with investments
in subsidiaries, branches and associates, and interests in joint arrangements,
a deferred tax asset shall be recognised in accordance with paragraph 44.
In accordance with the above, it may be noted that deferred taxes is required
to be recognised for all taxable and deductible temporary differences except
in specified situations, e.g. if it arises from initial recognition of an asset or a
liability. However, adjustment to the cost of the asset due to exchange
difference is a subsequent transaction and does not arise on `the initial
recognition of an asset or liability'. In other words, capitalisation of the
exchange differences (including the exchange differences prior to the date of
transition) represents subsequent measurement of the liability which has
been adjusted to the cost of the asset. Accordingly, in the given case, initial
recognition exemption will not be available and deferred tax is required to be
recognised on temporary difference arising from capitalised exchange
differences.
(ITFG Clarification Bulletin 8, Issue 8)
(Date of finalisation: May 05, 2017)
110
Ind AS 16, Property, Plant and
Equipment
Accounting Treatment of expenditure on the construction/
development of railway siding, road and bridge to facilitate the
construction of a new refinery
Issue 70: ABC Ltd is setting up a new refinery outside the city limits. In
order to facilitate the construction of the refinery and its operations,
ABC Ltd. is required to incur expenditure on the
construction/development of railway siding, road and bridge. Though
ABC Ltd. incurs (or contributes to) the expenditure on the
construction/development, it will not have ownership rights on these
items and they are also available for use to other entities and public at
large. Whether ABC Ltd. can capitalise expenditure incurred on these
items as property, plant and equipment (PPE)? If yes, how should these
items be depreciated and presented in the financial statements of ABC
Ltd.?
Response: Paragraph 7 of Ind AS 16 states that "the cost of an item of
property, plant and equipment shall be recognised as an asset if, and only if:
a) it is probable that future economic benefits associated with the item
will flow to the entity; and
b) the cost of the item can be measured reliably."
Further, paragraph 9 of Ind AS 16 provides that, "This Standard does not
prescribe the unit of measure for recognition, i.e., what constitutes an item of
property, plant and equipment. Thus, judgement is required in applying the
recognition criteria to an entity's specific circumstances. It may be
appropriate to aggregate individually insignificant items, such as moulds,
tools and dies, and to apply the criteria to the aggregate value."
Paragraph 16 of Ind AS 16, inter alia, states that the cost of an item of
property, plant and equipment comprise any costs directly attributable to
bringing the asset to the location and condition necessary for it to be capable
of operating in the manner intended by management.
In the given case, railway siding, road and bridge are required to facilitate the
construction of the refinery and for its operations. Expenditure on these items
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Compendium of ITFG Clarification Bulletins
is required to be incurred in order to get future economic benefits from the
project as a whole which can be considered as the unit of measure for the
purpose of capitalisation of the said expenditure even though the company
cannot restrict the access of others for using the assets individually. It is
apparent that the aforesaid expenditure is directly attributable to bringing the
asset to the location and condition necessary for it to be capable of operating
in the manner intended by management.
In view of this, even though ABC Ltd. may not be able to recognise
expenditure incurred on these assets as an individual item of property, plant
and equipment in many cases (where it cannot restrict others from using the
asset), expenditure incurred may be capitalised as a part of overall cost of
the project. From this, it can be concluded that, in the extant case the
expenditure incurred on these assets, i.e., railway siding, road and bridge,
should be considered as the cost of constructing the refinery and
accordingly, expenditure incurred on these items should be allocated and
capitalised as part of the items of property, plant and equipment of the
refinery.
Depreciation
As per paragraph 43 of Ind AS 16, each part of an item of property, plant and
equipment with a cost that is significant in relation to the total cost of the item
shall be depreciated separately.
Further, paragraph 45 of Ind AS 16 provides that, a significant part of an item
of property, plant and equipment may have a useful life and a depreciation
method that are the same as the useful life and the depreciation method of
another significant part of that same item. Such parts may be grouped in
determining the depreciation charge.
In view of the above, if these assets have a useful life which is different from
the useful life of the item of property, plant and equipment to which they
relate, it should be depreciated separately. However, if these assets have a
useful life and the depreciation method that are the same as the useful life
and the depreciation method of the item of property, plant and equipment to
which they relate, these assets may be grouped in determining the
depreciation charge. Nevertheless, if it has been included in the cost of
property, plant and equipment as a directly attributable cost, it will be
depreciated over the useful lives of the said property, plant and equipment.
The useful lives of these assets should not exceed that of the asset to which
it relates.
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Presentation
These assets should be presented within the class of asset to which they
relate.
(ITFG Clarification Bulletin 11, Issue 8)
(Date of finalisation: July 31, 2017)
Selection of valuation model of immovable properties
Issue 71: (i) ABC Ltd. is covered under Phase II of Ind AS roadmap and
is required to apply Ind AS from financial year 2017-18. It has certain
immovable properties such as land or building. Whether ABC Ltd. is
allowed to use revaluation model under Ind AS 16, Property, Plant and
Equipment for such immovable properties instead of cost model in its
first Ind AS financial statements prepared for the period ending 31st
March 2018.
(ii) Whether ABC Ltd. can opt for cost model for some class of property,
plant and equipment and apply revaluation model for other class of
property, plant and equipment in its first Ind AS financial statements
prepared for the period ending 31st March 2018.
Response: (i) An entity will first be required to evaluate that whether the land
and building that it holds is an investment property or its property, plant and
equipment (PPE).
Ind AS 40, Investment Property provides that Investment property is property
(land or a building--or part of a building--or both) held (by the owner or by
the lessee under a finance lease) to earn rentals or for capital appreciation or
both, rather than for:
(a) use in the production or supply of goods or services or for
administrative purposes; or
(b) sale in the ordinary course of business.
Further Ind AS 16, Property, Plant and Equipment, states that- Property,
plant and equipment are tangible items that:
(a) are held for use in the production or supply of goods or services, for
rental to others, or for administrative purposes; and
(b) are expected to be used during more than one period.
In accordance with the above, if land or building is classified as PPE, then
the same shall be initially measured at cost and for subsequent
measurement the entity has the option to choose cost model or revaluation
model as per paragraph 29 of Ind AS 16 as stated below:
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Compendium of ITFG Clarification Bulletins
"An entity shall choose either the cost model in paragraph 30 or the
revaluation model in paragraph 31 as its accounting policy and shall apply
that policy to an entire class of property, plant and equipment."
However, if land or building has been held to earn rentals or for capital
appreciation or both then the same shall be classified as investment property
and only cost model as per paragraph 30 of Ind AS 40 can be used.
As per paragraph 20 of Ind AS 40, "An investment property shall be
measured initially at its cost ." Further paragraph 30 requires that, "An entity
shall adopt as its accounting policy the cost model prescribed in
paragraph 56 to all of its investment property."
Further, paragraph 56 of Ind AS 40 states as follows:
Cost model
56 After initial recognition, an entity shall measure all of its investment
properties in accordance with Ind AS 16's requirements for cost model,
other than those that meet the criteria to be classified as held for sale (or are
included in a disposal group that is classified as held for sale) in accordance
with Ind AS 105, Non-current Assets Held for Sale and Discontinued
Operations. Investment properties that meet the criteria to be classified as
held for sale (or are included in a disposal group that is classified as held for
sale) shall be measured in accordance with Ind AS 105.
(ii) As per paragraph 31 of Ind AS 16,"After recognition as an asset, an item
of property, plant and equipment whose fair value can be measured reliably
shall be carried at a revalued amount, being its fair value at the date of the
revaluation less any subsequent accumulated depreciation and subsequent
accumulated impairment losses. Revaluations shall be made with sufficient
regularity to ensure that the carrying amount does not differ materially from
that which would be determined using fair value at the end of the reporting
period."
Further, paragraphs 36 and 37 of Ind AS 16, inter alia, state:
"36 If an item of property, plant and equipment is revalued, the entire class of
property, plant and equipment to which that asset belongs shall be revalued."
37 A class of property, plant and equipment is a grouping of assets of a
similar nature and use in an entity's operations...... ."
In accordance with the above, it may be noted that the standard requires that
if revaluation model is chosen then that should be applied to the entire class
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Ind AS 16, Property, Plant and Equipment
and not to an individual item of property, plant and equipment. Accordingly,
in the given case, the entity may elect to opt for revaluation model for a
particular class of assets and cost model for another class of assets which
are classified as property, plant and equipment.
(ITFG Clarification Bulletin 12, Issue 1)
(Date of finalisation: October 23, 2017)
Accounting treatment of the wrongly capitalised asset which does
not meet the definition of tangible asset
Issue 72: ABC Ltd. is a first-time adopter of Ind AS and has opted for
deemed cost exemption as per paragraph D7AA of Ind AS 101, First-
time Adoption of Indian Accounting Standards. It had capitalised an
item of property, plant and equipment under previous GAAP even
though it did not meet the definition of an asset. Whether this asset
cost can also be continued to be capitalised under deemed cost
exemption/
Response: Paragraph D7AA of Ind AS 101, provides that, "Where there is
no change in its functional currency on the date of transition to Ind ASs, a
first-time adopter to Ind ASs may elect to continue with the carrying value for
all of its property, plant and equipment as recognised in the financial
statements as at the date of transition to Ind ASs, measured as per the
previous GAAP and use that as its deemed cost as at the date of transition
after making necessary adjustments in accordance with paragraph D21 and
D21A, of Ind AS 101."
In accordance with the above, the option of deemed cost exemption can be
availed for property, plant and equipment measured as per previous GAAP.
The incorrect capitalisation of the item of property, plant and equipment did
not meet the definition of asset as per previous GAAP and the definition of
`Property, plant and equipment' as per Ind AS 16, accordingly the deemed
cost exemption under paragraph D7AA of Ind AS 101 cannot be availed for
those assets.
Further, it is important to note the provisions of paragraph 10 of Ind AS 101,
which states that, "Except as described in paragraphs 1319 and Appendices
BD, an entity shall, in its opening Ind AS Balance Sheet:
(a) recognise all assets and liabilities whose recognition is required by Ind
ASs;
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Compendium of ITFG Clarification Bulletins
(b) not recognise items as assets or liabilities if Ind ASs do not permit
such recognition;
(c) reclassify items that it recognised in accordance with previous GAAP
as one type of asset, liability or component of equity, but are a
different type of asset, liability or component of equity in accordance
with Ind ASs; and
(d) apply Ind ASs in measuring all recognised assets and liabilities."
Paragraph 26 of Ind AS 101 provides that, `If an entity becomes aware of
errors made under previous GAAP, the reconciliations required by paragraph
24(a) and (b) shall distinguish the correction of those errors from changes in
accounting policies.'
Further, paragraph 24 of Ind AS 101 provides that, "To comply with
paragraph 23, an entity's first Ind AS financial statements shall include:
(a) reconciliations of its equity reported in accordance with previous
GAAP to its equity in accordance with Ind ASs for both of the following
dates:
(i) the date of transition to Ind ASs; and
(ii) the end of the latest period presented in the entity's most recent
annual financial statements in accordance with previous GAAP.
(b) a reconciliation to its total comprehensive income in accordance with
Ind ASs for the latest period in the entity's most recent annual financial
statements. The starting point for that reconciliation shall be total
comprehensive income in accordance with previous GAAP for the
same period or, if an entity did not report such a total, profit or loss
under previous GAAP."
In view of the above, the incorrect capitalisation of asset which does not
meet the definition of tangible asset will be covered under paragraph 26 of
Ind AS 101 being an error, and the disclosure of the same should be done as
per paragraph 24 of Ind AS 101 as mentioned above.
(ITFG Clarification Bulletin 8, Issue 4)
(Date of finalisation: May 05, 2017)
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Ind AS 16, Property, Plant and Equipment
Re-computation of Depreciation based on useful life when Ind AS 16
applied retrospectively
Issue 73: A Ltd. (first-time adopter to Ind AS) chooses to measure its
property, plant and equipment by applying Ind AS 16, Property, Plant
and Equipment retrospectively. Under previous GAAP, A Ltd. had been
applying depreciation rates specified in Schedule XIV to the Companies
Act, 1956. Whether A Ltd. is required to recompute depreciation based
on useful lives from the date of initial capitalisation of property, plant
and equipment or it will have to apply depreciation rates applied under
previous GAAP till the date of opening balance sheet?
Response:
Ind AS 101 requires retrospective application of Ind AS effective at the end of
a first-time adopter's first Ind AS reporting period. However, as an exception
to this rule, Ind AS 101, inter alia, provides deemed cost exemption, wherein
as at the date of transition to Ind AS, a first time adopter may elect to
measure all of its items of property, plant and equipment (PPE) at the
carrying amounts as per its previous GAAP.
In case the first-time adopter does not elect to choose deemed cost
exemption, then the requirements of Ind AS 16 would have to be applied as if
the first-time adopter had always applied the Standard. Accordingly, PPE will
be measured based on historical cost determined in accordance with Ind AS
16.
Paragraph 50 of Ind AS 16, Property, Plant & Equipment states as under:
"The depreciable amount of an asset shall be allocated on a systematic basis
over its useful life."
Further, paragraph 57 of Ind AS 16, states as follows:
"The useful life of an asset is defined in terms of the asset's expected utility
to the entity. The asset management policy of the entity may involve the
disposal of assets after a specified time or after consumption of a specified
proportion of the future economic benefits embodied in the asset. Therefore,
the useful life of an asset may be shorter than its economic life. The
estimation of the useful life of the asset is a matter of judgement based on
the experience of the entity with similar assets."
As per the above requirements, it may be noted that as per Ind AS 16, a
company is required to compute depreciation based on an assessment of
useful lives of an asset.
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Further, paragraphs 13 & 14 of Ind AS 101, First-time Adoption of Indian
Accounting Standards state as follows:
"13 This Ind AS prohibits retrospective application of some aspects of other
Ind ASs. These exceptions are set out in paragraphs 1417 and Appendix B.
14 An entity's estimates in accordance with Ind ASs at the date of transition
to Ind ASs shall be consistent with estimates made for the same date in
accordance with previous GAAP (after adjustments to reflect any difference
in accounting policies), unless there is objective evidence that those
estimates were in error."
In accordance with the above paragraphs, it may be noted while transitioning
to Ind AS, a first-time adopter's estimate of depreciation under previous
GAAP can only be changed if those estimates were in error. However, when
a company has been computing depreciation as per rates prescribed under
Schedule XIV of Companies Act, 1956, then it has not estimated the useful
life of an asset but has depreciated its assets as per the minimum
requirements of law.
Accordingly, when a first-time adopter chooses to measure its PPE by
retrospective application of Ind AS 16, then it will be required to re-compute
depreciation by assessing the useful life of an asset in accordance with Ind
AS 16 which is consistent with Schedule II to the Companies Act, 2013.
(ITFG Clarification Bulletin 3, Issue 14)
(Date of finalisation: June 22, 2016)
Property, plant and equipment - capitalisation of capital spares
when deemed cost exemption availed for property, plant and
equipment on transition to Ind AS.
Issue 74: ABC Ltd. is covered under Ind AS roadmap and required to
prepare its financial statements as per Ind AS from financial year 2016-
17 with comparatives for financial year 2015-16. The date of transition
to Ind AS is April 1, 2015. The Company has chosen to continue with the
carrying value for all of its property, plant and equipment as recognised
in the financial statements as at the date of transition to Ind AS,
measured as per the previous GAAP. The Company has recorded
capital spares in its previous GAAP financial statements as a part of
inventory.
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Ind AS 16, Property, Plant and Equipment
How should the capital spares be accounted under Ind AS on the date
of transition to Ind AS, if the Company chooses to apply the previous
GAAP as deemed cost exemption?
Response: As per paragraph 8 of Ind AS 16, Property, Plant and Equipment,
items such as spare parts are to be recognised in accordance with Ind AS
16, when they meet the definition of `property, plant and equipment'.
Otherwise such items are classified as inventory.
As per Ind AS 16, `property, plant and equipment', are tangible items that:
(a) are held for use in the production or supply of goods or services, for rental to
others, or for administrative purposes; and
(b) are expected to be used during more than one period.
Paragraph 7 of Ind AS 16, Property, Plant and Equipment, states as under:
"The cost of an item of property, plant and equipment shall be recognised as
an asset if, and only if:
(a) it is probable that future economic benefits associated with the item
will flow to the entity; and
(b) the cost of the item can be measured reliably."
Therefore, if an item of spare part meets the definition of `property, plant and
equipment' as mentioned above and satisfies the recognition criteria as per
paragraph 7 of Ind AS 16, such an item of spare has to be recognised as
property, plant and equipment. If that spare part does not meet the definition
and recognition criteria as cited above, that spare is to be recognised as
inventory.
Paragraph 10 of Ind AS 101, First-time Adoption of Indian Accounting
Standards, inter alia, states that an entity, shall in its opening Ind AS Balance
Sheet, recognise all assets and liabilities whose recognition is required by
Ind AS.
As per paragraph D7AA, once the company chooses previous GAAP as
deemed cost as provided in paragraph D7AA of Ind AS 101, it is not allowed
to adjust the carrying value of property, plant and equipment for any
adjustments other than those in accordance with paragraph D21 and D21A of
Ind AS 101. In this case, a question arises whether the company may
capitalise spares as a part of property, plant and equipment on the date of
transition to Ind AS. It may be noted deemed cost exemption as the previous
GAAP is in respect of carrying value of property, plant and equipment
capitalised under previous GAAP on the date of transition to Ind AS. This
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Compendium of ITFG Clarification Bulletins
condition does not prevent a company to recognise an asset whose
recognition is required by Ind AS on the date of transition.
In the given case, the capital spares were recognised as inventory under
previous GAAP and they were not appearing under carrying amount of PPE.
In view of the above, it is clear that ABC Ltd. should recognise `capital
spares' if they meet definition of PPE as on the date of transition, in addition
to continuing carrying value of PPE as per paragraph D7AA of Ind AS 101.
