IFRS adoption and IFRS convergence : CARVE OUTS

Although IFRS has already become the need of the hour, confusion still prevailsover the difference between IFRS adoption and IFRS convergence. So let’sclarify:

IFRS adoption: A country adopting IFRS is implementing IFRS into itslegislation in exact form as issued by IASB. Most of the countries adopted IFRS,rather than converged.

IFRS convergence: A country converging to IFRS cooperates with IASB tomutually develop compatible accounting and financial reporting standards (so,no 100% mere adoption occurs). A typical example of IFRS convergence is India itself. In India we have the converged IFRS in the form of Ind AS as issued by ICAI.

Main differences

The Ind AS have been prepared by NACAS along with MCA and ICAI the draft Ind AS afterdue deliberations on the comments and suggestions as given by industries representatives. The finally recommended Ind AS have the following carve outs w.r.t IFRS. These carve outs havebeen made to fill up the gap/differences in application ofAccounting Principles Practices and economic conditionsprevailing in India.

Ind AS 21-The Effects of Changes in Foreign Exchange Rates

It requires recognition of exchange differences arising on translation of monetary items from foreign currency to functional currency directly in profit or loss.

Carve out: Ind AS 21 permits an option to recognise exchange differences arising on translation of certain long-term monetary items from foreign currency to functional currency directly in equity. In this situation, Ind AS 21requires the accumulated exchange differences to be amortised to profit or loss in an appropriate manner.

2. Ind AS 28- Investment in Associates

Paragraph 25 require that difference between the reporting period of an associate and that of the investor should not be more than three months, in any case.

Carve out: The phrase ‘unless it is impracticable’ has been added in the relevant requirement i.e., paragraph 25 of Ind AS 28. IAS 28 requires that for the purpose of applying equitymethod of accounting in the preparation of investor’s financial statements, uniform accounting policies should be used. In other words, if the associate’s accounting policies are different from those of the investor, the investor should change the financial statements of the associate by using same accounting policies.

Carve out: The phrase, ‘unless impracticable to do so’ has been added in the relevant requirements i.e., paragraph 26 of Ind AS 28.

3. Ind AS 39- Financial Instruments: Recognition andMeasurement

IAS 39 requires all changes in fair values in case of financial liabilities designated at fair value through Profit and Loss at initial recognition shall be recognised in profit or loss. IFRS 9 which will replace IAS 39 requires these to be recognised in ‘other comprehensive income’.

Carve out : A provison has been added to paragraph 48 of Ind AS 39 that in determining the fair value of the financial liabilities which upon initial recognition are designated at fair value through profit or loss, any change in fair value consequent to changes in the entity’s own credit risk shall be ignored.

4. Ind AS 103, Business Combinations

IFRS 3 requires bargain purchase gain arising on business combination to be recognised in profit or loss.

Carve out: Ind AS 103 requires the same to be recognised in other comprehensive income and accumulated in equity as capital reserve, unless there is no clear evidence for the underlying reason for classification of the business combination as a bargain purchase, in which case, it shall berecognised directly in equity as capital reserve.

Ind AS 101, First-time Adoption of Indian Accounting Standards

(i) Presentation of comparatives in the First-time Adoption of Indian Accounting Standards (Ind AS) 101 (corresponding to IFRS 1)

IFRS 1 defines transitional date as beginning of the earliest period for which an entity presents full comparative information under IFRS. It is this date which is the starting point for IFRS and it is on this date the cumulative impact of transition is recorded based on assessment of conditions at that date by applying the standards retrospectively except to the extent specifically provided in this standard as optional exemptions and mandatory exceptions. Accordingly, the comparatives, i.e., the previous year figures are also presented in the first financial statements prepared under IFRS on the basis of IFRS.

Carve out: Ind AS 101, requires an entity to provide comparatives as per the existing notified Accounting Standards. It is provided that, in addition to aforesaid comparatives, an entity may also provide comparatives as per Ind AS on a memorandum basis.

(ii) Presentation of reconciliation: IFRS 1 requires reconciliations for opening equity, total comprehensive income, cash flow statement and closing equity for the comparative period to explain the transition to IFRS from previous GAAP.

Carve out: Ind AS 101 provides an option to provide a comparative period financial statements on memorandum basis. Where the entities do not exercise this option and, therefore, do not provide comparatives, they need not provide reconciliation for total comprehensive income, cash flow statement and closing equity in the first year of transition but are expected to disclose significant differences pertaining to total comprehensive income. Entities thatprovide comparatives would have to provide reconciliations which are similar to IFRS.

(iii) Cost of Non-current Assets Held for Sale and Discontinued Operations on the date of transition on First-time Adoption of Indian Accounting Standards (Ind AS)

Carve out: Ind AS 101 provides transitional relief that while applying Ind AS 105 – Non-current Assets Held for Sale and Discontinued Operations, an entity may use the transitional date circumstances to measure such assets or operations at the lower of carrying value and fair value less cost to sell.

(iv) Foreign currency gains/losses on translation of long term monetary items.

Carve out: Ind AS 101 provides that on the date of transition, if there are long-term monetary assets or long-term monetary liabilities mentioned in paragraph 29A of Ind AS 21, an entity may exercise the option mentioned in that paragraph regarding spreading over the unrealised Gains/Losses over the life of Assets/Liabilities either retrospectively or prospectively. If this option is exercised prospectively, the accumulated exchange differences in respect of those items are deemed to be zero on the date of transition.

(v) Financial instruments existing on transition date

Carve out: Ind AS 101 provides that the financial instruments carried at amortised cost should be measured in accordance with Ind AS 39 from the date of recognition of financial instrumentsunless it is impracticable (as defined in Ind AS 8) for an entity to apply retrospectively the effective interest method or the impairment requirements of Ind AS 39. If it is impracticable to do so then the fair value of the financial asset at the date of transition to Ind-ASs shall be the new amortised cost of that financial asset at the date of transition to Ind ASs. Ind AS 101 provides another exemption that financial instruments measured at fair value shall bemeasured at fair value as on the date of transition to Ind AS.

(vi) Definition of previous GAAP under Ind AS 101 FirsttimeAdoption of Indian Accounting Standards

IFRS 1 defines previous GAAP as the basis of accounting that a first-time adopter used immediately before adopting IFRS.

Carve out: Ind AS 101 defines previous GAAP as the basis of accounting that a first-time adopter used immediately before adopting Ind ASs for its reporting requirements in India. For instance, for companies preparing their financial statements in accordance with the existing Accounting. Standards notified under the Companies (Accounting Standards) Rules, 2006 shall consider those financial statements as previous GAAP financial statements.

(vii) Cost of Property, Plant and Equipment (PPE), Intangible Assets, Investment Property, on the date of transition of First-time Adoption of Indian Accounting Standards.

Ind AS 101 provides an entity an option to use carrying values of all assets as on the date of transition in accordance with previous GAAP as an acceptable starting point under Ind AS.