Introduction To IFRS

An Introduction International Financial Reporting Standards (IFRS) Amit Gilra

Preparation and Presentation of Financial Statements - India Basic Framework Generally Accepted Accounting Practices (Accounting Standards & Guidelines) - Indian GAAP Selected Accounting Policies Regulatory Requirements

Preparation and Presentation of Financial Statements INDIA Basic Framework Regulatory Requirements Indian GAAP Accounting Policies Accounting Treatment difference Disclosure requirements Impact in Financial Statements Vs US Basic Framework Regulatory Requirements US GAAP Accounting Policies Differences

Need for understanding the differences Business going global Consolidation of financial statements Enhance confidence of global stakeholders Facilitate international acquisitions Provide Standardized Quality of MIS across global businesses Requirement of Global Financial Reporting Language International Accounting Standard Committee formed in 1973 (IASC)

Functions of IASC Issue of International Accounting Standards (IAS) IAS 1 to IAS 41 from 1973 to 2001 Issue of Standing Interpretations Committee (SIC) SIC 1 to SIC 32 till 1973 to 2001 IASC replaced by International Accounting Standard Board (IASB) in 2001 Issue of International Financial Reporting Standards (IFRS) IFRS 1 to IFRS 8 Issue of International Financial Reporting Interpretation Committee (IFRIC) IFRIC 1 to IFRIC 16 Some of these IAS considered While framing local Standards

From IAS to IFRS International Accounting Standards Committee (IASC ) 1973 2000 International Accounting Standards Board (IASB ) 2001 Future International Accounting Standards (IAS) International Financial Reporting Standards (IFRSs) IFRS IAS IFRS IFRIC SIC

List of IAS/IFRS IAS NO TITLE CORRESPONDING AS 1 Presentation of Financial Statements 1 2 Inventories 2 7 Cash Flow Statements 3 8 Net Profit or Loss for the period, Fundamental Errors and Change in Accounting Policies 5 10 Events after the Balance Sheet date 4 11 Construction Contracts 7 12 Income taxes 22 14 Segmental Reporting 17 15 Information reflecting the effect of changing prices - 16 Property, Plant and Equipment 6 & 10 17 Leases 19 18 Revenue 9 19 Employees Benefits 15 20 Accounting for Govt Grants and Disclosure of Government Assistance 12 21 The effects of changes in the foreign exchange rates 11 22 Business Combination 14

IAS NO TITLE CORRESPONDING AS 23 Borrowing Costs 16 24 Related Party Disclosures 18 26 Accounting and Reporting by Retirement Benefits Plan - 27 Consolidated Financial Statements and Accounting for Investments in Subsidiaries 21 28 Accounting for Investments in Associates 23 29 Financial Report in Hyper Inflationary Economics - 30 Disclosure in the financial statements of the Banks and similar Financial Institutions - 31 Financial Reporting of Interest in Joint Ventures 27 33 Earning per Share 20 35 Discontinuing Operations 25 36 Impairment Assets 28 37 Provisions, Contingent liabilities and Contingent assets 29 38 Intangible Assets 26 39 Financial Instruments : Recognition and Measurement 30 & 31 40 Investment Property - 41 Agriculture - IFRS 1 First Time Adoption of IFRS - IFRS 2 Share Based Payment - IFRS 3 Business Combinations 14 IFRS 4 Insurance Contracts - IFRS 5 Non current assets held for sale and discontinued operations - IFRS 6 Exploration for and Evaluation of Mineral Resources - IFRS 7 Financial Instruments : Disclosures 31 IFRS 8 Opening Segments -

IFRS Today and Tomorrow Today IFRS is used in over 100 countries: Required across all EU countries, starting in 2005 Argentina, Brazil, Canada and India have announced mandated use By 2014, it is expected that: All major countries will have adopted IFRS to some extent China and Japan will be substantially converged to IFRS U.S. public companies will begin to be required to use IFRS Accounting Standards Used by Global Fortune 500

IFRS and India Formulation and issue of Accounting Standard (AS) by Accounting Standard Board of the ICAI Convergence with IFRS required Formation of IFRS Task Force Achieving convergence with IFRS Laying down a road map for the above Adoption of IFRS effectively from 1 st April 2011.