(ITFG Clarification Bulletin 3, Issue 9)
(Date of finalisation: June 22, 2016)
Property, Plant and Equipment - Capitalisation of expenditure on
assets not owned by the company
Issue 75: Company X has incurred expenditure on construction of a
road on the land which is not owned by the Company. Whether the
expenditure incurred on construction of such a road by the Company
has to be capitalised or expensed out under Ind AS?
Response: The capitalisation of expenditure incurred on construction of
assets on land not owned by a company would depend on facts and
circumstances of each case, particularly, considering paragraph 16(b) of Ind
AS 16, Property, Plant and Equipment (PPE), which states that such an
expenditure should be necessary for making the item of PPE capable of
operating in the manner intended by the management.
(ITFG Clarification Bulletin 2, Issue 5)
(Date of finalisation: April 12, 2016)
Property Plant and Equipment- Recognition Criteria of spare part
as an item of property, plant and equipment and depreciation
thereon
Issue 76: A Company has a spare part, which it terms as `insurance
spare', is required to be used along with equipment. Whether the spare
part is required to be recognised as part of that equipment? Whether
depreciation is required to be calculated separately for that spare part
or along with the equipment for which it has been used?
Response: As per paragraph 8 of Ind AS 16, Property, Plant and Equipment,
items such as spare parts are to be recognised in accordance with Ind AS
16, when they meet the definition of `property, plant and equipment'.
Otherwise such items are classified as inventory.
As per Ind AS 16, `property, plant and equipment', are tangible items that:
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Ind AS 16, Property, Plant and Equipment
(a) are held for use in the production or supply of goods or services, for
rental to others, or for administrative purposes; and
(b) are expected to be used during more than one period.
Paragraph 7 of Ind AS 16, Property, Plant and Equipment, states as under:
The cost of an item of property, plant and equipment shall be recognised as
an asset if, and only if:
(a) it is probable that future economic benefits associated with the item
will flow to the entity; and
(b) the cost of the item can be measured reliably.
Therefore, if an item of spare part meets the definition of `property, plant and
equipment' as mentioned above and satisfies the recognition criteria as per
paragraph 7 of Ind AS 16, such an item of spare part has to be recognised as
property, plant and equipment separately from the equipment. If that spare
part does not meet the definition and recognition criteria as cited above that
spare part is to be recognised as inventory.
The depreciation on such an item of spare part will begin when the asset is
available for use i.e. when it is in the location and condition necessary for it
to be capable of operating in the manner intended by management. In case
of a spare part, as it may be readily available for use, it may be depreciated
from the date of purchase of the spare part. In determination of the useful life
of the spare part, the life of the machine in respect of which it can be used
can be one of the determining factors.
(ITFG Clarification Bulletin 2, Issue 4)
(Date of finalisation: April 12, 2016)
Accounting of spare parts which meet the definition of property,
plant and equipment on the date of transition
Issue 77: XYZ Ltd. is covered under Ind AS roadmap and needs to
comply Ind AS from financial year 2016-17. It has recorded certain spare
parts in its previous GAAP financial statements as a part of inventory.
As per paragraph 8 of Ind AS 16, these items meet the definition of
`property, plant and equipment' and required to be capitalised as PPE
on the date of transition to Ind AS. In this regard, clarify the issues
given below:
(i) At what amount such spare parts should be recognised in the
first Ind AS financial statements? Whether depreciation should be
charged from the date when the same became available for use or
date of actual use?
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Compendium of ITFG Clarification Bulletins
(ii) Explain the words `more than one period' used in definition of
property, plant and equipment.
Response: (i) As per Ind AS 16, Property, Plant and Equipment, `property,
plant and equipment', are tangible items that:
(a) are held for use in the production or supply of goods or services, for
rental to others, or for administrative purposes; and
(b) are expected to be used during more than one period.
Further paragraph 7 of Ind AS 16, states as under:
"The cost of an item of property, plant and equipment shall be recognised as
an asset if, and only if:
(a) it is probable that future economic benefits associated with the item
will flow to the entity; and
(b) the cost of the item can be measured reliably."
As per paragraph 8 of Ind AS 16, Property, Plant and Equipment, items such
as spare parts are to be recognised as property, plant and equipment in
accordance with Ind AS 16, when they meet the definition of `property, plant
and equipment'. Otherwise such items are classified as inventory.
Therefore, if an item of spare part meets the definition of `property, plant and
equipment' as mentioned above and satisfies the recognition criteria as per
paragraph 7 of Ind AS 16, such an item of spare has to be recognised as
property, plant and equipment. If that spare part does not meet the definition
and recognition criteria as cited above that spare is to be recognised as
inventory [Refer - Issue 9 of ITFG Clarification Bulletin 3].
As per paragraph 10 of Ind AS 101, except for the mandatory exceptions and
voluntary exemptions provided in Ind AS 101, an entity shall, in its opening
Ind AS Balance Sheet:
(b) not recognise items as assets or liabilities if Ind ASs do not permit
such recognition;
(c) reclassify items that it recognised in accordance with previous GAAP
as one type of asset, liability or component of equity, but are a
different type of asset, liability or component of equity in accordance
with Ind ASs; and
(d) apply Ind ASs in measuring all recognised assets and liabilities.
Paragraphs D5 to D8B provide various deemed cost exemptions that an
entity may elect to use on the date of transition. In this regard, it is pertinent
to note that paragraph D7AA of Ind AS 101 provides an option to continue
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Ind AS 16, Property, Plant and Equipment
the carrying values for all of its property, plant and equipment as recognised
in the financial statements as at the date of transition to Ind ASs, measured
as per the previous GAAP and use that as its deemed cost as at the date of
transition if there is no change in its functional currency. However, the above
exemption cannot be used for such spare parts in the given case since the
same were not recognised as fixed assets, i.e., PPE, in the previous GAAP.
Moreover, paragraph D7AA does not prevent a company to recognise an
asset as PPE whose recognition is required by Ind AS on the date of
transition [Refer Issue 9 of ITFG Clarification Bulletin 3].
In view of the above, the entity should apply applicable Ind AS i.e. Ind AS 16
retrospectively to measure the amount that will be recognised for such spare
parts on the date of transition to Ind AS.
With regard to deprecation, paragraph 50 of Ind AS 16 provides that the
depreciable amount of an asset shall be allocated on a systematic basis over
its useful life.
As per paragraph 6 of Ind AS 16, Useful life is:
(a) the period over which an asset is expected to be available for use by
an entity; or
(b) the number of production or similar units expected to be obtained from
the asset by an entity.
Paragraph 55 of Ind AS 16, inter alia, provides that depreciation of an asset
begins when it is available for use, i.e., when it is in the location and
condition necessary for it to be capable of operating in the manner intended
by management.
Spare parts are generally available for use from the date of its purchase.
Accordingly, spare parts recognised as property, plant and equipment shall
be depreciated when the same are available for use.
(ii) As per Ind AS 16, `property, plant and equipment', are tangible items
that:
(a) are held for use in the production or supply of goods or services,
for rental to others, or for administrative purposes; and
(b) are expected to be used during more than one period.
Accounting policies are the specific principles, bases, conventions, rules and
practices applied by an entity in preparing and presenting financial
statements.
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The term `more than one period' is not defined in Ind AS. Ordinarily, the
accounting policies are determined for preparing and presenting financial
statements on annual basis.
Accordingly, the term `period', should ordinarily be construed to be the
annual period.
(ITFG Clarification Bulletin 5, Issue 6)
(Date of finalisation: September 19, 2016)
Accounting treatment of the Revaluation surplus as per previous GAAP
on transition date and Revaluation gain arising after transition date
when Ind AS 16 applied retrospectively
Issue 78: PQR Ltd. is under Phase II of Ind AS roadmap. On the date of
transition i.e. 1.4.2016, it has elected not to use deemed cost exemption
given under Ind AS 101, First-time Adoption of Indian Accounting
Standards for measuring its property, plant and equipment. It has opted
to retrospectively apply the requirements of Ind AS 16, Property, Plant
and Equipment to all items of property, plant and equipment and has
opted for revaluation model of Ind AS 16 for subsequent measurement.
PQR Ltd. has been applying revaluation model under previous Indian
GAAP.
What will be the accounting treatment of the following revaluation
surplus in the Ind AS financial statements of PQR Ltd:
a) Revaluation surplus as per previous GAAP on transition date;
b) Revaluation gain arising after transition date.
Would the answer be different if the company would have opted for
deemed cost exemption under paragraph D5 of Ind AS 101.
Response: Paragraph 39 of Ind AS 16, Property, Plant and Equipment
states as follows:
39 If an asset's carrying amount is increased as a result of a revaluation,
the increase shall be recognised in other comprehensive income and
accumulated in equity under the heading of revaluation surplus. However,
the increase shall be recognised in profit or loss to the extent that it reverses
a revaluation decrease of the same asset previously recognised in profit or
loss.
Further, as per Ind AS 1, Presentation of Financial Statements, other
comprehensive income comprises items of income and expense (including
reclassification adjustments) that are not recognised in profit or loss as
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Ind AS 16, Property, Plant and Equipment
required or permitted by other Ind ASs. The components of other
comprehensive income includes changes in revaluation surplus (see Ind AS
16, Property, Plant and Equipment and Ind AS 38, Intangible Assets);
In accordance with the above, as per Ind AS 16, revaluation increase should
be recognised in other comprehensive income.
(a) In the given case, the company has not elected deemed cost
exemption given under Ind AS 101 and has chosen to apply the
requirements of Ind AS 16 retrospectively. Assuming the other
requirements of Ind AS 16 are met, the company would apply
revaluation model of Ind AS 16 to its PPE and the revaluation reserve
on transition date determined in accordance with the requirements of
Ind AS 16 (carried from previous GAAP) will be recognised as
revaluation surplus in equity. The opening balance of revaluation
surplus as per previous GAAP should be transferred to retained
earnings or if appropriate, another category of equity.
(b) Any revaluation gains arising on subsequent recognition, i.e. after the
date of transition, will be recognised in the Other Comprehensive
Income.
If the company would have opted exemption under paragraph D5 of Ind AS
101 at the date of transition then the opening balance of revaluation surplus
as per previous GAAP should be transferred to retained earnings or if
appropriate, another category of equity disclosing the description of the
nature and purpose of such amount in accordance with the requirements of
paragraph 79(b) of Ind AS 1, Presentation of Financial Statements.
This aspect has also been clarified in ITFG Clarification Bulletin 8 (Issue 7).
Accordingly, at the date of transition if a company opts for deemed costs
under Ind AS 101, then all revaluations under the previous GAAP up to the
date of transition, i.e. opening balance of revaluation reserve will be
transferred to retained earnings (or, if appropriate another category of equity)
and changes in revaluations after the date of transition (i.e. subsequent
recognition) will be recognised through OCI. It may be noted that if the
company has chosen to use revaluation model for subsequent measurement
then it has to apply the same policy for all the periods (including transition
date) presented in the first Ind AS financial statements.
(ITFG Clarification Bulletin 14, Issue 6)
(Date of finalisation: February 01, 2018)
125
Ind AS 17, Leases
Classification of land lease under Ind AS
Issue 79: XYZ Ltd. has obtained a land from the government on a long-
term lease basis which spans 99 years and above. At the end of the
lease term, the lease could be extended for another term or the land
could be returned to the government authority. Whether such land
leases should be classified as finance lease or operating lease in the
financial statements of XYZ Ltd. prepared in accordance with Ind AS?
Response: Paragraph 4 of Ind AS 17, Leases, inter alia, provides as follows:
"A finance lease is a lease that transfers substantially all the risks and
rewards incidental to ownership of an asset. Title may or may not be
eventually be transferred.
An operating lease is a lease other than a finance lease."
Further, paragraph 15A of Ind AS 17, states as follows:
"15A When a lease includes both land and buildings elements, an entity
assesses the classification of each element as a finance or an operating
lease separately in accordance with paragraphs 713. In determining
whether the land element is an operating or a finance lease, an important
consideration is that land normally has an indefinite economic life."
Therefore, one important consideration for evaluating lease of land is that
land has an indefinite economic life and it is expected that the value of land
generally appreciates.
Paragraphs 10 & 11 of Ind AS 17, Leases state as follows:
"10 Whether a lease is a finance lease or an operating lease depends on the
substance of the transaction rather than the form of the contract. Examples
of situations that individually or in combination would normally lead to a lease
being classified as a finance lease are:
(a) the lease transfers ownership of the asset to the lessee by the end of
the lease term;
(b) the lessee has the option to purchase the asset at a price that is
expected to be sufficiently lower than the fair value at the date the
option becomes exercisable for it to be reasonably certain, at the
inception of the lease, that the option will be exercised;
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Ind AS 17, Leases
(c) the lease term is for the major part of the economic life of the asset
even if title is not transferred;
(d) at the inception of the lease the present value of the minimum lease
payments amounts to at least substantially all of the fair value of the
leased asset; and
(e) the leased assets are of such a specialised nature that only the lessee
can use them without major modifications.
11 Indicators of situations that individually or in combination could also lead
to a lease being classified as a finance lease are:
(a) if the lessee can cancel the lease, the lessor's losses associated with
the cancellation are borne by the lessee;
(b) gains or losses from the fluctuation in the fair value of the residual
accrue to the lessee (for example, in the form of a rent rebate
equalling most of the sales proceeds at the end of the lease); and
(c) the lessee has the ability to continue the lease for a secondary period
at a rent that is substantially lower than market rent."
In case of lease of land for 99 years and above, if it is likely that such leases
meet the criteria that at the inception of the lease the present value of the
minimum lease payments amounts to at least substantially all of the fair
value of the leased asset then in this case, such lease will be classified as
`finance lease'.
However, it may also be noted that land normally has an indefinite economic
life. Where in substance there is no transfer of risks and rewards, it should
be considered as an operating lease. Some of the indicators to consider in
the overall context of whether there is transfer of risks and rewards incidental
to ownership include the lessee's ability to renew lease for another term at
substantially below market rent, lessee's option to purchase at price
significantly below fair value etc.
Accordingly, classification as operating or finance lease requires exercise of
judgement based on evaluation of facts and circumstances in each case,
while considering the indicators envisaged as above.
(ITFG Clarification Bulletin 7, Issue 5)
(Date of finalisation: March 30, 2017)
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Straight-lining of lease payments if escalation of lease payments
is different from general inflation.
Issue 80: ABC Ltd. has entered into an operating lease agreement for
taking a building on lease. The rent agreement is for 5 years with
escalation of lease rent at the rate of 15% p.a. The general inflation in
the country expected for the aforesaid period is around 6%.
Shall the lease payments be straight-lined or not as per Ind AS 17? If
yes, should the entire 15% p.a. escalation in lease rent be straight-lined
over a period of 5 years or only the difference which exceeds the
expected inflation rate will be straight-lined?
Response: Paragraph 33 of Ind AS 17, Leases, states as follows:
"Lease payments under an operating lease shall be recognised as an
expense on a straight-line basis over the lease term unless either:
(a) another systematic benefit is more representative of the time pattern
of the user's benefit even if the payments to the lessors are not on that
basis; or
(b) the payments to the lessor are structured to increase in line with
expected general inflation to compensate for the lessor's expected
inflationary cost increases. If payments to the lessor vary because of
factors other than general inflation, then this condition is not met."
As per paragraph 33 of Ind AS 17, lease payments shall be straight-lined
over the period of lease unless, inter alia, the payments to the lessor are
structured to increase in line with expected general inflation to compensate
for the lessor's expected inflationary cost increases. If payments to the lessor
vary because of factors other than general inflation, then lease payments
shall be straight-lined.
Judgement would be required to be made as per the facts and circumstances
of each case to determine whether the payments to the lessor are structured
to increase in line with expected general inflation. Therefore, it is required to
evaluate the lease agreement to ascertain the real intention and attributes of
escalation in lease payments, i.e., whether the intention of such escalation is
to compensate for expected general inflation or any other factors.
It is not necessary that the rate of the escalation of lease payments should
exactly be equal to the expected general inflation. If the actual increase or
decrease in the rate of inflation is not materially different as compared to the
expected rate of inflation under the lease agreement, it is not required to
straight-line the lease payments. However, the purpose of such escalation
should only be to compensate the expected general inflation rate.
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Ind AS 17, Leases
In the given case, the increase of 15% p.a. in lease rentals does not appear
to have any link with general inflation which is expected to be 6%.
Accordingly, the entire lease payments should be straight-lined since the
increase is not a compensation for inflation.
(ITFG Clarification Bulletin 5, Issue 7)
(Date of finalisation: September 19, 2016)
Accounting treatment of restoration costs in case of a leasehold land
Issue 81: A company is using a leasehold land for its business purposes.
As per the lease terms, the company is under an obligation to restore the
land to its original condition at the end of the lease tenure. What should be
the accounting treatment of restoration costs in case of a leasehold land?
Response: The Company will be required to first evaluate whether the lease
is a finance lease or an operating lease, in accordance with the principles of
Ind AS 17, Leases.
If it is determined that the lease is a finance lease, then as per paragraph
16(c) of Ind AS 16, Property, Plant and Equipment, the cost of an item of
property, plant and equipment comprises the initial estimate of the costs of
dismantling and removing the item and restoring the site on which it is
located, the obligation for which an entity incurs either when the item is
acquired or as a consequence of having used the item during a particular
period for purposes other than to produce inventories during that period.
Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets contains
requirements on how to measure decommissioning, restoration and similar
liabilities. Further, Appendix A to Ind AS 16 also provides guidance on how to
account for the effect of changes in the measurement of existing
decommissioning, restoration and similar liabilities.
Paragraph 8 of Appendix A of Ind AS 16 states that the periodic unwinding of
the discount shall be recognised in profit or loss as a finance cost as it
occurs. Capitalisation under Ind AS 23 is not permitted.
