IFRS FAQs

IFRS FAQs on Standards

Revenue Recognition
1. What are the major changes in Revised AS 9 – Revenue Recognition?

The definition of revenue itself is broadened. It covers all economic benefits that arise in the ordinary course of activities of an entity, which result in increases in equity other than increases relating to contributions from the equity fund.

Revenue is to be measured at fair value received or receivable and not at the nominal value.

Property Plant and Equipment

2. What criteria are applied to recognise a PPE under revised AS 10?

A PPE is recognised if and only if the following two criteria are satisfied:

(i) Future economic flows
(ii) Measurable costs

All other tests like improved standards performance, extension of life and so on cannot be applied to recognize a PPE.

3. What is the major change in depreciation accounting?

As per the revised AS 10, PPE is based on the component approach. Each major component with significant cost vis-à-vis the total cost should be depreciated separately.

4. Is there an option to retain the cost model in the subsequent years after the initial recognition?

As per revised AS 10, an entity can adopt the cost model or the revaluation model at subsequent recognition. However, the revaluation model requires the value to be closer to fair value. Also, revaluation should be done regularly and to the entire class of assets.

Lease

5. What are the major differences between AS and IAS relating to the accounting of Lease?

Lease of Land is outside the scope of AS 19 whereas in IAS 17 lease of land and building is separated and recognised as either an operating or a finance lease depending on the circumstance.
AS 19 prohibits upward revision of unguaranteed residual value. Whereas, there is no such provisioning in IAS 17.

6. Does AS 19 provide exclusion from its scope?

The scope excludes the measurement principle for the following:

(i) Property held by lessees, that is, accounted for as an investment property
(ii) Investment property provided by lessors under operating leases
(iii) Biological assets held by lessees under finance leases
(iv) Biological assets provided by lessors as operating leases

There is also a distinction between inception of lease and commencement of lease.

Construction Contracts

7. What is the major difference in revenue recognition of a construction contract?

As per revised AS 7:
Contract revenue shall be measured at fair value of consideration received or receivable.

Deals with accounting and disclosure of service concession arrangements.

Business Combination

8. What are the major changes in the revised AS 14 Business Combination?


Whereas the original AS 14 deals only with amalgamation, the revised AS 14 defines business combination, which has a wider scope.

9. What are the methods of accounting permitted in Business Combinations?

The revised AS 14 prescribes only the acquisition method for each business combination. The pooling of interest method and the purchase method, which were allowed earlier, will not be allowed in the new standards.

10. How is goodwill treated in a business combination?

As per revised AS 14, goodwill is not amortised but tested for impairment on an annual basis.






FAQ s on Convergence of Indian Accounting Standards convergence IFRS


1. What is IFRS?

International Financial Reporting Standards (IFRS) are a set of accounting standards developed by the International Accounting Standards Board (IASB). These are becoming the global standard for the preparation of public company financial statements.

2. What is IASB?

IASB is an independent accounting standard-setting body, which consists of 14 members from nine countries and is based in London. This organisation took over from the International Accounting Standards Committee in 2001. It is funded by contributions from major accounting firms, private financial institutions and industrial companies, central and development banks, and other international and professional organisations throughout the world.

3. What is the difference between convergence and adoption?

Adoption would mean full-fledged use of IFRS as issued by the IASB by the Indian public companies.

Convergence means that the Indian Accounting Standards (AS) and the International Financial Reporting Standards (IFRS) would, over time, continue working together to develop high quality, compatible accounting standards.

4. What is the deadline for convergence of IFRS in India?

As per the notification of the Ministry of Corporate Affairs, convergence of Indian Accounting Standards (AS) with International Financial Reporting Standards (IFRS) will take place in phases. The first phase commences 1st April 2011.

5. Are IFRS and the Revised Indian Accounting Standards the same?

No. They are not the same. India wants to converge with IFRS and not adopt IFRS and there are some differences between IFRS and revised AS. For example, the terminologies are different as against the Indian Accounting Standards.

Indian Accounting Standards IFRS
Balance Sheet Statement of Financial Position
Statement of Profit and Loss Account Statement of Comprehensive Income
Approval for the financial statement for issue Authorisation of the financial statements for issue

There are some conceptual differences in some standards.

6. What are the advantages of converging with IFRS?

Convergence with IFRS:

Improves investor confidence across the world with transparency and comparability
Improves inter-unit/ inter-firm/inter-industry comparison
Group consolidation made easy with same standard by all companies in-group wherever located
Acceptability of financial statements across all stock exchanges, which facilitates entry of any Indian company to any stock exchange across the globe.


7. What are the major differences between existing Indian Standards and IFRS?

The major difference is in fair value accounting. Also, some new concepts and models have been introduced. For example, Acquisition Method in lieu of Purchase Method in business combinations. Also, certain practices have been removed. For example, the LIFO method has been removed in accounting of inventories.