Compliance with IFRS Compliance with IFRS includes : All active standards (IASs and IFRSs) All active interpretations (SICs and IFRICs) IFRS requires presentation of comparative period Must make explicit and unreserved statement of compliance

First Time Implementation (IFRS 1) Applicable when an entity makes its first explicit and unreserved reference to IFRS Generally apply retrospectively all IFRS effective at reporting date Certain exemptions can be elected Some exceptions that must be followed Requires one year of comparative financial information Transition adjustments recognized in retained earnings Must explain effect of transition to IFRS

Key Dates 01/04/2010 01/04/2011 31/03/2012 First IFRS Reporting Date Date of Transition Date of Applicability Comparative period under IFRS First IFRS reporting period Last reporting under Indian GAAP

Key Differences IFRS Vs Indian GAAP

Key Differences between IFRS and Indian GAAP Inventory Events occurring after Balance Sheet Date Prior Period Items and changes in Accounting policies Fixed Assets

INVENTORY Valuation of Inventories (AS 2) Vs Inventories (IAS 2)

Key Differences - Inventory Particulars IFRS Indian GAAP US GAAP Scope IAS 2 includes provisions relating to the work in progress of a service provider AS 2 excludes work in progress arising in the normal course of business of service provider. Hence there is no guidance for the same. Similar to Indain GAAP IAS 2 does not apply to inventories held by commodity traders There is no scope exemption in AS 2 for any inventory held by commodity traders Similar to Indain GAAP

Key Differences - Inventory Particulars IFRS Indian GAAP US GAAP Inventory Valuation Inventories are carried at the lower of cost or net realizable value Inventories are carried at the lower of cost or net realizable value Lower of cost or market subject to upper/lower limit of NRV Frequency of Assessment of NRV A new assessment of Net Realizable Value is required to be made in each Reporting period No specific guidance in AS 2. Write Down Reversal is required for a subsequent increase in value of inventory previously write down Reversal is required for a subsequent increase in value of inventory previously write down Reversal of write down of inventory is not permitted

Key Differences - Inventory Particulars IFRS Indian GAAP US GAAP Cost Formula Application The following cost formula allowed : FIFO Method Weighted Average Cost LIFO method is not allowed The following cost formula allowed : FIFO Method Weighted Average Cost LIFO method is not allowed The following cost formula allowed : FIFO Method Weighted Average Cost LIFO Method Consistency in cost formula application The same cost formula is used for all inventories that have a similar nature and use to the entity Not specified . However consistency is a fundamental principle The same cost formula is used for all inventories that have a similar nature and use to the entity

Key Differences - Inventory Particulars IFRS Indian GAAP US GAAP Cost of Inventory Cost of inventory excludes only Selling Cost, Not Distribution Cost Cost of inventory does not include Selling & Distribution Cost as per AS 2 Similar to AS 2 Purchase under Deferred Settlement Terms Difference between the purchase price of inventory for normal credit terms and the amount paid for deferred settlement terms is recognized as interest Expense Inventories purchased on deferred settlement terms are not explicitly dealt with in the accounting standard on inventories Disclosure Requirements Disclosure requirements are same except the following : Any write down and reversal of any write down Circumstances they led to reversal of a write down Carrying amount of inventory that are pledged as securities No specific requirements for disclosure

EVENTS AFTER THE BALANCE SHEET DATE Contingencies and Events occurring after the balance sheet date (AS 4) Vs Events after Reporting Period (IAS 10)

Key Differences – Events after Balance Sheet Date Particulars IFRS Indian GAAP US GAAP Proposed Dividend An Entity should not recognize the proposed dividends as a liability at the balance sheet date. Companies are required to make provision for proposed dividend , even though they are proposed after the balance sheet date Similar to IFRS Date of authorization Date of authorization for issue of financial statements and the authorizing authority should be specifically mentioned in financial statements itself No such requirements in AS 4 Similar to IFRS Disclosure of Non Adjusting events Material Non Adjusting Events are required to be disclosed in the financial statements Non adjusting events are required to be disclosed in the report of approving authority

PRIOR YEAR ITEMS Net P & L for the period, Prior Period items and change in Accounting Policies (AS 5) Vs Accounting policies, Changes in Accounting Estimates and Errors (IAS 8)

Key Differences – Prior Period Items, Change in Accounting Policies Particulars IFRS Indian GAAP US GAAP Definition Prior Period Errors Broad definition of Prior Period items. It includes all the items in the financial statements AS 5 covers only Income and Expenses in the definition of prior period items Prior Period Errors Prior Period errors are to be corrected retrospectively and restate the opening balances of assets, liability and equity Reported as a prior period adjustment in current year results . Comparatives are not required to restate. Similar to IFRS Extraordinary Item It prohibits disclosure of any items as Extraordinary Items Separate disclosure is required as per AS 5 Impending Changes It requires disclosure of any impending change in accounting policy It does not require such disclosure Similar to IFRS

