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Kolkata | Mumbai | Delhi | Dhanbad | Bhubaneswar | Patna
SKA
Introduction to Ind ASPresentation of Financial Statement &Accounting of ppe and related Standards
Vivek AgarwalFCA, ACS, DISA (ICAI), B Com (Hons)
Partner
S K Agrawal & Cowww.skagrawal.co.in
ACAE CA Study Circle , EIRC - ICAI
28th Dec 2016
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“The more you learn, you
learn that you still have lot
to learn”
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1. Introduction
2. Financial Statement (IND AS 1)
3. Accounting Policies, Changes in Accounting
Estimates and Errors (IND AS 8)
4. Property, plant and equipment (IND AS 16)
5. Intangible assets (IND AS 38)
Agenda
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Introduction
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Setting the Context
MCA had issued a roadmap for implementation of Indian Accounting Standards (Ind
AS) converged with IFRS. Ind AS which has been made applicable in two phases
As per the roadmap, all subsidiaries, associates and joint ventures (if any) would also
be covered in Phase as per their parent
As part of Ind AS implementation, management should be able to select accounting
policies and process to achieve long term objective
Ind AS implementation is not just an accounting change but will have significant
impact on business, systems, processes, communication with various stakeholders etc
and need to be considered strategically
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2
3
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Progress in recent times
Previous plan – 1 April 2011
July 2014 – Finance Minister’s budget speech
January 2015 – press release on revised roadmap issued by the MCA
February 2015 – roadmap for transition to Ind AS notified and 39 Ind AS
issued
Carve-outs exist, but are manageable
March 2015 – CBDT notifies 10 Income Computation and Disclosure
Standards (ICDS) to address tax issues and then defers same for FY 2016-
17
Ind AS standards published in the official gazette. New standard on
revenue recognition (Ind AS 115) deferred and Ind AS 18 notified
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Unintended consequences of carve outs – Common control acquisitions
Early adoption of new financial instruments standard
Phased implementation – Banks, NBFCs and Insurance companies is not
covered in first phase as they are governed by respective statute
Conforming changes to other regulations – Indirect Taxes, Distributable
profits
Transition adjustments – Treatment of reserves
SEBI considerations – Quarterly/Half Yearly reporting, IPO’s & restatement
of 5 year data
MAT considerations
…but, some challenges remain
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Roadmap for Ind AS
MANDATORY IMPLEMENTATION OF IND-AS VOLUNTARY IMPLEMENTATION
KEY MATTERS
Listed Companies or
Companies in the process of
Listing and having net worth
of INR 500 Crores or more
(debt or equity, In or outside
India listing)
All other unlisted Companies
having net worth of INR 500
Crores or more
Holding, Subsidiary, Joint
venture or Associates of
companies covered above
Listed Companies or
Companies in the process of
Listing and having net worth
of less than INR 500 Crores
or more (debt or equity, In or
outside India listing)
All other unlisted Companies
having net worth of INR 250
Crores or more but less than
INR 500 Crores
Holding, Subsidiary, Joint
venture or Associates of
companies covered above
Once Ind AS is followed, it shall be followed for all subsequent years
Accounting period beginning
from 1 April 2016 with
comparatives for March 2016
Accounting period beginning
from 1 April 2017 with
comparatives for March 2017
Any company can voluntarily
adopt Ind AS from year
beginning 1 April 2015 with
comparative for 2014-15
Roadmap is released in a press
release, 39 IND AS notified
Banks, Insurance Companies
and NBFCs falls in phase as per
their statute, mainly from 2018-
19.
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Timeline for Transition to Ind AS – Phase 1
1/4/2015 31/3/2016 31/3/2017
Reporting PeriodTransition Date Comparative Period
• Opening
Balance
Sheet
Comparatives
(Quarterly/Annual):
• Balance Sheet
• Statement of
Profit & Loss
• Statement of
Changes in
Equity
Actuals
(Quarterly/Annual):
• Balance Sheet
• Statement of
Profit & Loss
• Statement of
Changes in
Equity
Financial Statements as per AS
Financial Statements as per Ind AS
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Timeline for Transition to Ind AS – Phase 2
1/4/2016 31/3/2017 31/3/2018
Reporting PeriodTransition Date Comparative Period
• Opening
Balance
Sheet
Comparatives
(Quarterly/Annual):
• Balance Sheet
• Statement of
Profit & Loss
• Statement of
Changes in
Equity
Actuals
(Quarterly/Annual):
• Balance Sheet
• Statement of
Profit & Loss
• Statement of
Changes in
Equity
Financial Statements as per AS
Financial Statements as per Ind AS
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Rule 4(2) of the Companies (Indian Accounting Standards) Rules, 2015, states as under:
“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)”.
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SEBI issued a circular on Nov 30, 2015 prescribing the formats for publishing financial under the
newly issued SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
Companies adopting Ind AS for the first time will need to ensure that comparatives filed in such
quarterly/annual financial results are also Ind AS compliant.
Disclosures regarding reconciliation of equity, total comprehensive income and explanation
relating to changes in its accounting policies and use of exemptions etc. is required in the
quarterly results for the period covered by its first Ind - AS Financial Statements
So, for June 2016 quarter, following will be required –
Financial Results - QE Jun 2015, QE Mar 2016 and QE Jun 2016
Financial Results - YE 2015 -16
Segmental reporting – for above periods
Following reconciliations between IGAAP and Ind AS (equity, income statement, CF)
Equity – as at 31st Mar 2015, 30 thJun 2015 and 31st Mar 2016
Income Statement - QE Jun 2015,
Income Statement – YE 2015-16
CF –narrative explanation for YE 2015 -16
Ind – AS – Listed Companies Quarterly Reporting
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Investors
Lenders
Suppliers
Customers
Government and other agencies
Employees
Public
Users of Financial Statements
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Should present fairly - faithful representation
Entity must:
– select and apply appropriate accounting policies keeping in mind
the GAAP hierarchy,
– present the information such that it provides, relevant, comparable
and understandable information, and
– provide additional disclosures where necessary.
