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An overview of IFRS & Challenges involved in first time adoptionThe Institute of Chartered Accountants of India, Bangalore1st December’2010

CA Aditya SinghalM.Com, FCA, DISA(ICAI)+91 99728 27300Aditya.singhal@icai.org

Join IFRS professional group for regular IFRS update:http://finance.groups.yahoo.com/group/IFRS-Professional/

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Authoritative literature• IFRS

• IFRS• IAS• IFRIC• SIC

• Order of authoritativeness• IFRS including any appendices• Interpretations• Appendices to IFRS that do not form part of the

standards• Implementation guidance issued by IASB

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IASC & its Objectives• IASC was founded in 1973

• 2001 -IASC was set up as part of a restructuring

• Objectives of the IASC Foundation are• To develop a single set of high

quality global accounting standards to help participants in the worlds capital markets and other users make economic decisions

• To promote use and rigorous application of those standards

• To take into account the special needs of small and medium sized entities

• To bring about convergence of national accounting standards and IFRS

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Framework for preparation and presentation of Financial Statements

• Framework provides a conceptual framework as a foundation for the preparation and appraisal of accounting standards• FRAMEWORK is the FOUNDATION of many IFRS but

is not an IFRS• It does not have the same authority as an IFRS• In some circumstances there may be conflict between the

Framework and an IFRS. In such cases the requirements of the specific IFRS always prevail over the Framework

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The Framework

Underlying assumptionsAccrual BasisGoing Concern

Qualitative Characteristics – Presentation Understandability Comparability - Content Relevance Reliability

ElementsRecognitionMeasurement

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Assets - Liability - Equity - Income - Expenses

-Resource-Controlled by an entity-As a result of past event-From which economic benefits are expected to flow to the entity

-Present obligation-Arising from past events-The settlement of which is expected to result in an outflow from the entity of economic benefits

-Residual interest in the entity’s assets after deducting all of its liabilities-It is sub-divided in the statement of financial position

-Increase in economic benefit - During the accounting period - In the form of inflows, enhancement in assets or decrease in liability-Other than those relating to contribution from equity participants

- Decrease in economic benefits- During the period- In the form of outflows, depletion of assets or incurrence of liability - Other than that which relates t o distributions to equity participants

T h e - E l e m e n t s

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Recognition criteria• Recognition is the process of incorporating an item that

meets the definition of an element and satisfies the recognition criteria into the SOFP or SCI

• An item that meets the definition of an element (asset, liability, income or expense) should be recognized if :• It is probable that any economic benefit associated with

the item will flow to or from the entity• The item has a cost or value that can be measured reliably

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Measurements of ElementsHistorical cost

Present value

Realizable cost

Fair Value

Current Cost

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IFRS – From India perspectiveIn phase I it would be applicable w.e.f. 1st April’2011 to: •Companies which are part of

NSE- Nifty 50 & BSE- SENEX 30,

•Companies whose shares or other securities are listed on stock exchanges outside India and

•Companies, whether listed or not, which have a net worth in excess of Rs. 1000 Crore.

In Phase II it would be applicable w.e.f. 1st April’2013 to•The companies whether listed

or not, having a net worth exceeding Rs. 500 Crore but not exceeding Rs. 1000 Crore.

In Phase III it would be applicable w.e.f. 1st April 2014 to,•All the remaining listed

companies having net worth less than Rs. 500 Crore.

IFRS would be applicable into three phases:

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Conceptual Differences• Substance over form

• Fair value

• Current and Non-Current Classification

• Discounting (Time value of money)

• Standards prevail over law

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Challenges involved in first time adoptions1. Fair value override permitted under IFRS

2. Retrospective application

3. Barred – extraordinary items

4. Impact of change in accounting policy

5. The use of revaluation for fixed assets, intangibles and investment property

…. cont

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Challenges involved in first time adoptions

6. Consolidation of financials – Special purpose entities

7. Goodwill/negative goodwill treatment

8. Revenue recognition of long term construction contract

9. Impairment of non-current assets

10. Classification of financial instrument

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IFRS 1 – the 5 step process1. Identification of date of transition

2. Selection of accounting policies that comply with IFRSs

3. Preparation of an opening IFRS balance sheet

4. Preparation of the first IFRS financial statements

5. Reconciliations and disclosures.

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Identification of date of transition

• Transition Date - 1st April’ 2010

• Adoption Date - 1st April’2011

• Reporting Date - 31st March’2012

If entity presents comparative statements

• Transition/Adoption Date – 1st April’ 2011

• Reporting Date- 31st March’2012

If entity does not present comparative statements

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Selection of accounting policies that comply with IFRSsa) Need to apply IFRS effective at the Reporting Date.

b) May apply a new IFRS that is not yet mandatory, if it permits early application.

c) Determine which exceptions to use

d) Take into account the exceptions to retrospective application

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Preparation of an opening IFRS Balance Sheet

• Does not recognize items as assets or liabilities if IFRS does not permit such recognition

• Recognize all assets and liabilities whose recognition is required by IFRS

• Reclassify assets, liabilities and items of equity as per the requirements of IFRS

• Measure all assets and liabilities in accordance with IFRS

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Preparation of an opening IFRS Balance Sheet

Assets/ Liability

as per IFRS?

Recognised under Indian

GAAP

Whether Measurement in line with IFRS?

Re-classify, if required by IFRS

Include as per IFRS

prescription

Recognised under Indian

GAAP?

Exclude and do not recognise

No Change required

Adjust carrying amount as per

IFRS

YES YES

YES

YES

NoNo No

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Preparation of the first IFRS financial statements - Optional ExemptionsFixed Assets

• Use of fair value as deemed cost

• Decommissioning liabilities included in the cost of property, plant and equipment.

• Leases• Service

concession arrangements

• Borrowing costs

Business Combinatio

n • Business

combinations• Assets and

liabilities of subsidiaries, associates and joint ventures

• Investments in subsidiaries, jointly controlled entities and associates in separate financial statements

• Cumulative translation differences

Financial Instrument

s• Compound

financial instruments

• Designation of previously recognized financials instruments

• Fair value measurement of financial assets or financials liability at initial recognition

Others

• Employees benefits

• Share- based payment transactions

• Insurance contracts

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Preparation of the first IFRS financial statements - Mandatory Exceptions

Assets held for sale and discontin

ued operatio

ns

Non- Controlling interests

Hedge accounting

Derecognition of

financial assets and

financial liabilities

Estimates

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Reconciliations and disclosures• Equity from previous GAAP to IFRS at the transition

date and the end of the last period presented in the entity ‘s most recent financials statements under previous GAAP

• Net profit from previous GAAP to IFRS for the last period in the entity's most recent financial statements under previous GAAP.

• Other disclosures in the first IFRS financials statements

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Questions ?

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Key Learning Points

1. First time adoption is more of a business decision than accounting

2. Doing it right at the first time is very critical

3. Judiciously applying the optional exemptions will help reduce the GAAP difference

4. Practice with options will guide to refine decisions

5. Significant disclosure and reconciliation requirements

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Thanks !

CA Aditya SinghalM.com, FCA, DISA(ICAI)+91 99728 27300Aditya.singhal@icai.org

Join IFRS professional group for regular IFRS update:http://finance.groups.yahoo.com/group/IFRS-Professional/