In accordance with the above, all site restoration costs need to be estimated
and capitalised at initial recognition, in order that such costs can be
recovered over the life of the item of property, plant and equipment, even if
the expenditure will only be incurred at the end of the item's life. Where an
obligation exists to restore a site to its former condition at the end of its
useful life, the present value of the related future payments is capitalised
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Compendium of ITFG Clarification Bulletins
along with the cost of acquisition or construction upon completion and a
corresponding liability is recognised.
Thereafter, the asset comprising the decommissioning cost is depreciated
over its useful life, while the discounted provision is progressively unwound,
with the unwinding charge shown as finance cost in accordance with
paragraph 8 of Appendix A of Ind AS 16 as stated above.
Alternatively, if it is determined that the lease is an operating lease and the
entity incurs amount to construct the asset/ structure on land which it is required
to remove those on expiration of the lease, it should account for the removal
obligation as it has a present obligation under the lease to remove the
improvements at the end of the lease term. In such situations, the entity will
capitalise leasehold building/improvements and amortise them over the term of
the lease. The removal obligation arises when the entity completes the
construction, which is the past event. The present value of expected outflow
should be recognised as a liability when the construction is completed. An asset
of the same amount should be recognised and amortised over the remaining
lease term.
(ITFG Clarification Bulletin 14, Issue 2)
(Date of finalisation: February 01, 2018)
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Ind AS 18, Revenue
Classification of expense of providing free third party goods
under Customer Loyalty Programmes
Issue 82: Company X participated in a customer loyalty programme
operated by a third party. Under the programme, members earn points
for purchases made in X's stores. The members can redeem the
accumulated award points for goods supplied by the third party. X has
fulfilled its obligation to programme members once the members have
been granted points when making purchases in its stores. The
obligation to supply the redeemed goods lies with the third party. At the
end of 31 March 2017, X has granted award points with an estimated fair
value of ` 20,000 and owes the third party ` 17,000.
In the above situation, what should be the classification of the expense
of providing free third party goods i.e. in the above example, should `
17,000 be:
classified as changes in inventories of finished goods, stock in
trade and WIP or
classified as marketing expense or
reduced from revenue?
Response: Paragraph 8 of Appendix B, Customer Loyalty Programmes of
Ind AS 18, Revenue states as follows:
"8 If a third party supplies the awards, the entity shall assess whether it is
collecting the consideration allocated to the award credits on its own account
(i.e. as the principal in the transaction) or on behalf of the third party (i.e. as
an agent for the third party).
(a) If the entity is collecting the consideration on behalf of the third party, it
shall:
(i) measure its revenue as the net amount retained on its own
account, i.e. the difference between the consideration allocated
to the award credits and the amount payable to the third party
for supplying the awards; and
(ii) recognise this net amount as revenue when the third party
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becomes obliged to supply the awards and entitled to receive
consideration for doing so. These events may occur as soon as
the award credits are granted. Alternatively, if the customer can
choose to claim awards from either the entity or a third party,
these events may occur only when the customer chooses to
claim awards from the third party.
(b) If the entity is collecting the consideration on its own account, it shall
measure its revenue as the gross consideration allocated to the award
credits and recognise the revenue when it fulfills its obligations in
respect of the awards."
In accordance with the above, if the entity is acting as a principal then it shall
recognise the revenue at gross amount and the expense of providing free
third party goods will be included in the cost of goods sold.
If the entity is acting as an agent, then in accordance with paragraph 8(a) (i),
it shall measure its revenue at the net amount, i.e. the difference between
the consideration allocated to the award credits and the amount payable to
the third party.
Accordingly, in the given case the entity will assess based on facts and
circumstances as to whether it is acting as an agent or principal. If it is
determined that Company X is acting as an agent, then entity will recognise
commission income of ` 3,000. If it is determined that Company X is acting
as a principal, then company X shall recognise revenue of ` 20,000 and `
17,000 shall be charged to the Statement of Profit & Loss as cost of goods
sold
(ITFG Clarification Bulletin 10, Issue 6)
(Date of finalisation: July 5, 2017)
Revenue Recognition - Treatment of Service Tax
Issue 83: How revenue should be recognised in case Service Tax is
collected from customer for rendering of services?
Response: Paragraph 8 of Ind AS 18, inter alia, provides that revenue
includes only the gross inflows of economic benefits received and receivable
by the entity on its own account. Amounts collected on behalf of third parties
such as sales taxes, goods and services taxes and value added taxes are
not economic benefits which flow to the entity and do not result in increases
in equity. Therefore, they are excluded from revenue.
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Ind AS 18, Revenue
In view of the above, since service tax collected represents the amount
collected on behalf of a third party, viz., the government, revenue should be
net of service tax collected.
(ITFG Clarification Bulletin 4, Issue 2)
(Date of finalisation: August 19, 2016)
Revenue Recognition - presentation of Excise Duty (Gross or net
of sales)
Issue 84: ABC Ltd., which is a manufacturer of TV sets, sells a TV at `
50,000 which includes excise duty of ` 5,000. What is the amount to be
recognised as revenue? How excise duty should be presented in
financial statements? Is there any change in the presentation of excise
duty as compared to presentation prescribed in AS 9?
Response: Paragraph 8 of Ind AS 18, inter alia, provides that revenue
includes only the gross inflows of economic benefits received and receivable
by the entity on its own account. Amounts collected on behalf of third parties
such as sales taxes, goods and services taxes and value added taxes are
not economic benefits which flow to the entity and do not result in increases
in equity. Therefore, they are excluded from revenue.
Excise duty is a liability of the manufacturer which forms part of the cost of
production, irrespective whether the goods are sold or not. Therefore,
recovery of excise duty flows to the entity on its own account and the same
should be included in the amount of revenue. Accordingly, in the present
case, revenue should be recognised at ` 50,000/-
With regard to disclosure of Excise Duty, explanation to paragraph 10 of AS
9, Revenue Recognition, specifically provides that the excise duty included in
the turnover should be shown as reduction from the gross turnover on the
face of the statement of profit and loss.
Ind AS 18, Revenue, does not specifically prescribe any guidance for
presentation of excise duty. However, under Ind AS reporting framework,
revenue from sale of products is presented by including the Excise Duty as
discussed above. As per Division - II of Schedule III to the Companies Act,
2013 (i.e. Ind AS based Schedule III) Note 3 of General Instructions for
Preparation of Statement of Profit and Loss, provides that revenue from
operations shall disclose separately in the notes:
(a) sale of products (including Excise Duty);
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(b) sale of services; and
(c) other operating revenues.
In view of above, since the revenue is the gross amount including excise
duty, in the statement of profit and loss prepared under Ind AS, the excise
duty should be reflected as an expense.
(ITFG Clarification Bulletin 4, Issue 1)
(Date of finalisation: August 19, 2016)
Whether an entity should adjust the consideration (including
advance payments) for the effect of time value of money
Issue 85: On entering into contracts to supply goods and services, an
entity requires advance payments from its customers. The period and
effective interest rate between the date of receipt of the advance payment
and the date that the entity transfers the risks and rewards of the goods
and services to the customer are considered significant.
Whether the entity is required to adjust such advance payments received
from a customer for goods or services to be provided over a long term for
the effect of time value of money in accordance with Ind AS?
Response: Assuming that the contract established between the customer and
the supplier does not contain a lease under Appendix C Determining Whether an
Arrangement contains a Lease to Ind AS 17, and is not within the scope
of Appendix C Transfers of Assets from Customers to Ind AS 18. Furthermore,
the contract does not meet the definition of a derivative under Ind AS 109,
Financial Instruments.
Paragraph 9 of Ind AS 18, Revenue requires entities to measure revenue `at
the fair value of the consideration received or receivable'.
Further, paragraph 11 of Ind AS 18, inter-alia provides that, `In most cases, the
consideration is in the form of cash or cash equivalents and the amount of
revenue is the amount of cash or cash equivalents received or receivable.
However, when the inflow of cash or cash equivalents is deferred, the fair value
of the consideration may be less than the nominal amount of cash received or
receivable. For example, an entity may provide interest-free credit to the buyer or
accept a note receivable bearing a below-market interest rate from the buyer as
consideration for the sale of goods. When the arrangement effectively constitutes
a financing transaction, the fair value of the consideration is determined by
discounting all future receipts using an imputed rate of interest.'
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Ind AS 18, Revenue
An analogy must be drawn from the above paragraph and accordingly, when
the entity has received advance payments from the customer for providing
promised goods or services, then it must evaluate whether the payment
terms provide it with a significant benefit of financing. While making such an
evaluation judgement is to be exercised and consideration be given to factors
such as whether, the arrangement has been entered in the normal course of
business, the advance payment is per typical payment terms within industry
and having a primary purpose other than financing, it is a security for a future
supply of limited goods or services or other relevant factors depending on
facts and circumstances of each case [emphasis added]. If it is concluded
that the arrangement does effectively constitute a significant financing
component, i.e., a loan provided by the customer to the supplier for providing
the promised goods, then the entity should adjust the consideration
(including advance payments) for the effect of time value of money.
(ITFG Clarification Bulletin 14, Issue 3)
(Date of finalisation: February 1, 2018)
135
Ind AS 20, Accounting for Government
Grants and Disclosure of Government
Assistance
Accounting of below-market rate interest loan - exemption under
para B10 of Ind AS 101
Issue 86 :(i) P Ltd., had obtained a below-market rate of interest loan of
` 10,00,000 from Government as on April 1, 2014 for 5 years. The date of
transition to Ind AS for Entity P is April 1, 2016. Paragraph B10 of Ind
AS 101, First-time Adoption of Indian Accounting Standards, requires a
first-time adopter to use its previous GAAP carrying amount of
government loans existing at the date of transition to Ind AS as the Ind
AS carrying amount of such loans at that date.
Under previous GAAP, the carrying amount was ` 10,00,000 at the date
of transition to Ind AS. The amount repayable will be ` 10,05,000 at
April 1, 2019. No other payment is required under the terms of the loan
and there are no future performance conditions attached to the loan.
Whether the exemption under paragraph B10 is only for the date of
transition to Ind AS or all the subsequent period till the existing loan is
presented i.e. 31.3.2019.
(ii) Further P Ltd., also has deferment of liability payable to government
based on agreement i.e. liability similar to sales tax deferment for 10
years, can the P Ltd take exemption under B10 stating it is similar to
government loan?
Response: (i) Paragraph B10 of Ind AS 101, First-time Adoption of Indian
Accounting Standards states as follows:
"B10 A first-time adopter shall classify all government loans received as a
financial liability or an equity instrument in accordance with Ind AS 32,
Financial Instruments: Presentation. Except as permitted by paragraph B11,
a first-time adopter shall apply the requirements in Ind AS 109, Financial
Instruments, and Ind AS 20, Accounting for Government Grants and
Disclosure of Government Assistance, prospectively to government loans
existing at the date of transition to Ind ASs and shall not recognise the
corresponding benefit of the government loan at a below-market rate of
interest as a government grant. Consequently, if a first-time adopter did not,
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Ind AS 20, Accounting for Government Grants and Disclosure of...
under its previous GAAP, recognise and measure a government loan at a
below-market rate of interest on a basis consistent with Ind AS requirements,
it shall use its previous GAAP carrying amount of the loan at the date of
transition to Ind ASs as the carrying amount of the loan in the opening Ind
AS Balance Sheet. An entity shall apply Ind AS 109 to the measurement of
such loans after the date of transition to Ind ASs."
Paragraph 10A of Ind AS 20 states that, "The benefit of a government loan at
a below-market rate of interest is treated as a government grant. The loan
shall be recognised and measured in accordance with Ind AS 109, Financial
Instruments. The benefit of the below market rate of interest shall be
measured as the difference between the initial carrying value of the loan
determined in accordance with Ind AS 109, and the proceeds received. The
benefit is accounted for in accordance with this Standard. The entity shall
consider the conditions and obligations that have been, or must be, met
when identifying the costs for which the benefit of the loan is intended to
compensate."
In accordance with the above, a first-time adopter is required to use its
previous GAAP carrying amount of government loans existing at the date of
transition to Ind AS as the Ind AS carrying amount of such loans at that date.
A first-time adopter applies Ind AS 32, Financial Instruments: Presentation to
classify such a loan as a financial liability or an equity instrument. It shall
apply the requirements of Ind AS 20 and Ind AS 109 prospectively to
government loans existing at the date of transition to Ind AS, unless the
necessary information needed to apply the requirements of Ind AS 109
and Ind AS 20, retrospectively was obtained at the time of initially
accounting for that loan. As a result of not applying Ind AS 20 and Ind AS
109 retrospectively to government loans at the date of transition, the
corresponding benefit of the government loan at a below-market rate of
interest is not recognised as a government grant.
It is pertinent to note that subsequently, the first-time adopter applies Ind AS
109 to such a loan. To do so, the entity calculates the effective interest rate
by comparing the carrying amount of the loan at the date of transition to Ind
AS with the amount and timing of expected repayments to the government.
In the given case, as per Ind AS 32, the loan meets the definition of a
financial liability. P Ltd. uses the previous GAAP carrying amount of the loan
at the date of transition to Ind AS as the carrying amount of the loan in the
opening Ind AS balance sheet. Further, in order to measure the loan after the
date of transition to Ind AS, the effective interest rate starting from April 1,
2016 shall be calculated.
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(ii) As per Ind AS 20, "Government grants are assistance by government in
the form of transfers of resources to an entity in return for past or future
compliance with certain conditions relating to the operating activities of the
entity. They exclude those forms of government assistance which cannot
reasonably have a value placed upon them and transactions with
government which cannot be distinguished from the normal trading
transactions of the entity."
Further, paragraphs 9 and 10 of Ind AS 20 state as follows:
9 The manner in which a grant is received does not affect the accounting
method to be adopted in regard to the grant. Thus a grant is accounted for in
the same manner whether it is received in cash or as a reduction of a liability
to the government.
In a scheme of deferral of sales tax, the amount of sales tax collected by the
company from its customers is retained by the company and is required to be
repaid after specified years (10 years in the example above). This makes
such an arrangement similar in nature to an interest free loan and hence the
treatment as mentioned in part (i) above shall also be applied to such
balances outstanding at the date of transition.
(ITFG Clarification Bulletin 12, Issue 7)
(Date of finalisation: October 23, 2017)
Accounting treatment of exemption of custom duty under EPCG
scheme
Issue 87: MNC Ltd. has received grant in the nature of exemption of
custom duty on capital goods with certain conditions related to export
of goods under Export Promotion Capital Goods (EPCG) scheme of
Government of India. Whether the same is a government grant under
Ind AS 20, Government Grants and Disclosure of Government
Assistance? If yes, then whether it is a Grant related to asset or Grant
related to income and how the same is to be accounted for?
Response: Paragraph 3 of Ind AS 20, Government Grants and Disclosure of
Government Assistance, states as follows:
"3 Government grants are assistance by government in the form of transfers
of resources to an entity in return for past or future compliance with certain
conditions relating to the operating activities of the entity. They exclude those
forms of government assistance which cannot reasonably have a value
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Ind AS 20, Accounting for Government Grants and Disclosure of...
placed upon them and transactions with government which cannot be
distinguished from the normal trading transactions of the entity."
In accordance with the above, in the given case exemption of custom duty
under EPCG scheme is a government grant and should be accounted for as
per the provisions of Ind AS 20.
Ind AS 20 defines grant related to assets and grants related to income as
follows:
"Grants related to asset are government grants whose primary condition is
that an entity qualifying for them should purchase, construct or otherwise
acquire long-term assets. Subsidiary conditions may also be attached
restricting the type or location of the assets or the periods during which they
are to be acquired or held.
Grants related to income are government grants other than those related to
assets."
It is pertinent to note that the classification of the grant as related to asset or
income will require exercise of judgement and careful examination of the
facts, objective and conditions attached to the scheme of the government.
Care is also required to ascertain the purpose of the grant and the costs for
which the grant is intended to compensate.
Based on the evaluation of facts, if it is ascertained that the grant is an asset
related grant then the same shall be presented as per paragraph 24 & 26 of
Ind AS 20 which has been stated below:
Presentation of grants related to assets
24 Government grants related to assets, including non-monetary grants at
fair value, shall be presented in the balance sheet by setting up the grant as
deferred income.
26 The grant set up as deferred income is recognised in profit or loss on a
systematic basis over the useful life of the asset."
If it is determined that the grant is related to income then the same shall be
presented as follows:
Presentation of grants related to income
29 Grants related to income are presented as part of profit or loss, either
separately or under a general heading such as `Other income'; alternatively,
they are deducted in reporting the related expense.
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It may be further noted that as per paragraph 12 of Ind AS 20, government
grants shall be accounted as follows:
"12 Government grants shall be recognised in profit or loss on a systematic
basis over the periods in which the entity recognises as expenses the related
costs for which the grants are intended to compensate
In the given case, if based on the terms and conditions of the scheme, the
grant received is to compensate the import cost of assets subject to an
export obligation as prescribed in the EPCG Scheme; recognition of grant in
the statement of profit and loss should be linked to fulfilment of associated
export obligations.
However, if the grant received is to compensate the import cost of the asset
and based on the examination of the terms and conditions of the grant, if it
can be reasonably concluded that conditions relating to export of goods are
subsidiary conditions, then it is appropriate to recognise such grant in profit
or loss over the life of the underlying asset.
(ITFG Clarification Bulletin 11, Issue 5)
(Date of finalisation: July 31, 2017)
Accounting treatment of the grants in the nature of promoters'
contribution on the date of transition to Ind AS and post transition
to Ind AS
Issue 88: ABC Co. is a government company and is a first-time adopter
of Ind AS. As per the previous GAAP, the contributions received by
ABC Co. from the government (which holds 100% shareholding in ABC
Co.) which is in the nature of promoters' contribution have been
recognised in capital reserve and treated as part of shareholders' funds
in accordance with the provisions of AS 12, Accounting for Government
Grants.