8. How difficult is it to converge Indian Accounting Standards with IFRS?

It will not be difficult because we have always been following good standards of accounting. However, every corporate has to take the necessary step in understanding the new standards, training its staff and paving a smooth transition. The management at the top level should take interest in this regard.

9. What other areas of the profession will IFRS affect apart from the accounting professionals?

Apart from accounting professionals, other professionals like valuation experts, actuaries and so on will have a role to play once there is convergence with IFRS.

10. What are the likely costs of converting to IFRS?

The costs would be determined largely by the size and nature of the respective company. The initial cost to identify and quantify the differences between Indian GAAP and IFRS, staff training, and implementing IT support could be significant.



11. What are the different phases of convergence for companies in India?

Opening Balance Sheet as at 1 April 2011 Companies which are part of NSE Index – Nifty 50

ii. Companies, which are part of BSE Sensex – BSE 30

Companies whose shares or other securities are listed on a stock exchange outside India
Companies, whether listed or not, having a net worth of more than INR1,000 crore

Phase II

Opening balance sheet as at 1 April 2013* Companies not covered in Phase 1 and having net worth exceeding INR 500 crore

Phase II

Opening balance sheet as at 1 April 2014*
Listed companies not covered in the earlier phases
* If the financial year of a company commences at a date other than 1 April, it shall prepare its opening balance sheet at the commencement of immediately following financial year.

12. For implementing the Converged AS, is there a need to change other regulatory requirements?

Yes. The changes in the regulations relating to SEBI, RBI and IRDA are required to be aligned with IFRS. The Institute of Chartered Accountants of India is liaising with the respective regulators to enable a smooth transition.

13. What are the challenges envisaged in convergence?

Training of accounting professionals to adapt to the new standards
Changes required in accounting software and information technology systems
Issues related to different legal and regulatory requirements










FAQs Based on Press Releases

A. Applicability

1. What are the two sets of Accounting Standards under Section 211 (3C)?


The two sets of Accounting Standards are:

The Indian Accounting Standards, which have to be converged with the IFRS, and made applicable to the specified class of companies.
The second set would comprise the existing Indian Accounting Standards. They would be applicable to other companies, including Small and Medium Companies (SMCs).

2. What is status of Indian Accounting Standards convergence with IFRS?

As per the press release dated 22nd January 2010, the Chairman of the Accounting Standards Board of ICAI will submit the converged version of the Accounting Standards to NACAS from time to time for recommendations and onward submission to the Ministry. However, convergence of all accounting standards has to be competed by ICAI by 31st March 2010. The NACAS will submit its recommendations to the Ministry by 30th April 2010. The same can be accessed from the link http://www.icai.org/post.html?post_id=410

3. To which class of companies will the converged accounting standards be applicable and by when?

The converged accounting standards will be applicable in phases as mentioned:

Phase I: The following categories of companies will convert their opening balance sheets as at 1st April, 2011 if the financial year commences on or after 1st April 2011 in compliance with the notified accounting standards that are convergent with

IFRS. These companies are:
Companies, which are part of NSE – Nifty 50.
Companies, which are part of BSE – Sensex 30.
Companies whose shares or other securities are listed on stock exchanges outside India.
Companies, whether listed or not, which have a net worth in excess of Rs.1,000 crores.


Phase II Companies, whether listed or not, having a net worth exceeding Rs. 500 crores but not exceeding Rs. 1,000 crores will convert their opening balance sheet as at 1st April, 2013 if the financial year commences on or after 1st April, 2013 in compliance with the notified accounting standards that are convergent with IFRS.


Phase III: Listed companies which have a net worth of Rs. 500 crores or less will convert their opening balance sheet as at 1st April, 2014 if the financial year commences on or after 1st April, 2014, whichever is later, in compliance with the notified accounting standards that are convergent with IFRS

4. When the accounting year ends on a date other than 31st March, when can the conversion of opening Balance Sheet be made?

When the accounting year ends on a date other than 31st March, the conversion of the opening Balance Sheet will be made in relation to the first Balance Sheet, which is made on a date after 31st March.

5. Which of the companies need not follow the notified, converged accounting standards?

Companies, which fall in the following categories, will not be required to follow the notified accounting standards that are converged with the IFRS, though they may voluntarily opt to do so. But they need to follow only the notified accounting standards, which are not converged with the IFRS. These companies are:

Non-listed companies, which have a net worth of Rs. 500 crores or less, and whose shares or other securities are not listed on Stock Exchanges outside India.
Small and Medium Companies (SMCs).


B. Net Worth

6. What are the rules for calculation of the qualifying net worth to be recommended for companies in order to determine their applicability for applying the first set of Accounting Standards, that is, converged accounting standards?