Key Differences – Prior Period Items, Change in Accounting Policies Particulars IFRS Indian GAAP US GAAP Absence of standard or interpretation It provides specific guidance on the selection of accounting policies where there is no IFRS or interpretation that specifically applies to a transaction. No specific guidance under AS 5

FIXED ASSETS Accounting for Fixed Assets (AS 10) Vs Properly, Plant and Equipment (IAS 16)

Key Differences – Fixed Assets Particulars IFRS Indian GAAP US GAAP Definition Tangible Items that Are held for use in the production or supply of goods or service, for rentals to others, or for administrative purposes; and b) Are expected to be used during more than one period Fixed Asset is an Asset held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the ordinary course of business Initial Measurement of cost Initial measurement of cost also includes Fair value gains or losses on qualifying cash flow hedges relating to the purchase of PPE in a foreign currency Cost of dismantling and removing the item or restoring the site on which PPE is located No specific guideline on the measurement of gains/losses on qualifying cash flow hedges and capitalization of dismantling and site restoration cost Similar to IFRS except hedge gains or losses on qualifying cash flow hedges are not included

Key Differences – Fixed Assets Particulars IFRS Indian GAAP US GAAP Capitalization It mandates component Accounting . Each major part of the plant to be depreciated separately AS 10 does not require full adoption of component accounting. It is stated that accounting of asset may be improved through allocation of cost to various parts of the asset Does not require a component approach for depreciation Determination of Depreciation The depreciation amount of an item of PPE is allocated on a systematic basis over its useful life. Higher of the following : Depreciation calculated as per the rate specified in the Schedule XIV of the Companies Act. Depreciation as determined based on estimated useful life of the assets Similar to IFRS

Key Differences – Fixed Assets Particulars IFRS Indian GAAP US GAAP Depreciation Method A variety of depreciation methods can be used to allocate the depreciable amount on systematic basis over its useful life Can be followed either SLM or WDV Similar to IFRS Change in Depreciation Method Changes in the depreciation method are considered as change in accounting Estimate Prospective effect in current period Changes in the depreciation method are considered as change in accounting Policies and effects to be quantified and disclosed Retrospective effect in computation of depreciation Similar to IFRS Review of Useful Life and Residual Value Re assessment of useful life and residual value is required at least at each financial year end AS 10 does not specify any such requirement Similar to IFRS

Key Differences – Fixed Assets Particulars IFRS Indian GAAP US GAAP Subsequent Costs Cost of replacement is to be capitalized The carrying amounts of those parts that are replaced is to be derecognized Replacement cost is Expensed No requirement for decapitalizing the carrying amount of replaced items Similar to IFRS Major inspection cost and overhaul expenditure The cost of major inspection and overhaul expenses are to be capitalized The expenditure that increases the benefit over previously assessed capacity is capitalized. The inspection cost and overhaul expenses are expensed Similar to IFRS Purchase under Deferred Settlement Terms The cost of an item of PPE is the cash price equivalent at the recognition date. If payment is deferred beyond normal credit terms, the difference between the cash price equivalent and the total payment is recognized as interest over the period of credit. No specific guideline under AS 2 with respect to fixed asset acquisition under deferred settlement scheme

Key Differences – Fixed Assets Particulars IFRS Indian GAAP US GAAP Revaluation If an entity adopts the revaluation model, re valuation is required to be made with regular period 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 No specific requirement on frequency of revaluation Similar to IFRS Group Revaluation If an item of PPE is revalued, then the entire class of PPE to which that asset belongs to be revalued. Revaluation Approach is ad hoc in nature . Similar to IFRS Depreciation on revaluation Depreciation on revalued portion cannot be recouped out of revaluation reserve Depreciation on revalued portion can be recouped out of revaluation reserve

Key Differences – Fixed Assets Particulars IFRS Indian GAAP US GAAP Compensation Compensation received from third parties against loss of items of PPE are to be included in Profit & Loss when the compensation becomes receivable No specific requirement.

Way Forward Minutes of the meeting to be documented Drafting the Action Plan to be taken Mapping the differences for other areas

Introduction To IFRS

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