1) Whether the accounting treatment of the grants in the nature of
promoters' contribution as per AS 12 is also permitted under Ind
AS 20 Accounting for Government Grants and Disclosure of
Government Assistance. If not, then what will be the accounting
treatment of such grants recognised in capital reserve as per
previous GAAP on the date of transition to Ind AS.
2) What will be the accounting treatment of the grants in the nature
of promoters' contribution which ABC Co. receives post
transition to Ind AS?
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Ind AS 20, Accounting for Government Grants and Disclosure of...
Response: 1) Paragraph 2 of Ind AS 20, Accounting for Government Grants
and Disclosure of Government Assistance, inter-alia, states as follows:
"2 This Standard does not deal with:
(a)...
(c) government participation in the ownership of the entity."
In accordance with the above, it may be noted that Ind AS 20 specifically
scopes out the participation by the government in the ownership of an entity.
In this fact pattern, Government has 100% shareholding in the entity.
Accordingly, the entity needs to determine whether the payment is provided
as a shareholder contribution or as a government. Equity contributions will be
recorded in equity while grants will affect the statement of profit and loss.
Where it is concluded that the contributions are in the nature of government
grant, the entity shall apply the principles of Ind AS 20 retrospectively as
specified in Ind AS 101. Ind AS 20 requires all grants to be recognised as
income on a systematic basis over the periods in which the entity recognises
as expenses the related costs for which the grants are intended to
compensate. Unlike AS 12, Ind AS 20 requires the grant to be classified as
either a capital or an income grant and does not permit recognition of
government grants in the nature of promoter's contribution directly to
shareholders' funds.
Where it is concluded that the contributions are in the nature of shareholder
contributions are recognised in capital reserve under previous GAAP, it is
important to note the provisions of paragraph 10 of Ind AS 101, which states
that:
"10 Except as described in paragraphs 1319 and Appendices BD, an entity
shall, in its opening Ind AS Balance Sheet:
(a) recognise all assets and liabilities whose recognition is required by Ind
ASs;
(b) not recognise items as assets or liabilities if Ind ASs do not permit
such recognition;
(c) reclassify items that it recognised in accordance with previous GAAP
as one type of asset, liability or component of equity, but are a
different type of asset, liability or component of equity in accordance
with Ind ASs; and
(d) apply Ind ASs in measuring all recognised assets and liabilities."
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Accordingly, as per the above requirements of paragraph 10(c) in the given
case, contributions recognised in the Capital Reserve should be transferred
to appropriate category under `Other Equity' at the date of transition to Ind
AS.
(2) The entity shall apply the same principles as mentioned above for
accounting the contributions received by the entity subsequent to the
transition date.
(ITFG Clarification Bulletin 9, Issue 3)
(Date of finalisation: May 15, 2017)
142
Ind AS 21, The Effects of Changes in
Foreign Exchange Rates
Determination of functional currency and presentation currency
for preparation of annual financial statements in case of Group
Issue 89: Company X, which is incorporated in India is the wholly-
owned subsidiary of Company Y. In accordance with the principles of
Ind AS 21 The Effects of Changes in Foreign Exchange Rates, Company
X has ascertained its functional currency to be USD. Company X has
subsidiaries and joint ventures outside India and prepares both
standalone as well as consolidated financial statements. The functional
currency of the parent company, i.e. Company Y continues to be `.
Company Y will require Company X to provide its annual consolidated
financial statements presented in ` for consolidation and reporting at
ultimate parent level.
Whether Company X would present its annual financial statements as
per Ind AS in its functional currency (i.e. USD) or in the functional
currency of the parent company (`)? Further, whether statutory auditors
of Company X will provide their audit report on financial statements
prepared in ` or financial statements prepared in USD?
Response:
As per paragraph 17 of Ind AS 21, "In preparing financial statements, each
entity--whether a stand-alone entity, an entity with foreign operations (such
as a parent) or a foreign operation (such as a subsidiary or branch)--
determines its functional currency in accordance with paragraphs 914. The
entity translates foreign currency items into its functional currency and
reports the effects of such translation in accordance with paragraphs 2037
and 50."
Paragraph 21 of Ind AS 21 states that, "A foreign currency transaction shall
be recorded, on initial recognition in the functional currency, by applying to
the foreign currency amount the spot exchange rate between the functional
currency and the foreign currency at the date of the transaction."
In accordance with the above, it may be noted that each entity is required to
determine its functional currency in accordance with Ind AS 21 and is
required to translate foreign currency items into functional currency.
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Compendium of ITFG Clarification Bulletins
Further, Paragraph 18 of Ind AS 21 states as follows:
"Many reporting entities comprise a number of individual entities (e.g.
a group is made up of a parent and one or more subsidiaries). Various
types of entities, whether members of a group or otherwise, may have
investments in associates or joint arrangements. They may also have
branches. It is necessary for the results and financial position of each
individual entity included in the reporting entity to be translated into the
currency in which the reporting entity presents its financial statements.
This Standard permits the presentation currency of a reporting entity to
be any currency (or currencies). The results and financial position of
any individual entity within the reporting entity whose functional
currency differs from the presentation currency are translated in
accordance with paragraphs 3850."
Paragraphs 38 & 39 of Ind AS 21 are stated below:
"38 An entity may present its financial statements in any currency (or
currencies). If the presentation currency differs from the entity's
functional currency, it translates its results and financial position into
the presentation currency. For example, when a group contains
individual entities with different functional currencies, the results and
financial position of each entity are expressed in a common currency
so that consolidated financial statements may be presented.
39 The results and financial position of an entity whose functional
currency is not the currency of a hyperinflationary economy shall be
translated into a different presentation currency using the following
procedures:
(a) assets and liabilities for each balance sheet presented (i.e.
including comparatives) shall be translated at the closing rate at
the date of that balance sheet;
(b) income and expenses for each statement of profit and loss
presented (i.e. including comparatives) shall be translated at
exchange rates at the dates of the transactions; and
(c) all resulting exchange differences shall be recognised in other
comprehensive income."
In accordance with the above paragraphs, it may be noted that entities within
a group may have different functional currencies. Further, as Ind AS does not
prohibit the use of any currency as presentation currency, an entity may
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Ind AS 21, The Effects of Changes in Foreign Exchange Rates
present its financial statements in any currency by applying the translation
procedures from functional to presentation currency as stated above.
Accordingly, in the given case, if Company X is statutorily required to present
its financial statements in `, which is different from its functional currency,
i.e. USD, then it may do so by choosing the ` as presentation currency and
prepare and present its financial statements by applying the provisions of
paragraphs 38 and 39 of Ind AS 21.
As Company X is statutorily required to present its financial statements in `,
the auditor of Company X will be required to give audit report on financial
statements prepared in `.
(ITFG Clarification Bulletin 7, Issue 2)
(Date of finalisation: March 30, 2017)
Identification of functional currency of an entity
Issue 90: XY Ltd. is being covered under Phase I of Ind AS and needs to
apply Ind AS from the financial year 2016-17. It has two businesses,
Business X and Business Y. As per Accounting Standards, the financial
statements of the Company are prepared in Indian Rupee ("`"), as
required by the Companies Act 2013 and thereby, all transactions of
both business X as well as business Y are recorded and measured in `.
Under Ind AS, the functional currency of the Business X is concluded to
be US Dollar ("USD") while the functional currency of the Business Y is
concluded to be `. In which currency, Company XY will prepare its
financial statements as per Ind AS?
Response: As per paragraph 8 of Ind AS 21, The Effects of Changes in
Foreign Exchange Rates, functional currency is the currency of the primary
economic environment in which the entity operates.
Further, paragraph 17 of Ind AS 21 states that:
"In preparing financial statements, each entity - whether a stand-alone
entity, an entity with foreign operations (such as a parent) or a foreign
operation (such as a subsidiary or branch)--determines its functional
currency in accordance with paragraphs 914 of Ind AS 21."
Paragraphs 9-14 of Ind AS 21, elaborate the factors that need to be
considered by an entity while determining its functional currency.
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In view of the above, it is concluded that functional currency needs to be
identified at the entity level, considering the economic environment in which
the entity operates, and not at the level of a business or a division.
Accordingly, in the given case, if XY Ltd. after applying paragraphs 9-14 of
Ind AS 21, concludes that its functional currency is USD at the entity level,
then it shall prepare its financial statements as per USD.
(ITFG Clarification Bulletin 3, Issue 3)
(Date of finalisation: June 22, 2016)
146
Ind AS 23, Borrowing Costs
Capitalisation of Dividend Distribution Tax (DDT) as borrowing
costs of the qualifying asset
Issue 91: Can Dividend Distribution Tax (DDT) paid on distribution of
dividend to preference shareholders (that are classified as liability as
per Ind AS 32, Financial Instruments: Presentation), be capitalised as
borrowing costs with the qualifying asset in accordance with the
principles of Ind AS 23, Borrowing Costs?
Response: Paragraphs 5 and 6 of Ind AS 23, Borrowing Costs, state as
follows:
"5 Borrowing costs are interest and other costs that an entity incurs in
connection with the borrowing of funds.
6 Borrowing costs may include:
(a) interest expense calculated using the effective interest method as
described in Ind AS 109, Financial Instruments; (b) ...."
With regard to the recognition of dividend declared on financial instruments,
paragraphs 35 and 36 of Ind AS 32 reproduced hereunder may be noted:
``35 Interest, dividends, losses and gains relating to a financial
instrument or a component that is a financial liability shall be
recognised as income or expense in profit or loss. Distributions to
holders of an equity instrument shall be recognised by the entity
directly in equity. Transaction costs of an equity transaction shall be
accounted for as a deduction from equity.
36 The classification of a financial instrument as a financial liability or
an equity instrument determines whether interest, dividends, losses
and gains relating to that instrument are recognised as income or
expense in profit or loss. Thus, dividend payments on shares wholly
recognised as liabilities are recognised as expenses in the same way
as interest on a bond. Similarly, gains and losses associated with
redemptions or refinancings of financial liabilities are recognised in
profit or loss, whereas redemptions or refinancings of equity
instruments are recognised as changes in equity. Changes in the fair
value of an equity instrument are not recognised in the financial
statements.''
In view of the above, if a financial instrument is classified as debt, the
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dividend or interest thereon is in the nature of interest which is charged to
profit or loss.
Further, paragraph 8 of Ind AS 23 states that, "An entity shall capitalise
borrowing costs that are directly attributable to the acquisition, construction
or production of a qualifying asset as part of the cost of that asset. An entity
shall recognise other borrowing costs as an expense in the period in which it
incurs them."
Paragraphs B5.4.4 and B5.4.8 of Ind AS 109, Financial Instruments, state as
follows:
"B5.4.4 When applying the effective interest method, an entity
generally amortises any fees, points paid or received, transaction
costs and other premiums or discounts that are included in the
calculation of the effective interest rate over the expected life of the
financial instrument....."
The Guidance Note on Ind AS Schedule III provides following guidance in
respect of dividend on redeemable preference shares:
Dividend on preferences shares, whether redeemable or convertible, is
of the nature of `Interest expense', only where there is no discretion of
the issuer over the payment of such dividends. In such case, the
portion of dividend as determined by applying the effective interest
method should be presented as `Interest expense' under `Finance
cost'. Accordingly, the corresponding Dividend Distribution Tax on
such portion of non-discretionary dividends should also be presented
in the Statement of Profit and Loss under `Interest expense'.
In the given case, assuming that the requirements of paragraph 8 of Ind AS
23 for capitalisation are met then the dividend on the preference shares that
are classified as a liability, in accordance with the principles of Ind AS 32,
Financial Instruments: Presentation would be treated as interest and DDT
paid thereon will be treated as cost eligible for capitalisation. Thus, in the
given case, DDT is in the nature of incremental cost that an entity incurs in
connection with obtaining the funds for qualifying asset. Hence DDT should
be capitalised along with interest. Further, dividend distribution tax paid on
such dividend will form part of the effective interest rate calculation (EIR) to
compute the effective interest expense to be capitalised with the qualifying
asset.
(ITFG Clarification Bulletin 13, Issue 1)
(Date of finalisation: January 16, 2018)
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Ind AS 23, Borrowing Costs
Capitalising of the processing fees as borrowing costs when the
loans are specifically borrowed for the purpose of a qualifying asset
Issue 92: As per Ind AS 23, Borrowing Costs, an entity shall capitalise
borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset as part of the cost of that
asset. An entity shall recognise other borrowing costs as an expense in the
period in which it incurs them.
When the loans are specifically borrowed for the purpose of a qualifying
asset and the processing charges incurred thereon have been incurred by
the company, then whether the entire processing charges needs to be
capitalised to the cost of the qualifying asset or the processing charges to
the extent amortised up to the period of capitalisation needs to be
capitalised?
Response: As per paragraph 6 of Ind AS 23, Borrowing Costs, borrowing costs
includes interest expense calculated using the effective interest method as
described in Ind AS 109, Financial Instruments.
Appendix A of Ind AS 109, Financial Instruments, defines `Effective interest
method' as, the rate that exactly discounts estimated future cash payments or
receipts through the expected life of the financial asset or financial liability to the
gross carrying amount of a financial asset or to the amortised cost of a financial
liability. When calculating the effective interest rate, an entity shall estimate the
expected cash flows by considering all the contractual terms of the financial
instrument (for example, prepayment, extension, call and similar options) but
shall not consider the expected credit losses. The calculation includes all fees
and points paid or received between parties to the contract that are an integral
part of the effective interest rate (see paragraphs B5.4.1B5.4.3), transaction
costs, and all other premiums or discounts. There is a presumption that the cash
flows and the expected life of a group of similar financial instruments can be
estimated reliably. However, in those rare cases when it is not possible to reliably
estimate the cash flows or the expected life of a financial instrument (or group of
financial instruments), the entity shall use the contractual cash flows over the full
contractual term of the financial instrument (or group of financial instruments).
Paragraph B5.4.1 of Ind AS 109, Financial Instruments, states as follows:
"In applying the effective interest method, an entity identifies fees that are
an integral part of the effective interest rate of a financial instrument. The
description of fees for financial services may not be indicative of the
nature and substance of the services provided. Fees that are an integral
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part of the effective interest rate of a financial instrument are treated as an
adjustment to the effective interest rate, unless the financial instrument is
measured at fair value, with the change in fair value being recognised in
profit or loss. In those cases, the fees are recognised as revenue or
expense when the instrument is initially recognised."
Further, paragraph B5.4.2 of Ind AS 109, inter-alia, states that, "fees that are an
integral part of the effective interest rate of a financial instrument include:
(c) origination fees paid on issuing financial liabilities measured at
amortised cost. These fees are an integral part of generating an
involvement with a financial liability. An entity distinguishes fees and costs
that are an integral part of the effective interest rate for the financial
liability from origination fees and transaction costs relating to the right to
provide services, such as investment management services."
In accordance with the above, the processing fee is an integral part of the
effective interest rate of a financial instrument and shall be included while
calculating the effective interest rate. Accordingly, the processing charges to the
extent amortised only up to the period of capitalisation of the qualifying asset can
be capitalised.
(ITFG Clarification Bulletin 14, Issue 1)
(Date of finalisation: February 1, 2018)
150
Ind AS 24, Related Party Disclosures
Whether sitting fees paid to independent director and Non-
executive director is required to be disclosed in the financial
statements prepared as per Ind AS
Issue 93: Whether sitting fees paid to independent director and Non-
executive director is required to be disclosed in the financial
statements prepared as per Ind AS?
Response: As per paragraph 9 of Ind AS 24, Related Party Disclosures,
"Key management personnel are those persons having authority and
responsibility for planning, directing and controlling the activities of the entity,
directly or indirectly, including any director (whether executive or otherwise)
of that entity."
In accordance with the above definition, key management personnel (KMP)
includes any director of the entity who are having authority and responsibility
for planning, directing and controlling the activities of the entity. Accordingly,
independent and non-executive directors are also covered under the
definition of KMP in accordance with Ind AS.
Paragraph 17 of Ind AS 24 requires the following disclosures about employee
benefits for key management personnel:
"An entity shall disclose key management personnel compensation in total
and for each of the following categories:
(a) short-term employee benefits;
(b) post-employment benefits;
(c) other long-term benefits;
(d) termination benefits; and
(e) share-based payment."
Further, paragraph 7 and 9 of Ind AS 19, Employee Benefits, states that-
"7 An employee may provide services to an entity on a full-time, part-
time, permanent, casual or temporary basis. For the purpose of this
Standard, employees include directors and other management
personnel."
"9 Short-term employee benefits include items such as the following, if
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expected to be settled wholly before twelve months after the end of the
annual reporting period in which the employees render the related
services:
(a) wages, salaries and social security contributions;
(b) paid annual leave and paid sick leave;
(c) profit-sharing and bonuses; and
(d) non-monetary benefits (such as medical care, housing, cars and free
or subsidised goods or services) for current employees."
In accordance with the above provisions, non- executive directors meeting
this criteria are covered under the definition of key management personnel.
The sitting fees paid to directors will fall under the definition of "Short-term
employee benefits" as per Ind AS 19 and is required to be disclosed in
accordance with the paragraph 17 of Ind AS 24.
(ITFG Clarification Bulletin 11, Issue 9)
(Date of finalisation: July 31, 2017)
152
Ind AS 27, Separate Financial
Statements
Post Ind AS adoption accounting treatment of profit share from
investment in limited liability partnership which is under joint
control (in separate financial statements)
Issue 94: Company A Ltd. has equity investment in a Limited Liability
Partnership (LLP). Company A Ltd. has joint control over the LLP and
assessed that investment in LLP is a joint venture. How investment in
LLP be accounted for in the separate financial statements of Company
A Ltd? Whether profit share from LLP will be adjusted to the carrying
amount of the investment in LLP in the separate financial statements of
Company A Ltd.?