For the purpose of calculating qualifying net worth of companies, the following rules will apply:

The net worth will be calculated as per the audited balance sheet of the company as at 31st March 2009 or the first balance sheet for accounting periods, which end after that date.
The net worth will be calculated as the Share Capital plus Reserves less Revaluation Reserve, Miscellaneous Expenditure and Debit Balance of the Profit and Loss Account.
For companies, which are not in existence on 31st March 2009, the net worth will be calculated on the basis of the first balance sheet ending after that date.
The calculation of net worth is for the purpose of the criteria only since "net worth" is a part of the criteria.

7. How is net worth computed?

The press release does not provide guidelines for computing the net worth. However, presumably, ‘net worth’ could be construed as defined under the Companies Act, 1956 (Act) [Section 2(29A)], which states: “net worth” means the sum total of the paid-up capital and free reserves after deducting the provisions or expenses as may be prescribed.

Explanation – For the purposes of this clause, “free reserves” mean all reserves created out of the profits and share premium account. But they do not include reserves created out of revaluation of assets, write back of depreciation provisions and amalgamation.

Further, as per Schedule VI to the Act and the Department (Letter No 8/16(1)/61-PR dated 09-May-1961), the debit balance of profit and loss account carried forward needs to be deducted from uncommitted reserves. Similarly, in order to reflect the true and fair view of the state of affairs of the company, it is necessary to deduct miscellaneous expenditure not written off, if any, from the free reserves.

As per an MCA press release dated May 5, 2010, Issue 7, the net worth will be calculated as:

Share Capital
Add: Reserves
Less: Revaluation Reserve
Miscellaneous Expenditure
Debit Balance of the P&L Account

8. Where the audit report includes qualifications, should the impact of qualifications be considered in computing net worth?

Though not addressed by the press release, it may be appropriate to adjust the net worth for the impact of qualifications, if any.

9. As at what date should the net worth be computed?

The net worth will be calculated as per the audited balance sheet of the company as at 31st March 2009 or the first balance sheet for accounting periods, which end after that date.

10. When a parent company falls under Phase 1 of applicability of converged standards and its Joint Venture/Subsidiary is not covered under Phase 1, will it have a consolidated or stand alone financial statements?

The companies covered in a particular phase having subsidiaries, joint ventures or associates not covered in those phase or phases will prepare their consolidated financial statements according to the first set of Accounting Standards, that is, the Converged Accounting Standards)

11. Whether determination of net worth to identify the phases of applicability is a one-time exercise or should be determined at the beginning of each year with effect from April 1, 2011?


Currently, the net worth assessment appears to be a one-time assessment.

The date for determination of the criteria is the Balance Sheet as at 31st March 2009 or the first Balance Sheet prepared thereafter when the accounting year ends on another date.

12. Whether a newly incorporated company with an initial net worth of less than Rs.500 crores will fall under the category of companies, which are not required to apply the Indian Accounting Standards converged with IFRS?

For companies, which are not in existence on 31st March 2009, the net worth will be calculated on the basis of the first balance sheet ending after that date.

C. Other Applicability Issues:

13. What will be the applicability date if the company has a year-end other than March 31?

The date for determination of the criteria is the Balance Sheet as at 31st March 2009 or the first Balance Sheet prepared thereafter when the accounting year ends on another date

14. At what date the criteria for inclusion in Phase 1 is to be considered for BES 30 and NSE 50 companies?

For all phase 1 companies, the date for determination of the criteria is the Balance Sheet as at 31st March 2009 or the first Balance Sheet prepared thereafter when the accounting year ends on another date.

15. Whether listing on a stock exchange outside India include GDRs, FCCBs and/or other debt securities?

Yes. The press release clearly specifies ‘shares and other securities’, which indicates that even debt securities should be considered for evaluating this criteria.

16. What will be the requirements with respect to financial statements of subsidiaries, joint ventures and associates?

The companies covered in a particular phase having subsidiaries, joint ventures or associates not covered in that phase or phases will prepare their consolidated financial statements according to the first set of Accounting Standards, that is, the Converged Accounting Standards.

17. Is early adoption of Indian Accounting Standards converged with IFRS allowed? If yes, by whom?

When one or more companies in a group fall in a phase other than the phase applicable to the parent company, they will continue to prepare standalone accounts according to the phase applicable to them. But the parent may need to make amendments to these accounts for the purposes of consolidation as per the Converged Accounting Standards. Such subsidiaries, joint ventures or associate companies may have the option for early adoption of the Converged Accounting Standards.

D. Comparatives


18. For companies under each of the phases, will there be a requirement to present comparative information as per the Indian Accounting Standards converged with IFRS? For example, for Phase I companies –the previous year comparatives for the year ended March 31, 2012, which is March 31, 2011)?