Response: Paragraph 26 of Ind AS 111, Joint Arrangements, prescribes the
accounting treatment for investment in joint arrangements in separate
financial statement of joint operator or joint venture as follows:
"26 In its separate financial statements, a joint operator or joint
venturer shall account for its interest in:
(a) a joint operation in accordance with paragraph 20-22;
(b) a joint venture in accordance with paragraph 10 of Ind AS 27,
Separate Financial Statements."
Paragraph 10 of Ind AS 27, Separate Financial Statements, inter alia,
provides that when an entity prepares separate financial statements, it shall
account for investments in subsidiaries, joint ventures and associates either:
(a) at cost, or
(b) in accordance with Ind AS 109.
In the given case, Company A Ltd. has joint control over the LLP and has
assessed that investment in LLP is a joint venture. Accordingly, the entity
shall account for its investment in the joint venture in its separate financial
statements as per paragraph 10 of Ind AS 27, i.e. at cost or in accordance
with Ind AS 109. Therefore, adjustment of profit share from LLP to the
carrying amount of the investment in LLP in its separate financial statements
is not permitted.
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Compendium of ITFG Clarification Bulletins
The accounting of return on investment (i.e. profit share from LLP) will
depend on the terms of contract between Company A Ltd. and LLP. The
share in profit in LLP shall be recognised as income in the statement of profit
and loss as and when the right to receive its profit share is established.
(ITFG Clarification Bulletin 5, Issue 8)
(Date of finalisation: September 19, 2016)
Measurement of investment in subsidiaries at cost if valued at fair
value on date of transition
Issue 95: Company A has made investment in subsidiary S Ltd.
Company A elects to measure the investment in S Ltd. at fair value on
the date of transition as per Ind AS 101. Can Company A opt to carry
the investment in S Ltd. at cost after the date of transition as per Ind AS
27?
Response: Paragraph D15 of Ind AS 101, First-time Adoption of Indian
Accounting Standards states as under:
"If a first-time adopter measures such an investment at cost in accordance
with Ind AS 27, it shall measure that investment at one of the following
amounts in its separate opening Ind AS Balance Sheet:
(a) cost determined in accordance with Ind AS 27; or
(b) deemed cost. The deemed cost of such an investment shall be its:
(i) fair value at the entity's date of transition to Ind ASs in its separate
financial statements; or
(ii) previous GAAP carrying amount at that date.
A first-time adopter may choose either (i) or (ii) above to measure its
investment in each subsidiary, joint venture or associate that it elects to
measure using a deemed cost."
Further, paragraph 10 of Ind AS 27, Separate Financial Statements, inter-alia
states as under:
"When an entity prepares separate financial statements, it shall account for
investments in subsidiaries, joint ventures and associates either:
(a) at cost, or
(b) in accordance with Ind AS 109."
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Ind AS 27, Separate Financial Statements
In accordance with the above, it may be noted that for a first-time adopter
cost of investment in a subsidiary shall be one of the following amounts:
cost determined in accordance with Ind AS 27 (i.e. retrospective
application of Ind AS 27)
fair value at the entity's date of transition to Ind AS
previous GAAP carrying amount
Accordingly, if a company chooses to measure its investment at fair value at
the date of transition then that is deemed to be cost of such investment for
the company and, therefore, it shall carry its investment at that amount (i.e.
fair value at the date of transition) after the date of transition.
Accordingly, in the given case, Company A can carry investment in S Ltd. at
transition date fair value which is deemed to be its cost as per paragraph 10
of Ind AS 27.
(ITFG Clarification Bulletin 3, Issue 12)
(Date of finalisation: June 22, 2016)
155
Ind AS 32, Financial Instruments:
Presentation
Computation of financial liability in case of convertible
debentures sharing same coupon rate and market rate
Issue 96: A company ABC Limited has issued compulsorily convertible
debentures at 14.5 % coupon rate which will be converted at the end of
10 years. The unsecured loan market rate of interest is 14.5%
(Assuming this rate can be considered as the appropriate market rate
for the given purpose). Coupon rate on debentures is same as that of
the market rate of interest although coupon rate on instruments with
conversion feature is generally lower than market rate of interest on
unsecured loans. How the financial liability (debt portion) would be
computed in such situation. (It is assumed that the equity conversion
option requires the company to deliver a fixed number of its own shares
for a fixed amount of another financial asset indicating that it meets the
`fixed for fixed' criterion under Ind AS 32).
Response: As per Ind AS 32, Financial Instruments: Presentation, in case of
compound financial instruments, it is required to separate it into two
components, i.e., financial liability (debt) and equity component. When
allocating the initial carrying amount of the compound instrument to the
underlying financial liability and equity component, an entity first determine
the fair value of the liability component (assuming there is no embedded
derivative). The fair value of the liability component is determined with
reference to the fair value of a similar stand-alone debt instrument. The
amount allocated to the equity component is residual amount after deducting
the fair value of the financial liability component from the fair value of the
entire compound instrument.
The application guidance of Ind AS 32 provides additional guidance on
compound financial instruments from issuers' point of view.
AG31 A common form of compound financial instrument is a debt instrument
with an embedded conversion option, such as a bond convertible into
ordinary shares of the issuer, and without any other embedded derivative
features. Paragraph 28 requires the issuer of such a financial instrument to
present the liability component and the equity component separately in the
balance sheet, as follows:
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Ind AS 32, Financial Instruments: Presentation
(a) The issuer's obligation to make scheduled payments of interest and
principal is a financial liability that exists as long as the instrument is
not converted. On initial recognition, the fair value of the liability
component is the present value of the contractually determined stream
of future cash flows discounted at the rate of interest applied at that
time by the market to instruments of comparable credit status and
providing substantially the same cash flows, on the same terms, but
without the conversion option.
(b) The equity instrument is an embedded option to convert the liability
into equity of the issuer. This option has value on initial recognition
even when it is out of the money.
Basis above guidance, the fair value of the liability shall be the present value
of the contractually determined stream of future cash flows discounted at the
rate of interest applied at that time by the market to instruments of
comparable credit status and providing substantially the same cash flows, on
the same terms, but without the conversion option. The amount allocated to
the equity component will be the residual amount after deducting the fair
value of the financial liability component as determined above from the fair
value of the entire compound instrument (for purpose of this issue,
transaction costs have been ignored).
(ITFG Clarification Bulletin 13, Issue 10)
(Date of finalisation: January 16, 2018)
Treatment of dividend on financial instruments declared after the
end of the reporting period
Issue 97: ABC Ltd. has declared dividend on a financial instrument
(which has been classified as a liability in accordance with Ind AS 32,
Financial Instruments: Presentation), after the end of the reporting
period. Whether ABC Ltd. is required to accrue such dividends in the
financial statements for the year even if it is declared after the end of
the reporting period?
Response:
Assuming ABC Ltd. has correctly classified the financial instrument as
financial liability as per Ind AS 32, then it shall account for dividend in
accordance with the following provisions of paragraph 35 of Ind AS 32:
"35 Interest, dividends, losses and gains relating to a financial instrument
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or a component that is a financial liability shall be recognised as income or
expense in profit or loss. Distributions to holders of an equity instrument shall
be recognised by the entity directly in equity. Transaction costs of an equity
transaction shall be accounted for as a deduction from equity."
Further, paragraph 12 of Ind AS 10 states that, `If an entity declares
dividends to holders of equity instruments after the reporting period, the
entity shall not recognise those dividends as a liability at the end of the
reporting period.'
It may also be noted that the above paragraph of Ind AS 10 applies only to
those financial instruments which are classified as equity instruments. The
payment of dividend/interest to financial instruments classified as liability
accrues at the end of the reporting period even if it is paid or declared after
the end of the reporting period. Accordingly, in the given case, ABC Ltd. is
required to account for the dividend, even if it is declared after the end of the
reporting period.
Further, accounting for dividend on financial instrument which is classified as
financial liability is governed by classification of such instrument under Ind
AS 109. If it is classified as subsequently measured at Amortised Cost,
dividend will be accrued as part of interest expense recognised based on
effective interest method.
(ITFG Clarification Bulletin 7, Issue 6)
(Date of finalisation: March 30, 2017)
Treatment of optionally convertible preference shares in
Standalone financial statements and consolidated financial
statements
Issue 98: A holding company H Ltd., which is covered under phase II of
Ind AS has a subsidiary S Ltd. H Ltd. is holding 57% of equity in S Ltd.
The subsidiary S Ltd., has issued 1.5% optionally convertible
preference shares to its holding company, which are non-cumulative.
All preference shares are issued to holding company. The subsidiary
company has the option to convert or redeem the stated preference
shares. H Limited does not have any right for the redemption of such
preference shares. How will these instruments be accounted for in the
following financial statements:
(i) Stand-alone financial statements of S Ltd;
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Ind AS 32, Financial Instruments: Presentation
(ii) Stand-alone financial statements of H Ltd; and
(iii) Consolidated financial statements of the Group.
Response: It has been assumed that S Ltd. has an option to convert the
instrument into a fixed number of its own shares and dividend payment is
discretionary.
Paragraph 16 of Ind AS 32, Financial Instruments: Presentation, inter alia,
states that, "when an issuer applies the definitions in paragraph 11 to
determine whether a financial instrument is an equity instrument rather than
a financial liability, the instrument is an equity instrument if, and only if, both
conditions (a) and (b) below are met.
(a) The instrument includes no contractual obligation:
(i) to deliver cash or another financial asset to another entity; or
(ii) to exchange financial assets or financial liabilities with another
entity under conditions that are potentially unfavourable to the
issuer.
(b) If the instrument will or may be settled in the issuer's own equity
instruments, it is:
(i) a non-derivative that includes no contractual obligation for the
issuer to deliver a variable number of its own equity instruments;
or
(ii) a derivative that will be settled only by the issuer exchanging a
fixed amount of cash or another financial asset for a fixed
number of its own equity instruments. For this purpose, rights,
options or warrants to acquire a fixed number of the entity's own
equity instruments for a fixed amount of any currency are equity
instruments if the entity offers the rights, options or warrants
pro-rata to all of its existing owners of the same class of its own
non-derivative equity instruments. Apart from the aforesaid, the
equity conversion option embedded in a convertible bond
denominated in foreign currency to acquire a fixed number of
the entity's own equity instruments is an equity instrument if the
exercise price is fixed in any currency. Also, for these purposes
the issuer's own equity instruments do not include instruments
that have all the features and meet the conditions described in
paragraphs 16A and 16B or paragraphs 16C and 16D, or
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Compendium of ITFG Clarification Bulletins
instruments that are contracts for the future receipt or delivery of
the issuer's own equity instruments."
(i) Provided the conversion feature is considered substantive, the instrument
can be viewed as an equity instrument, because the issuer has the ability to
convert the instrument into a fixed number of its own shares at any time. The
issuer, therefore, has the ability to avoid making a cash payment or settling the
instrument in a variable number of its own shares. Any feature that might have
been considered to be an embedded derivative would not meet the definition of a
derivative on a stand-alone basis, given the ability to avoid payment. Hence, the
issuer's conversion and redemption options would not be separated, and the
entire instrument would be classified as equity in the separate financial
statements of S Ltd.
(ii) In the separate financial statements of H Limited, the investment should
be considered to be an investment in subsidiary and therefore would be excluded
from the scope of Ind AS 109 unless H Ltd has elected otherwise.
Paragraph 10 of Ind AS 27, Separate Financial Statements, states that when
an entity prepares separate financial statements, it shall account for
investments in subsidiaries, joint ventures and associates either:
(a) at cost, or
(b) in accordance with Ind AS 109.
In view of the above assuming that the company H Ltd. has not elected to
account for its investment in accordance with Ind AS 109, it would account
for it at cost.
(iii) In the consolidated financial statements of the Group, these
transactions will be eliminated, being intra-group transactions in accordance
with Ind AS 110.
(ITFG Clarification Bulletin 14, Issue 7)
(Date of finalisation: February 01, 2018)
160
Ind AS 33, Earnings per Share
Presentation of earning per share for separate and consolidated
financial statements
Issue 99: Paragraph 9 of Ind AS 33, Earnings per Share states that, "An
entity shall calculate basic earnings per share amounts for profit or
loss attributable to ordinary equity holders of the parent entity and, if
presented, profit or loss from continuing operations attributable to
those equity holders."
Does this mean that a subsidiary company, not wholly owned, should
present EPS only for the portion of the profit which is attributable to the
parent entity?
Response: Paragraph 4 of Ind AS 33 states as follows:
"4 When an entity presents both consolidated financial statements and
separate financial statements prepared in accordance with Ind AS 110,
Consolidated Financial Statements, and Ind AS 27, Separate Financial
Statements, respectively, the disclosures required by this Standard shall be
presented both in the consolidated financial statements and separate
financial statements. In consolidated financial statements such disclosures
shall be based on consolidated information and in separate financial
statements such disclosures shall be based on information given in separate
financial statements. An entity shall not present in consolidated financial
statements, earnings per share based on the information given in separate
financial statements and shall not present in separate financial statements,
earnings per share based on the information given in consolidated financial
statements."
In accordance with the above an entity is required to disclose EPS in both its
Stand-alone Financial Statements (SFS) and in Consolidated Financial
Statements (CFS) (if presented by the entity).
Paragraph 9 states that an entity shall calculate basic earnings per share
amounts for profit or loss attributable to ordinary equity holders of the parent
entity and, if presented, profit or loss from continuing operations attributable
to those equity holders.
Further, paragraph A1 of Appendix A of Ind AS 33 also states that, "For the
purpose of calculating earnings per share based on the consolidated
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financial statements, profit or loss attributable to the parent entity refers to
profit or loss of the consolidated entity after adjusting for non- controlling
interests."
It is pertinent to note that the requirements of paragraph 9 of Ind AS 33 have
been provided in the context of calculating EPS in the consolidated financial
statements of an entity.
However, analogy may be drawn from paragraph 9 of Ind AS 33 that in case
of separate financial statements, the parent entity mentioned in paragraph 9
will imply the legal entity of which separate financial statements are being
prepared and accordingly, when an entity presents EPS in its separate
financial statements, then the same shall be calculated based on the profit or
loss attributable to its equity shareholders.
(ITFG Clarification Bulletin 11, Issue 3)
(Date of finalisation: July 31 2017)
Treatment of Foreign Currency Monetary Item Translation
Difference Account for the purpose of calculation of basic
earnings per share (EPS)
Issue 100: MNC Ltd. is a first-time adopter of Ind AS. It had availed the
option given under paragraph 46/46A of AS 11, The Effects of Changes
in Foreign Exchange Rates notified under the Companies (Accounting
Standards) Rules, 2006. MNC Ltd. has opted for the exemption given
under paragraph D13AA of Ind AS 101, First-time Adoption of Indian
Accounting Standards and accordingly, debited exchange differences
arising from translation of long term foreign currency monetary items to
Foreign Currency Monetary Item Translation Difference Account.
Whether the amount debited to Foreign Currency Monetary Item
Translation Difference Account is required to be reduced from profit or
loss from continuing operations for the purpose of calculating basic
earnings per share (EPS) as per paragraph 12 of Ind AS 33, Earnings
per Share?
Response: Paragraph 12 of Ind AS 33 states as follows:
"For the purpose of calculating basic earnings per share, the amounts
attributable to ordinary equity holders of the parent entity in respect of:
(a) profit or loss from continuing operations attributable to the parent
entity; and
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Ind AS 33, Earnings per Share
(b) profit or loss attributable to the parent entity
shall be the amounts in (a) and (b) adjusted for the after-tax amounts of
preference dividends, differences arising on the settlement of preference
shares, and other similar effects of preference shares classified as equity.
Where any item of income or expense which is otherwise required to be
recognised in profit or loss in accordance with Indian Accounting Standards
is debited or credited to securities premium account/other reserves, the
amount in respect thereof shall be deducted from profit or loss from
continuing operations for the purpose of calculating basic earnings per
share."
In accordance with the above, it is pertinent to note that the above paragraph
refers to those items of income or expense which as per Ind AS would have
been required to be recognised in profit or loss but are recognised in
securities premium account/other reserves.
Accordingly, the exchange differences arising from translation of long term
foreign currency monetary items that are debited to Foreign Currency
Monetary Translation Reserve Account as per paragraph 46/46A of AS 11 is
an option available under Ind AS.
Accordingly, exchange differences that are being debited to Foreign
Currency Monetary Item Translation Difference Account is in accordance with
Ind AS and therefore, the same is not required to be reduced from profit or
loss from continuing operations for the purpose of calculating basic earnings
per share.
(ITFG Clarification Bulletin 10, Issue 5)
(Date of finalisation: July 05, 2017)
163
Ind AS 37, Provisions, Contingent
Liabilities and Contingent Assets
Whether provision for unspent Corporate Social Responsibility
expenditure is required to be made as per Ind AS
Issue 101: Whether provision for unspent Corporate Social
Responsibility expenditure is required to be made as per Ind AS?
Response: Paragraph 14 of Ind AS 37, Provisions, Contingent Liabilities and
Contingent Assets states:
"A provision shall be recognised when:
(a) an entity has a present obligation (legal or constructive) as a result of
a past event;
(b) it is probable that an outflow of resources embodying economic
benefits will be required to settle the obligation; and
(c) a reliable estimate can be made of the amount of the obligation.
If these conditions are not met, no provision shall be recognised."
Section 135 (5) of the Companies Act, 2013 (the Act) requires a company to
spend a certain amount as expenditure towards Corporate Social
Responsibility (CSR). The proviso to section 135 (5) of the Act provides that
if the specified amount is not spent by the company during the year, the
Directors' Report should disclose the reasons for not spending the amount.
In accordance with the above, it may be noted that provision for the amount
which is not spent, i.e., any shortfall in the amount that was expected to be
spent as per the provisions of the Act on CSR activities and the amount
actually spent at the end of a reporting period, may not be required in the
financial statements.
However, if a company has already undertaken certain CSR activity for which
an obligation has been created, for example, by entering into a contractual
obligation, or either a constructive obligation has arisen during the year, then
in accordance with Ind AS 37, a provision for the amount of such CSR
obligation, needs to be recognised in the financial statements.
(ITFG Clarification Bulletin 8, Issue 1)
(Date of finalisation: May 5, 2017)
164
Ind AS 38, Intangible Assets
Applicability of revenue based amortisation for intangible assets
arising service concession arrangements in respect of toll roads
for new arrangements entered after the date of transition
Issue 102: Paragraph 7AA of Ind 38, Intangible Assets read with
paragraph D22 of Ind AS 101, First-time Adoption of Indian Accounting
Standards permits revenue based amortisation for the intangible assets
arising from service concession arrangements in respect of toll roads
recognised in the financial statements for the period ending
immediately before the beginning of the first Ind AS reporting period.
However, Schedule II to the Companies Act, 2013, permits revenue
based amortisation for such intangible asset without any reference to
any financial year. Whether a company is permitted to follow revenue
based amortisation even for such new arrangements entered into after
Ind AS become applicable?
Response: Paragraph D22 of Ind AS 101, inter alia, states as follows:
"D22 A first-time adopter may apply the following provisions while applying
the Appendix A to Ind AS 11:
(i) Subject to paragraph (ii), changes in accounting policies are
accounted for in accordance with Ind AS 8, i.e. retrospectively, except
for the policy adopted for amortisation of intangible assets arising from
service concession arrangements related to toll roads recognised in
the financial statements for the period ending immediately before the
beginning of the first Ind AS financial reporting period as per the
previous GAAP................"
Paragraph D7AA of Ind AS 38, Intangible Assets, states as follows:
"7AA The amortisation method specified in this Standard does not
apply to an entity that opts to amortise the intangible assets arising
from service concession arrangements in respect of toll roads
recognised in the financial statements for the period ending
immediately before the beginning of the first Ind AS reporting period as
per the exception given in paragraph D22 of Appendix D to Ind AS
101."
Schedule II to the Companies Act, 2013, provides that for intangible assets,
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the provisions of the accounting standards applicable for the time being in
force shall apply, except in case of intangible assets (Toll Roads) created
under `Build, Operate and Transfer', `Build, Own, Operate and Transfer' or
any other form of public private partnership route in case of road projects.
Amortisation in such cases may be done on the basis of revenue as specified
Schedule II.
Paragraph 7AA of Ind 38 read with paragraph D22 of Ind AS 101, specifically
provides exemption for service concession arrangements in respect of toll
roads recognised in the financial statements for the period ending
immediately before the beginning of the first Ind AS reporting period as per
the previous GAAP, i.e., as per Schedule II to the Companies Act, 2013,
considering the requirements contained in that Schedule. Companies
(Accounts) Rules, 2014 prescribes to follow Ind AS in preparation of financial
statements.
Hence, in harmonisation of Rules and Ind AS 38 read with Ind AS 101,
principles of Ind AS 38 should be followed for all service concession
arrangements including roll roads once Ind AS is applicable to an entity.
(ITFG Clarification Bulletin 3, Issue 13)
(Date of finalisation: June 22, 2016)
166
Schedule III
Disclosure of operating profit on the face of Statement of Profit and
Loss in accordance with Ind AS based Schedule III
Issue 103: Can a company disclose operating profit on the face of
Statement of Profit and Loss in accordance with Ind AS based Schedule
III?
Response: As per Ind AS based Schedule III, aggregate of `Revenue from
operations' and `Other income' is to be disclosed on face of the Statement of
Profit and Loss. Revenue from operations is to be separately disclosed in the
notes, showing revenue from:
(a) Sale of products (including Excise Duty);
(b) Sale of services; and
(c) Other operating revenues
The aggregate of `Other income' is to be disclosed on face of the Statement
of Profit and Loss. As per Note 5 of General Instructions for the Preparation
of Statement of Profit and Loss `Other Income' shall be classified as:
(a) interest Income;
(b) dividend Income; and
(c) other non-operating income (net of expenses directly attributable to
such income).
Paragraph 9.1.8 of the Guidance Note on Ind AS based Schedule III, states
that, "The term "other operating revenue" is not defined. This would include
Revenue arising from a company's operating activities, i.e., either its
principal or ancillary revenue-generating activities, but which is not revenue
arising from sale of products or rendering of services. Whether a particular
income constitutes "other operating revenue" or "other income" is to be
decided based on the facts of each case and detailed understanding of the
company's activities."
Accordingly, disclosure of income shall be governed as stated above. Further
it is also pertinent to note that Ind AS Schedule III sets out the minimum
requirements for disclosure in the financial statements including notes. It
states that line items, sub-line items and sub- totals shall be presented as an
addition or substitution on the face of the financial statements when such
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presentation is relevant to the understanding of the company's financial
position or performance or to cater to industry/sector-specific disclosure
requirements, apart from, when required for compliance with amendments to
the Act or Ind AS.
As per the Guidance Note on Ind AS based Schedule III, the application of
the above requirement is a matter of professional judgement. The following
examples illustrate this requirement. Earnings before Interest, Tax,
Depreciation and Amortisation is often an important measure of financial
performance of the company relevant to the various users of financial
statements and stakeholders of the company. Hence, a company may
choose to present the same as an additional line item on the face of the
Statement of Profit and Loss. The method of computation adopted by
companies for presenting such measures should be followed consistently
over the years. Further, companies should also disclose the policy followed
in the measurement of such line items.
In respect of operating profit disclosure, certain items which are credited to
profit and loss account may not form part of operating profit measure and
therefore giving a separate line item for disclosure of the operating profit may
not be appropriate and would result in change in the format of Statement of
Profit and Loss as prescribed by Schedule III applicable to Ind AS
companies. It is also to be noted that Ind AS Schedule III and Ind AS
requires classification of expense by nature and not function. The operating
profit measure sub-total would result in a more appropriate presentation of
performance for entities classifying expenses by function. Since classification
of expenses by function is not permitted under Ind AS and Ind AS Schedule
III, it may not be appropriate to present an operating profit measure sub-total
as part of the statement of profit and loss. However, the entity may provide
such additional information in the financial statements.
(ITFG Clarification Bulletin 13, Issue 5)
(Date of finalisation: January 16, 2018)
Applicability of Ind AS based Schedule III on voluntary adoption of Ind
AS
Issue 104: Companies which have chosen for voluntary adoption of Ind
AS from the financial year 2015-16 do not have clear format that should
be used for the preparation of financial statements. In the absence of
any specific format, whether a company may apply Ind AS based
Schedule III (i.e. the Division II of Schedule III notified by MCA)?
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Schedule III
Response: The Ministry of Corporate Affairs, by notification dated April 6,
2016, amended Schedule III by incorporating Division-II for preparation of
financial statements as per Ind AS with effect from the date of publication in
the Official Gazette i.e. April 6, 2016. It may be noted that as on March 31,
2016, there was no specific Schedule prescribed under the Companies Act,
2013, for companies voluntarily adopting Ind AS from financial year 2015-16.
However, it may further be noted that there is no prohibition in amended
Schedule III incorporating Division II for its early or voluntary adoption.
In view of the above, a company voluntarily adopting Ind AS from financial
year 2015-16 may use the format specified in Division-II of Revised Schedule
III (which is in compliance with Ind AS notified as Companies (Indian
Accounting Standards) Rules, 2015) for the preparation of financial
statements as per Ind AS for financial year 2015-16, as going forward also
the same format shall be applied.
(ITFG Clarification Bulletin 3, Issue 1)
(Date of finalisation: June 22, 2016)
169
APPENDICES
APPENDIX I
Frequently Asked Questions (FAQs)
issued by the Accounting Standards
Board of ICAI
FAQ on utilisation of Securities Premium Account
Question: Company1 ABC Ltd. had issued non-convertible debentures
redeemable at premium, which were outstanding as on March 31, 2015.
The Company has measured this financial liability at amortised cost in
accordance with Ind AS 109, Financial Instruments. In the past, the
Company had utilised the Securities Premium Account for providing
for the debenture redemption premium payable and writing off
debenture issue expenses in view of the requirements of Section 78 of
the Companies Act, 1956 and Section 52 of the Companies Act 2013
(such utilisation is not allowed once Ind AS becomes applicable).
As the amount of Securities Premium Account had been utilised to
provide for debenture redemption premium payable and to write off
debenture issue expenses, what retrospective accounting adjustments
in this regard are required to be done in the books under Ind AS on
transition date.
Response: Non-convertible debentures (financial liability) in the given case
are classified as subsequently measured at amortised cost under Ind AS
109. Accordingly, Company ABC Ltd. will have to arrive at the amortised
cost at the date of transition by applying the effective interest method (EIM)
with retrospective effect from the date of issue of debentures. In view of
requirements of Ind AS 109, amortised cost computation using EIM includes
all transaction costs that are directly attributable to the acquisition or issue
of debentures, such as, expenses incurred on issue of debentures and
premiums and discounts, if any.
In the above background, the Securities Premium Account utilised in past as
described above, may result into higher carrying amount of non-convertible
1 This FAQ replaces the earlier Issue no. 7 of the Ind AS Transition Facilitation
Group (ITFG) Clarification Bulletin 2 issued by the Accounting Standards Board.
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debentures as per Indian GAAP compared to amortised cost carrying
amount required as per Ind AS 109 as on transition date and the excess
amount needs to be reversed into an appropriate component of equity.
In this regard, the following requirement of Ind AS 101, First-time Adoption
of Indian Accounting Standards, may be noted:
"11. 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. Therefore, an entity
shall recognise those adjustments directly in retained earnings (or, if
appropriate, another category of equity) at the date of transition to Ind ASs."
In view of the above-mentioned requirement of Ind AS 101, it may be
mentioned that the appropriate category of equity for reversal of the excess
carrying amount of non-convertible debentures in this case is the Securities
Premium Account. Accordingly, the excess of carrying value of financial
liability as per Indian GAAP over the amortised cost amount arrived at by
using EIM as per Ind AS 109 as on transition date should be reversed by
crediting the Securities Premium Account with corresponding debit to the
relevant account which was credited earlier.
FAQ on Dividend Distribution Tax
This FAQ on Dividend Distribution Tax has been issued by the Accounting
Standards Board (ASB) of the Institute of Chartered Accountants of India
(ICAI). The purpose of this FAQ is to illustrate and to assist in clarifying the
requirements regarding treatment of Dividend Distribution Tax
Question: What are the presentation requirements as per Ind AS for
dividend and dividend distribution tax thereon, if an entity has issued certain
financial instruments that are classified as debt as per the provisions of Ind
AS 32, Financial Instruments: Presentation? What would be the presentation
requirements in this regard, if the financial instruments issued are classified
as equity or if these are compound financial instruments and bifurcated into
debt and equity?
Response:
With regard to the recognition of dividend declared on financial instruments,
paragraphs 35 and 36 of Ind AS 32 reproduced hereunder may be noted:
`'35 Interest, dividends, losses and gains relating to a financial
instrument or a component that is a financial liability shall be
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Appendix I: FAQs issued by ASB
recognised as income or expense in profit or loss. Distributions to
holders of an equity instrument shall be recognised by the entity
directly in equity. Transaction costs of an equity transaction shall be
accounted for as a deduction from equity.
36 The classification of a financial instrument as a financial liability or
an equity instrument determines whether interest, dividends, losses and
gains relating to that instrument are recognised as income or expense in
profit or loss. Thus, dividend payments on shares wholly recognised as
liabilities are recognised as expenses in the same way as interest on a
bond. Similarly, gains and losses associated with redemptions or
refinancings of financial liabilities are recognised in profit or loss, whereas
redemptions or refinancings of equity instruments are recognised as
changes in equity. Changes in the fair value of an equity instrument are not
recognised in the financial statements.''
In view of the above, if a financial instrument is classified as debt, the
dividend or interest paid thereon is in the nature of interest which is charged
to profit or loss. Dividend or interest paid on a financial instrument which is
classified as equity, should be recognised in the Statement of Changes in
Equity. In case of a compound financial instrument, the dividend or interest
allocated to debt portion shall be charged to profit or loss and the portion of
dividend or interest pertaining to equity shall be recognised in Statement of
Changes in Equity.
With regard to the income tax consequences of dividend, paragraphs 52A
and 52B of Ind AS 12, Income Taxes, provide as under:
52A In some jurisdictions, income taxes are payable at a higher or lower
rate if part or all of the net profit or retained earnings is paid out as a
dividend to shareholders of the entity. In some other jurisdictions, income
taxes may be refundable or payable if part or all of the net profit or retained
earnings is paid out as a dividend to shareholders of the entity. In these
circumstances, current and deferred tax assets and liabilities are measured
at the tax rate applicable to undistributed profits.
52B In the circumstances described in paragraph 52A, the income tax
consequences of dividends are recognised when a liability to pay the
dividend is recognised. The income tax consequences of dividends are more
directly linked to past transactions or events than to distributions to owners.
Therefore, the income tax consequences of dividends are recognised in
profit or loss for the period as required by paragraph 58 except to the extent
that the income tax consequences of dividends arise from the circumstances
described in paragraph 58(a) and (b).
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Paragraph 52A deals with the aspect where income taxes are payable at a
higher or lower rate if part or all of the net profit or retained earnings is paid
out as a dividend to shareholders. However, as per paragraph 52B, income
tax consequences of dividends are to be presented in profit or loss where it
is linked to past transactions and events recognised. The ASB is of the view
that in India the rate of income tax for company on taxable income does not
change if a company distributes dividend. In India, the dividend distribution
tax is a tax that is computed on the basis of the amount of dividend
distributed to shareholders rather than based on the amount of profits
earned and it arises at the point of time when the profits are distributed.
Therefore, Indian scenario is different from the income tax consequences in
other jurisdictions, which are covered by paragraph 52A of Ind AS 12.
In this context, following paragraph 65A of Ind AS 12, Income Taxes, as
reproduced below may also be noted:
"65A When an entity pays dividends to its shareholders, it may be required
to pay a portion of the dividends to taxation authorities on behalf of
shareholders. In many jurisdictions, this amount is referred to as a
withholding tax. Such an amount paid or payable to taxation authorities is
charged to equity as a part of the dividends."
In India, dividends are not taxable in the hands of shareholders considering
that DDT is paid by the company that paid the dividend. Had there been no
DDT mechanism, dividend would have been taxable in the hands of
recipients, though recently it has been made taxable if the amount of
dividend exceeds a specified limit. Therefore, in view of paragraph 65A,
DDT is, in substance, of the nature of withholding tax. Therefore, the Board
is of the view that the nature of payment of DDT in India is not similar to the
scenario covered under the current paragraph 52A. Accordingly, the
following paragraph of Ind AS 12, Income Taxes is relevant with regard to
the presentation of dividend distribution tax paid:
``61A Current tax and deferred tax shall be recognised outside profit or
loss if the tax relates to items that are recognised, in the same or a different
period, outside profit or loss. Therefore, current tax and deferred tax that
relates to items that are recognised, in the same or a different period:
(a) in other comprehensive income, shall be recognised in other
comprehensive income.
(b) directly in equity, shall be recognised directly in equity.''
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Appendix I: FAQs issued by ASB
In view of the above, presentation of on the dividends should be consistent
with the presentation of the transaction that creates those income tax
consequences. Therefore, DDT should be charged to profit or loss if the
dividend itself is charged to profit or loss. If the dividend is recognised in
equity, the presentation of DDT should be consistent with the presentation of
the dividend, i.e., to be recognised in equity. Accordingly, in case of
combined financial instruments, bifurcated into debt and equity, the portion
of DDT related to dividend/interest to the debt component should be
recognised in profit or loss and that related to equity component should be
recognised in equity.
FAQ on Elaboration of terms `infrequent number of sales' or
`insignificant in value' used in Ind AS 109
Question: Ind AS 109, Financial Instruments, requires an entity to classify
financial assets on the basis of the entity's business model for managing the
financial assets. In this regard, under a business model whose objective is
to hold assets in order to collect contractual cash flows, the Standard
provides that for this purpose, it is necessary to consider the frequency,
value and timing of sales in prior periods. Ind AS 109 appears to envisage
sale of assets held under the amortised cost category before maturity, the
application guidance of Ind AS 109 states that such sales may be consistent
with a business model whose objective is to hold financial assets in order to
collect contractual cash flows if those sales are infrequent (even if significant
in value) or insignificant in value both individually and in aggregate (even if
frequent).
In view of the above, the following may be clarified:
a) How should the terms `infrequent number of sales' or `insignificant in
value' be interpreted and determined. Can indicative rebuttable
thresholds be prescribed for sales that are more than insignificant in
value?
b) What is the relation between the terms `immaterial' and `insignificant'?
Response: Ind AS 109 does not define the terms `infrequent number of
sales' or `insignificant in value'. However, these terms have been used in the
Standard in the context of determination of business model. Under Ind AS
109, generally, sales which are `infrequent in number' or `insignificant in
value' are considered to be consistent with a business model whose
objective is to hold financial assets in order to collect contractual cash flows.
The Standard does not lay down any thresholds for value or number in this
regard.
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However, the Standard provides detailed guidance on the hold to collect
business model. In 2012, IASB had made limited amendments in IFRS 9 to
clarify the objective of the hold to collect business model by providing
additional application guidance. Ind AS 109 discusses various situations
including credit risk where business model may be to hold assets to collect
contractual cash flows even if the entity sells financial assets before
maturity. Ind AS 109 provides that frequency and value of sales due to an
increase in the assets' credit risk may not be inconsistent with a business
model whose objective is to hold financial assets to collect contractual cash
flows. Accordingly, while determining the business model, management may
decide the situations in which sales of financial assets occurring before the
maturity date may not be considered inconsistent with the entity's business
model whose objective is to hold assets in order to collect contractual cash
flows, e.g., an entity may lay down some criteria such as, if an entity sells a
security which is initially rated as AAA security and subsequently, it is rated
as BB, it will not be inconsistent with the entity's business model whose
objective is to hold assets in order to collect contractual cash flows because
the management may want to rebalance its portfolio by selling it rather than
waiting till the maturity date. There can be other situations also depending
upon the facts and circumstances which need to be judged by the
management.