The companies, covered in Phase I, would be required to convert their opening
balance sheet as at 1st April 2011 in compliance with the first set of Accounting Standards, that is, the Converged Accounting Standards). Accordingly, companies are not required to provide comparative figures for the year 2010-11 as the first set of Accounting Standards, that is, the Converged Accounting Standards.

E. Formats


19. Will alternative formats be prescribed under Schedule VI to the Companies Act or any other relevant statute, which currently prescribes the format of financial statements like for electricity companies?

The press release specifies that the revised Schedule VI, according to the Indian Accounting Standards converged with IFRS will be submitted by the NACAS to the Ministry by January 31, 2010. We expect that the Schedule VI will then include two separate sets of formats – the existing one to be used by companies following the existing Indian Accounting Standards and a new one to be used by companies following the Indian Accounting Standards convergence with IFRS. Similar changes to other regulations, which prescribe financial reporting formats, can be expected from the relevant governing authority.

F. Other Authorities


20. Will the tax authorities take cognisance of financial statements prepared as per Indian Accounting Standards converged with IFRS for the purposes of filing tax returns?


While the press release does not talk about the consequential impact on taxation laws, it is expected that there will be guidelines/changes in law, which will provide clarity on this aspect. Further, assuming that the regulators will take some time to give cognisance to the Indian Accounting Standards converged with the IFRS under the tax laws, companies may need to maintain parallel sets of records to determine taxable income/book profits as per the current tax laws. Further, it can also be expected that in case of Minimum Alternative Tax (MAT), the law may require certain additional adjustments, say on account of fair value gains or losses and so on.

21. Will SEBI allow filing of financial statements prepared as per the Indian accounting standards converged with IFRS?

While the press release does not specifically address this issue, it is expected that SEBI will allow filing of Indian Accounting Standards converged with IFRS. This is also in line with SEBI’s press release dated November 9, 2009, which allowed voluntary adoption of IFRS by listed entities having subsidiaries

in website http://www.sebi.gov.in/press/2009/3442009.html. Again, it needs to be noted that SEBI has only issued a press release. A notification in this regard, once issued, will be binding on the companies.

22. Will the interim financial statements be prepared under the Indian Accounting Standards converged with IFRS, when the company falls under a specific phase?

Yes, for example, where a company falls under Phase I and has a March 31 as year-end, it would have to prepare its interim financial statements as at June 30, 2011, in accordance with the Indian Accounting Standards converged with IFRS.

23. When the first interim financial statements are prepared under the Indian Accounting Standards converged with IFRS, under which standards will the comparative ones be presented?

Assuming SEBI takes cognisance of the proposed requirements under the Companies Act that there is no requirement to present comparatives for the first annual financial statements as per Indian Accounting Standards converged with IFRS, it would be appropriate to assume that this would hold good for the interim financial statements as well. Accordingly, the comparatives would be as per the interim financial statements prepared in accordance with the existing Indian Accounting Standards.

G. Other Issues


(Based on the Press Release Dated May 4, 2010)

24. Can a company discontinue applying the Indian Accounting Standards converged with IFRS based on reassessment of eligibility criteria on a later date?


Once a company starts following the first set of Accounting Standards, that is, the Converged Accounting Standards on the basis of the eligibility criteria, it will be required to follow such Accounting Standards for all the subsequent financial statements even if any of the eligibility criteria does not subsequently apply to it.

25. Where the Indian Accounting Standards converged with IFRS are not fully consistent with IAS/IFRS issued by IASB, should Indian companies continue to apply Indian Accounting Standards converged with IFRS?

In case the notified Converged Accounting Standard is not fully consistent with the IAS/IFRS, that is, some deviations remains despite the intention to converge, as issued by the IASB, it is presumed that Indian companies will continue to follow the first set of Accounting Standards, that is, the Converged Accounting Standards as notified by the Government of India and will not adopt IFRS in toto.

26. As at what date should the net worth be computed for banks and NBFCs?

The MCA press release dated May 5, 2010 clarifies in Issues 4 and 8 that the date for determination of the criteria is the balance sheet as at March 31, 2011 or the first balance sheet prepared thereafter when the accounting year ends on another date.

27. How should net worth be computed for scheduled commercial banks/urban co-operative banks and NBFCs?

The MCA (Ministry Corporate Affairs) press release dated May 5, 2010, clarifies in Issue 8 that net worth will be calculated as:
Share Capital
Add: Reserves
Less: Revaluation Reserve
Miscellaneous Expenditure
Debit Balance of the P&L Account

28. When should net worth be computed for scheduled commercial banks/urban co-operative banks and NBFCs, which are not in existence as on March 31, 2011?

The MCA press release dated May 5, 2010 clarifies in Issues 8 that the net worth in such cases will be calculated based on the first balance sheet ending after that date.