In this regard, apart from the guidance contained in the Standard, the Basis
of Conclusions to IFRS 9 contains an additional instance in which sales of
financial assets occurring before the maturity date may not be considered
inconsistent with the entity's business model whose objective is to hold
assets in order to collect contractual cash flows. The instance relates to
change in the regulatory treatment of a particular type of financial asset
which may cause an entity to undertake a significant rebalancing of its
portfolio in a particular period.
In view of the above, following may be concluded:
(a) On the reading of Ind AS 109 along with the Basis of Conclusions to
IFRS 9, it can be concluded that it is a matter of judgement which
should be assessed keeping in view the facts and circumstances
pertaining to each case. Therefore, no rule of thumb in terms of even
indicative percentage can be laid down to determine `infrequent
number of sales' or
`insignificant in value', since it may not be applicable in all cases
considering the differing quantum, configuration and nature of
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Appendix I: FAQs issued by ASB
financial assets in different entities. Hence, no indicative rebuttable
thresholds can be prescribed for sales that are more than insignificant
in value.
(b) With regard to relation between terms `immaterial' and `insignificant', it
may be noted that guidance on the term `materiality' is already there
in Ind AS which also does not lay down any criteria based on
indicative fixed percentages. However, the term `insignificant' has not
been defined and can be interpreted to mean `less than material' or
almost `negligible'.
FAQ on deemed cost of Property, Plant and Equipment under Ind AS
101, First-time Adoption of Indian Accounting Standards
Issue: Ind AS 101 provides that the net carrying amounts of all of its
Property, Plant and Equipment as per previous GAAP can be used as
deemed cost on the date of transition to Ind AS. In that case, whether the
accumulated depreciation and provision for impairment under previous
GAAP would be treated as nil on the date of transition. In case the response
is in the affirmative, then how the provision for impairment provided before
the date of transition as per previous GAAP would be reversed in later years
if there is a change in the estimates used to determine the asset's
recoverable amount since the last impairment loss was recognized?
Response:
In the context of the issue, the following paragraphs of Ind AS 101, First-
time Adoption of Indian Accounting Standards, and the definition of `deemed
cost' contained in the Standard may be noted:
"D5 An entity may elect to measure an item of property, plant and
equipment at the date of transition to Ind ASs at its fair value and
use that fair value as its deemed cost at that date."
"D7AA Where there is no change in its functional currency on the date of
transition to Ind ASs, a first-time adopter to Ind ASs may elect to
continue with the carrying value for all of its property, plant and
equipment as recognised in the financial statements as at the date
of transition to Ind ASs, measured as per the previous GAAP and
use that as its deemed cost as at the date of transition after making
necessary adjustments in accordance with paragraph D21 and
D21A, of this Ind AS
Definition of Deemed Cost
"An amount used as a surrogate for cost or depreciated cost at a given date.
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Subsequent depreciation or amortisation assumes that the entity had initially
recognised the asset or liability at the given date and that its cost was equal
to the deemed cost."
In view of the above, with regard to deemed cost, Ind AS 101, inter alia,
provides an option to continue with the carrying value for all of its property,
plant and equipment measured as per previous GAAP and use that as
deemed cost on the date of transition. As per the definition of deemed cost,
it is the amount used as a surrogate for the cost or depreciated cost and for
the purpose of subsequent depreciation or amortisation, deemed cost
becomes the cost as the starting point. Accordingly, from the date of
transition, the deemed cost, i.e., carrying values of PPE as per the previous
GAAP in the given case, is the cost and any accumulated depreciation and
provision for impairment under previous GAAP have no relevance as would
be the case if fair value were to be taken as deemed cost as per paragraph
D5 above. Accordingly, provision for impairment provided before the date of
transition as per previous GAAP cannot be reversed in later years.
However, information regarding gross block of assets, accumulated
depreciation and provision for impairment under previous GAAP can be
disclosed by way of note forming part of the financial statements. This
information can be disclosed only as additional disclosures and the same
cannot be considered for subsequent recognition and/or measurement
purposes.
FAQs on requirements to prepare Consolidated Financial Statements
These FAQs on Consolidated Financial Statements have been issued by the
Accounting Standards Board (ASB) of the Institute of Chartered Accountants
of India (ICAI). The purpose of these FAQs is to illustrate and to assist in
clarifying the requirements regarding preparation of Consolidated Financial
Statements
1 (i) Whether a company H ltd is required to consolidate its
subsidiary which is a Limited Liability Partnership (LLP) or a
partnership firm?
(ii) Would the answer be different if LLP is an associate or joint
venture of H Ltd?
(i) As per rule 6 of Companies (Accounts) Rules, 2014, under the
heading `Manner of consolidation of accounts' it is provided that
consolidation of financial statements of a company shall be done in
accordance with the provisions of Schedule III to the Companies Act, 2013
and the applicable Accounting Standards.
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Appendix I: FAQs issued by ASB
It is noted that relevant Indian Accounting Standard i.e., Ind AS 110,
Consolidated Financial Statements provides that where an entity has control
on one or more other entities, the controlling entity is required to consolidate
all the controlled entities. Since, the word `entity' includes a company as well
as any other form of entity, therefore, LLPs and partnership firms are
required to be consolidated. Similarly, under Accounting Standard (AS) 21,
as per the definition of subsidiary, an enterprise controlled by the parent is
required to be consolidated. The term `enterprise' includes a company and
any enterprise other than a company. Therefore, under AS also, LLPs and
partnership firms are required to be consolidated.
Accordingly, in the given case, H ltd is required to consolidate its subsidiary
which is an LLP or a partnership firm.
(ii) If LLP or a partnership firm is an associate or joint venture of H ltd,
even then the LLP and the partnership firm need to be consolidated in
accordance with the requirements of applicable Accounting Standards.
2. A Company H ltd has no subsidiaries, but has investment in an
associate and a joint venture. Whether H Ltd. is required to prepare
consolidated financial statements for the year ending March 31, 2016,
in the context of Companies (Accounting Standards) Rules, 2006.
Section 129 (3) of the Companies Act, 2013 provides that where a company
has one or more subsidiaries, it shall prepare a consolidated financial
statement of the company and of all the subsidiaries. Further, an
Explanation to this sub section provides that the word "subsidiary" shall
include associate company and joint venture.
In view of the above, in the given case, though H ltd does not have any
subsidiary, it is required to prepare consolidated financial statements for its
associate and joint venture in accordance with the applicable Accounting
Standards, viz, AS 23, Accounting for Investments in Associates in
Consolidated Financial Statements and AS 27, Financial Reporting of
Interests in Joint Ventures, respectively.
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APPENDIX II
Extracts of Companies (Indian
Accounting Standards) Rules 2015
read with Companies (Indian
Accounting Standards) (Amendment)
Rules, 2016
2. Definitions. - (1) In these rules, unless the context otherwise requires,-
(a) "Accounting Standards" means the standards of accounting, or any
addendum thereto for companies or class of companies as specified in
rule 3;
(b) "Act" means the Companies Act, 2013 (18 of 2013);
(c) "Annexure" in relation to these rules means the Annexure containing
the Indian Accounting Standards (Ind AS) appended to these rules;
(d) "entity" means a company as defined in clause (20) of section 2 of the
Act;
(e) "financial statements" means financial statements as defined in clause
(40) of section 2 of the Act;
(f) "net worth" shall have the meaning assigned to it in clause (57) of
section 2 of the Act.
(g) "Non-Banking Financial Company" means a Non-Banking Financial
Company as defined in clause (f) of section 45-I of the Reserve Bank
of India Act, 1934 and includes Housing Finance Companies,
merchant Banking companies, Micro Finance Companies, Mutual
Benefit Companies, Venture Capital Fund Companies, Stock Broker or
Sub-Broker Companies, Nidhi Companies, Chit Companies,
Securitisation and Reconstruction Companies, Mortgage Guarantee
Companies, Pensions Fund Companies, Asset Management
Companies and Core Investment Companies.
(2) Words and expressions used herein and not defined in these rules but
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Appendix II: Extracts of Companies (Ind AS) Rules
defined in the Act shall have the same meaning respectively assigned to
them in the Act.
3. Applicability of Accounting Standards. - (1) The accounting standards
as specified in the Annexure to these rules to be called the Indian Accounting
Standards (Ind AS) shall be the accounting standards applicable to classes
of companies specified in rule 4.
(2) The Accounting standards as specified in Annexure to the Companies
(Accounting Standards) Rules, 2006 shall be the Accounting Standards
applicable to the companies other than the classes of companies specified in
rule 4.
(3) A company which follows the Indian Accounting Standards (Ind AS)
specified in Annexure to these rules in accordance with the provisions of rule
4 shall follow such standards only.
(4) A company which follows the accounting standards specified in
Annexure to the Companies (Accounting Standards) Rules, 2006 shall
comply with such standards only and not the Standards specified in
Annexure to these rules.
4. Obligation to comply with Indian Accounting Standards (Ind AS). -
(1) The Companies and their auditors shall comply with the Indian
Accounting Standards (Ind AS) specified in Annexure to these rules in
preparation of their financial statements and audit respectively, in the
following manner, namely:-
(i) any company and its holding, subsidiary, joint venture or associate
company may comply with the Indian Accounting Standards (Ind AS)
for financial statements for accounting periods beginning on or after
1stApril, 2015, with the comparatives for the periods ending on 31st
March, 2015, or thereafter;
(ii) the following companies shall comply with the Indian Accounting
Standards (Ind AS) for the accounting periods beginning on or after
1st April, 2016, with the comparatives for the periods ending on 31st
March, 2016, or thereafter, namely:-
(a) companies whose equity or debt securities are listed or are in
the process of being listed on any stock exchange in India or
outside India and having net worth of rupees five hundred crore
or more;
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Compendium of ITFG Clarification Bulletins
(b) companies other than those covered by sub-clause (a) of clause
(ii) of sub rule (1) and having net worth of rupees five hundred
crore or more;
(c) holding, subsidiary, joint venture or associate companies of
companies covered by sub-clause (a) of clause (ii) of sub- rule
(1) and sub-clause (b) of clause (ii) of sub- rule (1) as the case
may be; and
(iii) the following companies shall comply with the Indian Accounting
Standards (Ind AS) for the accounting periods beginning on or after
1st April, 2017, with the comparatives for the periods ending on 31st
March, 2017, or thereafter, namely:-
(a) companies whose equity or debt securities are listed or are in
the process of being listed on any stock exchange in India or
outside India and having net worth of less than rupees five
hundred crore;
(b) companies other than those covered in clause (ii) of sub- rule
(1) and sub-clause (a) of clause (iii) of sub-rule (1), that is,
unlisted companies having net worth of rupees two hundred and
fifty crore or more but less than rupees five hundred crore.
(c) holding, subsidiary, joint venture or associate companies of
companies covered under sub-clause (a) of clause (iii) of sub-
rule (1) and sub-clause (b) of clause (iii) of sub- rule (1), as the
case may be:
(iv) Notwithstanding the requirement of clause (i) to (iii), Non-Banking
Financial Companies (NBFCs) shall comply with the Indian Accounting
Standards (Ind AS) in preparation of their financial statements and
audit respectively, in the following manner, namely :-
(a) The following NBFCs shall company with the Indian Accounting
Standards (Ind AS) for accounting periods beginning on or after
the 1st April, 2018, with comparatives for the periods ending on
31st March, 2018, or thereafter-
(A) NBFCs having net worth of rupees five hundred crores or
more;
(B) holding, subsidiary, joint venture or associate companies
184
Appendix II: Extracts of Companies (Ind AS) Rules
of companies covered under item (A), other than those
already covered under clauses (i), (ii) and (iii) of sub-rule
(1) of rule 4.
(b) The following NBFCs shall comply with the Indian Accounting
Standards (Ind AS) for accounting periods beginning on or after
the 1st April, 2019, with comparatives for the periods ending on
31st march, 2019, or thereafter-
(A) NBFCs whose equity or debt securities are listed or in the
process of listing on any stock exchanges in India or
outside India and having net worth less than rupees five
hundred crore;
(B) NBFCs, that are unlisted companies, having net worth of
rupees two-hundred and fifty crore or more but less than
rupees five hundred crore; and
(C) holding, subsidiary, joint venture or associate companies
of companies covered under item (A) or item (B) of sub-
clause (b), other than those already covered in clauses
(i), (ii) and (iii) of sub-rule (1) or item (B) of sub-clause (a)
of clause (iv).
Explanation. For the purposes of clause (iv), if in a group of
Companies, some entities apply Accounting Standards specified in the
Annexure to the Companies (Accounting Standards) Rules, 2006 and
others apply accounting standards as specified in the Annexure to
these rules, in such cases, for the purpose of individual financial
statements, the entities should apply respective standards applicable
to them. For preparation of consolidated financial statements, the
following conditions are to be followed, namely:-
(i) Where an NBFC is a parent (at ultimate level or at intermediate
level), and prepares consolidated financial statements as per
Accounting Standards specified in the Annexure to the
Companies (Accounting Standards) Rules, 2006, and its
subsidiaries, associates and joint ventures, if covered by clause
(i), (ii) and (iii) of sub-rule (1) has to provide the relevant
financial statement data in accordance with the accounting
policies followed by the parent company for consolidation
purposes (until the NBFC is covered under clause (iv) of sub-
rule (1);
185
Compendium of ITFG Clarification Bulletins
(ii) where a parent is a company covered under clause (i), (ii) and
(iii) of sub-rule (1) and has an NBFC subsidiary, associate or a
joint venture, the parent has to prepare Ind AS- compliant
consolidated financial statements and the NBFC subsidiary,
associate or a joint venture has to provide the relevant financial
statement data in accordance with the accounting policies
followed by the parent company for consolidation purposes
(until the NBFC is covered under clause (iv) of sub-rule (1).
(v) Notwithstanding clauses (i) to (iv), the holding, subsidiary, joint venture
or associates companies of Scheduled commercial banks (excluding
RRBs) would be required to prepare Ind AS based financial statements
for accounting periods beginning from 1st April, 2018 onwards, with
comparatives for the periods ending 31st March, 2018 or thereafter.
Provided that nothing in this sub-rule, except clause (i), shall apply to
companies whose securities are listed or are in the process of being
listed on SME exchange as referred to in Chapter XB or on the
Institutional Trading Platform without initial public offering in
accordance with the provisions of Chapter XC of the Securities and
Exchange Board of India (Issue of Capital and Disclosure
Requirements) Regulations, 2009.
Explanation 1. - SME Exchange shall have the same meaning as assigned to
it in Chapter XB of the Securities and Exchange Board of India (Issue of
Capital and Disclosure Requirements) Regulations, 2009.
Explanation 2. - "Comparatives" shall mean comparative figures for the
preceding accounting period.
(2) For the purposes of calculation of net worth of companies under
clause (i), (ii) and (iii) of sub-rule (1), the following principles shall apply,
namely:-
(a) the net worth shall be calculated in accordance with the stand-alone
financial statements of the company as on 31st March, 2014 or the
first audited financial statements for accounting period which ends
after that date;
(b) for companies which are not in existence on 31st March, 2014 or an
existing company falling under any of thresholds specified in sub-rule
(1) for the first time after 31st March, 2014, the net worth shall be
186
Appendix II: Extracts of Companies (Ind AS) Rules
calculated on the basis of the first audited financial statements ending
after that date in respect of which it meets the thresholds specified in
sub-rule (1).
Explanation. - For the purposes of sub-clause (b), the companies meeting
the specified thresholds given in sub-rule (1) for the first time at the end of an
accounting year shall apply Indian Accounting Standards (Ind AS) from the
immediate next accounting year in the manner specified in sub-rule (1).
Illustration .- (i) The companies meeting threshold for the first time as on 31st
March, 2017 shall apply Ind AS for the financial year 2017-18 onwards.
(ii) The companies meeting threshold for the first time as on 31st March,
2018 shall apply Ind AS for the financial year 2018-19 onwards and so on.
(2A) For the purposes of calculation of net worth of Non-Banking
Financial Companies covered under clause (iv) of sub-rule (1), the following
principles shall apply, namely :-
(a) the net worth shall be calculated in accordance with the stand-alone
financial statements of the NBFCs as on 31st March, 2016 or the first
audited financial statements for accounting period which ends after
that date;
(b) for NBFCs which are not in existence on 31st March, 2016 or an
existing NBFC falling first time, after 31st March, 2016, the net worth
shall be calculated on the basis of the first audited stand-alone
financial statements ending after that date, in respect of which it meets
the thresholds.
Explanation. For the purposes of sub-clause (b), the NBFCs meeting the
specified thresholds given in sub-clause (b) of clause (iv) of sub-rule (1) for
the first time at the end of an accounting year shall apply Indian Accounting
Standards (Ind ASs) from the immediate next accounting year in the manner
specified in sub-clause (b) of clause (iv) of sub-rule (1).
Illustration (i) The NBFCs meeting threshold for the time as on 31st March,
2019 shall apply Ind AS for the financial year 2019-20 onwards.
(ii) The NBFCs meeting threshold for the time as on 31st March, 2020 shall
apply Ind AS for the financial year 2020-21 onwards and so on.
(3) Standards in Annexure to these rules once required to be complied
with in accordance with these rules, shall apply to both stand-alone financial
statements and consolidated financial statements.
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Compendium of ITFG Clarification Bulletins
(4) Companies to which Indian Accounting Standards (Ind AS) are
applicable as specified in these rules shall prepare their first set of financial
statements in accordance with the Indian Accounting Standards (Ind AS)
effective at the end of its first Indian Accounting Standards (Ind AS) reporting
period.
Explanation.- For the removal of doubts, it is hereby clarified that the
companies preparing financial statements applying the Indian Accounting
Standards (Ind AS) for the accounting period beginning on 1st April, 2016 or
1st April, 2018, as the case may be shall apply the Indian Accounting
Standards (Ind AS) effective for the financial year ending on 31st March,
2017 or 31st March, 2019, as the case may be.
(5) Overseas subsidiary, associate, joint venture and other similar entities
of an Indian company may prepare its standalone financial statements in
accordance with the requirements of the specific jurisdiction:
Provided that such Indian company shall prepare its consolidated financial
statements in accordance with the Indian Accounting Standards (Ind AS) if it
meets the criteria as specified in sub-rule (1).
(6) Indian company which is a subsidiary, associate, joint venture and
other similar entities of a foreign company shall prepare its financial
statements in accordance with the Indian Accounting Standards (Ind AS) if it
meets the criteria as specified in sub-rule (1).
(7) Any company opting to apply the Indian Accounting Standards (Ind
AS) voluntarily as specified in sub-rule (1) for its financial statements shall
prepare its financial statements as per the Indian Accounting Standards (Ind
AS) consistently.
(8) Once the Indian Accounting Standards (Ind AS) are applied voluntarily,
it shall be irrevocable and such companies shall not be required to prepare
another set of financial statements in accordance with Accounting Standards
specified in Annexure to Companies (Accounting Standards) Rules, 2006.
(9) Once a company starts following the Indian Accounting Standards (Ind
AS) on the basis of criteria specified in sub-rule (1), it shall be required to
follow the Indian Accounting Standards (Ind AS) for all the subsequent
financial statements even if any of the criteria specified in this rule does not
subsequently apply to it.
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Appendix II: Extracts of Companies (Ind AS) Rules
5. The Banking Companies and Insurance Companies shall apply the Ind
ASs as notified by the Reserve Bank of India (RBI) and Insurance Regulatory
Development Authority (IRDA) respectively. An insurer or insurance company
shall however, provide Ind AS compliant financial statement data for the
purposes of preparation of consolidated financial statements by its parent or
investor or venturer, as required by the parent or investor or venturer to
comply with the requirements of these rules.
189
APPENDIX III
Indexation of Issues- Standard-wise
Ind AS Issues directly dealing Other Issues which makes
with the Standard reference to the Standard
Ind AS 1 - Issue 25
Ind AS 2 - Issue 60
Ind AS 8 Issue 64 Issue 63
Ind AS 10 - Issue 97
Ind AS 12 Issue 65, 66, 67, 68 & 69 Issue 25
Ind AS 16 Issue 70, 71, 72, 73, 74, Issue 28 & 30
75, 76, 77 & 78
Ind AS 17 Issue 79, 80 & 81 -
Ind AS 18 Issue 82, 83, 84 & 85 -
Ind AS 20 Issue 86, 87 & 88 Issue 27 & 34
Ind AS 21 Issue 89 & 90 Issue 69
Ind AS 23 Issue 91& 92 -
Ind AS 24 Issue 93 -
Ind AS 27 Issue 94 & 95 Issue 43 & 45, 98
Ind AS 28 - Issue 14 & 15
Ind AS 32 Issue 96, 97 & 98 Issue 60, 86
Ind AS 33 Issue 99 & 100 -
Ind AS 36 - Issue 28
Ind AS 37 Issue 101 -
Ind AS 38 Issue 102 Issue 46
Ind AS 40 - Issue 71
190
Appendix III: Indexation of Issues - Standard-wise
Ind AS 101 Issue 22 to Issue 47 Issue 12, 52, 69, 72, 73,
74, 77, 78, 86, 95, 102
Ind AS 103 Issue 48, 49 and 50 Issue 47
Ind AS 107 Issue 51 & 52 -
Ind AS 105 - Issue 29
Ind AS 108 Issue 53 -
Ind AS 109 Issue 54,55,56,57,58,59 & Issue 26,35,39, 40,45,51,86,
60 91,92, 94, 95
Ind AS 110 Issue 61,62 &63 Issue 16, 45, 31 & 98
Ind AS 111 - Issue 94
Ind AS 112 - Issue 61
191
APPENDIX IV
Indexation of Issues in order of ITFG Clarification Bulletins
Bulletin Issue Topic Issue addressed Issue no. in Page
No. No. of this No.
ITFG Compendium
1 1 Roadmap Applicability of Ind AS- Net worth Criteria 21 29-30
1 2 Roadmap Applicability of Ind AS- Subsidiaries of Listed Company (different 1 1-4
scenario)
1 3 Ind AS 101 Capitalisation of exchange differences arising from long term foreign 42 59-60
192
currency monetary items in case of fixed assets(In case of first time
adoption of Ind AS)
1 4 Ind AS 101 Capitalisation of exchange differences arising from long term foreign 37 52-53
currency monetary items (In case of first-time adoption of Ind AS and
when change in functional currency)
1 5 Ind AS 101 Date for assessment of functional currency 24 33-34
2 1 Ind AS 101 Amortisation of balance of Foreign Currency Monetary Item Translation 41 58-59
Difference Account (FCMITDA)
2 2 Roadmap Applicability of Ind AS to an Indian subsidiary of a foreign company 13 16-17
2 3 Roadmap Date of Transition in case a company is already preparing financials 12 15-16
as per IFRS
2 4 Ind AS 16 Property Plant and Equipment- Recognition Criteria of spare part as an 76 120-121
item of property, plant and equipment and depreciation thereon
2 5 Ind AS 16 Property, Plant and Equipment - Capitalisation of expenditure on 75 120
assets not owned by the company
2 6 Ind AS 101 Revision of balance of Foreign Currency Monetary Item Translation 40 55-58
Difference Account (FCMITDA) at the time of first time adoption of Ind
AS on account of finance cost
Appendix IV: Indexation of Issues Bulletin-wise
3 1 Schedule III Applicability of Ind AS based Schedule III on voluntary adoption of Ind 104 168-169
AS
3 2 Roadmap Applicability of Ind AS to Core Investment Company (CIC) 11 14-15
193
3 3 Ind AS 21 Identification of functional currency of an entity 90 145-146
3 4 Roadmap Applicability of Ind AS to holding, subsidiary , joint venture and 15 20-21
associate company through direct or indirect association in case of
voluntary adoption by the parent company
3 5 Roadmap Applicability of Ind AS - associate company Consideration of share 14 17-20
warrants which are convertible into equity shares
3 6 Roadmap Applicability of Ind AS - associate company. In case of quarterly 10 13-14
results
3 7 Roadmap Applicability of Ind AS to holding company when subsidiary meets the 9 11-12
criteria for applicability of Ind AS
3 8 Roadmap Applicability of Ind AS - change in status of listed company 8 10-11
Compendium of ITFG Clarification Bulletins
3 9 Ind AS 16 Property, plant and equipment - capitalisation of capital spares when 74 118-120
deemed cost exemption availed for property, plant and equipment on
transition to Ind AS
3 10 Ind AS 101 Applicability of paragraph D13AA on foreign currency swaps in case 39 54-55
of hedged items
3 11 Ind AS 101 Applicability of paragraph D7AA for capital work in progress 30 43-44
3 12 Ind AS 27 Measurement of investment in subsidiaries at cost if valued at fair 95 154-155
value on date of transition
3 13 Ind AS 38 Applicability of revenue based amortisation for intangible assets 102 165-166
arising service concession arrangements in respect of toll roads for
194
new arrangements entered after the date of transition
3 14 Ind AS 16 Re-computation of Depreciation based on useful life when Ind AS 16 73 117-118
applied retrospectively
4 1 Ind AS 18 Revenue Recognition - presentation of Excise Duty (Gross or net of 84 133-134
sales)
4 2 Ind AS 18 Revenue Recognition - Treatment of Service Tax 83 132-133
4 3 Roadmap Applicability of Ind AS - In Case of Negative net worth 20 27-29
4 4 Roadmap Applicability of Ind AS- Date of Transition 7 9-10
5 1 Roadmap Applicability of Ind AS to holding company, if subsidiary company 16 21-23
incorporated for divestment purpose complies with Ind AS.
5 3 Ind AS 101 Selective adoption of deemed cost exemption under paragraph D7AA 33 46-47
5 4 Ind AS 101 Treatment of unadjusted processing of fees on loans taken before the 35 49-50
date of transition -In case of deemed cost exemption
5 5 Ind AS 101 Treatment of Government Grant on the date of transition-In case of 34 47-49
deemed cost exemption
5 6 Ind AS 16 Accounting of spare parts which meet the definition of property, plant 77 121-124
and equipment on the date of transition
5 7 Ind AS 17 Straight-lining of lease payments if escalation of lease payments is 80 128-129
Appendix IV: Indexation of Issues Bulletin-wise
different from general inflation.
5 8 Ind AS 27 Post Ind AS adoption accounting treatment of profit share from 94 153-154
investment in limited liability partnership which is under joint control
195
( in separate financial statements)
6 1 Roadmap Applicability of Ind AS - Net worth criteria 19 26-27
6 2 Roadmap Applicability of Ind AS - Section 8 company 6 8-9
6 3 Roadmap Applicability of Ind AS to holding company(NBFC) of the subsidiary 5 6-8
which is covered under the criteria of Ind AS roadmap
6 4 Roadmap Computation of net worth for Ind AS applicability- Government Grant to 18 25
be considered as capital reserve
7 1 Ind AS 101 Exemption under paragraph D13AA to foreign currency loan drawn 38 53-54
after Ind AS applicability to the entity
7 2 Ind AS 21 Determination of functional currency and presentation currency for 89 143-145
preparation of annual financial statements in case of Group
7 3 Ind AS 101 Reversal of impact of paragraph 46A of AS 11 when exemption as per 32 45-46
Compendium of ITFG Clarification Bulletins
paragraph D7AA of Ind AS 101 availed
7 4 Ind AS 101 Applicability of paragraph D13AA on long term foreign exchange 36 51-52
contracts
7 5 Ind AS 17 Classification of land lease under Ind AS 79 126-127
7 6 Ind AS 32 Treatment of dividend on financial instruments declared after the end 97 157-158
of the reporting period
7 7 Ind AS 12 Recognition of deferred tax asset on land sold as slump sale 68 105-107
7 8 Ind AS 101 Exemption of paragraph D15 on investment in debentures of subsidiary 45 63-65
company
7 9 Ind AS 101 Exemption under paragraph D22 of Ind AS 101 in respect of intangible 46 65-66
196
assets arising from service concession arrangements (toll roads)which
are in progress.
8 1 Ind AS 37 Whether provision for unspent Corporate Social Responsibility 101 164
expenditure is required to be made as per Ind AS
8 2 Ind AS 8 Disclosure of the new Ind AS which is not yet effective (Ind AS 115) 64 99
8 3 Ind AS 101 Date of Transition to Ind AS 22 31
8 4 Ind AS 16 Accounting treatment of the wrongly capitalised asset which does not 72 115-116
meet the definition of tangible asset
8 5 Ind AS 101 Reversal of the impairment provision recognised in books as at the 28 40-41
date of transition when exemption under paragraph D6 of Ind AS 101
availed
8 6 Ind AS 101 Accounting treatment of non-controlling interest in case of business 47 66-68
combinations in its consolidated financial statements as on the date of
transition
8 7 Ind AS 101 Accounting treatment of the balance outstanding in the "Revaluation 25 34-35
Reserve" and deferred tax on this transition revaluation reserve
8 8 Ind AS 12 Recognition of the deferred tax on the differences that are arising from 69 108-110
adjustment of exchange difference to the cost of the asset
8 9 Ind AS 107 Recognition of the dividend income on an investment in debt 51 76-78
instrument in the books of an investor
Appendix IV: Indexation of Issues Bulletin-wise
9 1 Ind AS 12 Accounting treatment of dividend distribution tax (DDT) and deferred 67 103-105
tax liability (DTL) on the accumulated undistributed profits of the
subsidiary company
197
9 2 Ind AS 103 Business Combinations of entities under common control 49 71-74
9 3 Ind AS 20 Accounting treatment of the grants in the nature of promoters' 88 140-142
contribution on the date of transition to Ind AS and post transition to
Ind AS
10 1 Ind AS 101 Accounting Treatment of interest free loan to subsidiary company when 43 60-61
exemption under paragraph D15 of Ind AS 101 availed
10 2 Ind AS 109 Accounting treatment of processing fees belonging to undisbursed 57 86-88
term loan amount
10 3 Ind AS 12 Recognition of deferred tax asset on the tax deductible goodwill in the 66 101-102
consolidated financial statements
10 4 Ind AS 101 Availment of deemed cost exemption for the assets classified as 29 41-43
Compendium of ITFG Clarification Bulletins
`Assets held for sale' but which do not fulfil the criteria for classifying
as held for sale in accordance with Ind AS 105 on the date of transition
10 5 Ind AS 33 Treatment of Foreign Currency Monetary Item Translation Difference 100 162-163
Account for the purpose of calculation of basic earnings per share
(EPS)
10 6 Ind AS 18 Classification of expense of providing free third party goods under 82 131-132
Customer Loyalty Programmes
11 1 Roadmap Applicability of Ind AS - Net Worth Criteria Treatment of ESOP 17 24
Reserve
11 2 Ind AS 12 Accounting treatment of Tax Holidays under Ind AS 65 100-101
198
11 3 Ind AS 33 Presentation of earning per share for separate and consolidated 99 161-162
financial statements
11 4 Ind AS 101 Measurement of Investment in Subsidiary when exemption under 44 61-63
paragraph D15 of Ind AS 101 availed
11 5 Ind AS 20 Accounting treatment of exemption of custom duty under EPCG 87 138-140
scheme
11 6 Ind AS 110 Treatment of depreciation in consolidated financial statements when 63 96-98
different method of depreciation applied by entities
11 7 Roadmap Applicability of Ind AS to non-corporate entities 4 5-6
11 8 Ind AS 16 Accounting Treatment of expenditure on the construction/development 70 111-113
of railway siding, road and bridge to facilitate the construction of a new
refinery
11 9 Ind AS 24 Whether sitting fees paid to independent director and Non-executive 93 151-152
director is required to be disclosed in the financial statements prepared
as per Ind AS
12 1 Ind AS 16 Selection of valuation model of immovable properties 71 113-115
12 2 Ind AS 101 Accounting Treatment of the Government Grant received before the 27 38-39
date of transition and measurement of property, plant and equipment
at the date of transition to Ind AS
12 3 Ind AS 109 Accounting of Financial Guarantee Contract - Comfort Letter 59 89-90
Appendix IV: Indexation of Issues Bulletin-wise
12 4 Ind AS 109 Accounting Treatment of prepayment premium and processing fees of 58 88-89
obtaining new loan to prepay old loan
199
12 5 Ind AS 101 Deemed cost exemption under paragraph D7AA (Treatment of 31 44-45
intragroup profit)
12 6 Roadmap Applicability of Ind AS to India branch office of foreign company 3 5
12 7 Ind AS 20 Accounting of below-market rate interest loan - exemption under para 86 136-138
B10 of Ind AS 101
12 8 Ind AS 103 Date of acquisition (i.e. date of obtaining control) under two scenario in 48 69-71
case of court scheme, whether business combination is or is not under
common control.
12 9 Ind AS 101 Applicability of Ind AS 109, Financial Instruments, if financial 26 35-38
instruments have been acquired as part of the business combinations
and the exemption under paragraph C1 of Ind AS 101 availed
12 10 Ind AS 101 Adjustments due to other Ind AS if deemed cost exemption availed 23 32-33
Compendium of ITFG Clarification Bulletins
12 11 Ind AS 109 Valuation of financial guarantee contract 54 82-83
13 1 Ind AS 23 Capitalisation of Dividend Distribution Tax(DDT) as borrowing costs of 91 147-148
the qualifying asset
13 2 Ind AS 109 Accounting Treatment of financial guarantee received from the Director 55 83-85
13 3 Ind AS 108 Disclosures by the entity in case it is operating into one segment 53 80-81
13 4 Roadmap Applicability of Ind AS to NBFCs in case not registered with RBI 2 4
13 5 Schedule III Disclosure of operating profit on the face of Statement of Profit and 103 167-168
Loss in accordance with Ind AS based Schedule III
13 6 Ind AS 109 Recognition of renegotiation gain/loss on Financial Instruments done in 56 85-86
subsequent year but before the approval of financial statements
200
13 7 Ind AS 110 Accounting Treatment of loss of investment in subsidiary 61 92-93
13 8 Ind AS 107 Foreign currency risk disclosure in case of option taken under 52 78-79
paragraph D13AA of Ind AS 101
13 9 Ind AS 110 Accounting treatment of dividend distribution tax in the consolidated 62 93-96
financial statements in case of partly-owned subsidiary - different
scenarios
13 10 Ind AS 32 Computation of financial liability in case of convertible debentures 96 156-157
sharing same coupon rate and market rate
14 1 Ind AS 23 Capitalising of the processing fees as borrowing costs when the loans 92 149-150
are specifically borrowed for the purpose of a qualifying asset
14 2 Ind AS 17 Accounting treatment of restoration costs in case of a leasehold land 81 129-130
14 3 Ind AS 18 Whether an entity should adjust the consideration (including advance 85 134-135
payments) for the effect of time value of money
14 4 Ind AS 103 Incorporation of effect of business combination in the standalone 50 74-75
financial statements in case of scheme of arrangement
14 5 Ind AS 109 Accounting treatment of shares held as stock-in trade in accordance 60 90-91
with Ind AS
14 6 Ind AS 16 Accounting treatment of the Revaluation surplus as per previous GAAP 78 124-125
Appendix IV: Indexation of Issues Bulletin-wise
on transition date and Revaluation gain arising after transition date
when Ind AS 16 applied retrospectively
14 7 Ind AS 32 Treatment of optionally convertible preference shares in Standalone 98 158-160
201
financial statements and consolidated financial statements
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