Note disclosures are not a substitute for proper accounting
May depart from GAAP
Fair Presentation and Compliance with Ind AS
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Fundamental Accounting Assumptions
1. Going Concern
2. Consistency
3. Accrual
Selection of Accounting Policies
1. Prudence
2. Substance over form
3. Materiality
IND AS -1 – DISCLOSURE OF APs
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Omissions or misstatements of items are material if
they could, individually or collectively, influence the
economic decisions of users taken on the basis of
the financial statements. Materiality depends on the
size and nature of the omission or misstatement
judged in the surrounding circumstances. The size
or nature of the item, or a combination of both,
could be the determining factor.
Materiality
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Assessment made by management
Use going concern basis to prepare financial statements
unless:
Intention to liquidate
Intention to cease trading
No realistic alternative but to liquidate
If other basis is used, disclose:
Basis used
Reason for not using going concern basis
Disclose uncertainties which cast significant doubt upon
ability to continue as going concern
Going concern
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Materiality and aggregation
Separate presentation of material items
Aggregation of immaterial amounts except when required
by law
Applies to statement of profit and loss and balance sheet
Offsetting
Balance sheet
Never, unless required or permitted by another Ind AS
Statement of profit and loss
Never, unless:
Required or permitted by another Ind AS
Present on a net basis similar transactions, immaterial
gains or losses (e.g., foreign exchange gains and losses)
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Consistency of presentation
Unless change required by Ind AS or significant change in
operations or apparent from review of financial statements
that another presentation or classification would be more
appropriate
Accrual basis of accounting
Except for cash flow information
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Identify what is included
Must display the following
1. the name of the entity
2. whether the financial statements are consolidated or
not
3. the date of the balance sheet or period covered
4. the reporting currency and
5. the level of rounding (e.g. INR in lacs)
Presentation
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Comparative information
For at least one prior period except when Ind ASs permit or
require otherwise
Reclassification, disclose:
Nature and reason of reclassification
Amount of each item or items reclassified
If impracticable, disclose:
Reason for not reclassifying
The nature of adjustments that would have been made
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Balance Sheet
Statement of Profit and Loss
Statement of Changes in
Equity
Statement of Cash Flows
Notes
Summary of significant
accounting policies
Other explanatory
information
Comparative information in
respect of the preceding period
A balance sheet as at the
beginning of the earliest
comparative period (in certain
cases)
Components of Financial Statements
2 Balance Sheets
2 Profit and
Loss
2 Cash Flows
2 Changes in equity
And notes Components of
Financial
Statements
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Assets
Current
Non-current
Disposal Group
Liabilities
Current
Non-current
Disposal group
Equity
Share
capital
Reserves
Others
Structure and Content: Balance Sheet
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Requirement to present classified balance sheet:
Current and non-current assets and liabilities unless a presentation
based on liquidity provides information that is reliable and more
relevant
If not separately classified based on above exception, present assets
and liabilities in order of liquidity
For each item, disclose amounts expected to be recovered or settled
after more than 12 months; if combined with items expected to be
recovered or settled in no more than 12 months
Deferred tax assets/liabilities – always non-current
Long-term debt expected to be refinanced under an existing loan facility
is non-current; even if due within twelve months – this is only if the
entity has a discretion to roll-over or refinance the obligation and
expects to do so
Structure and Content: Balance Sheet
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Current and Non-Current Assets
An entity shall classify an asset as current when
An entity shall classify all other assets as non-current
it expects to realise the asset, or intends to sell or consume it, in its normal operating cycle;
it holds the asset primarily for the purpose of trading;
it expects to realise the asset within twelve months after the reporting period; or
the asset is cash or a cash equivalent (as per Ind AS 7) unless the asset is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period.
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Current and Non-Current Liabilities
An entity shall classify a liability as current when
An entity shall classify all other liabilities as non-current
it expects to settle the liability in its normal operatingcycle;
it holds the liability primarily for the purpose of trading;
the liability is due to be settled within twelve monthsafter the reporting period; or
it does not have an unconditional right to defersettlement of the liability for at least 12 months after thereporting period .
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Long-term debt considered as current if breach of covenant and can be
called
Liability becomes payable on demand
Post balance sheet cure of a covenant violation will not change the
classification to non-current
Non-current if twelve months grace period given by balance sheet
date
In respect of debt classified as current, no change in classification on
account of the following events
Post balance sheet debt refinancing on long-term basis
Post balance sheet cure of a covenant violation or provision of
grace period to rectify the defect
Structure and Content: Balance Sheet
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Requirement to present minimum line items on the face of balance sheet:
Property, plant and equipment
Investment property
Intangible assets
Financial assets
Investments accounted for using the equity method
Biological assets
Inventories
Trade and other receivables
Cash and cash equivalents
Assets classified as held for sale and assets included in disposal groups
classified as held for sale
Trade and other payables
Structure and Content: Balance Sheet
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Requirement to present minimum line items on the face of balance sheet
(Contd.)
Provisions
Financial liabilities
Current tax liabilities and assets
Deferred tax liabilities and assets
Non-controlling interests, presented within equity
Issued capital and reserves attributable to the equity holders of the
parent
Assets classified as held for sale and assets included in disposal group
classified as held for sale
Liabilities included in disposal group classified as held for sale
Structure and Content: Balance Sheet
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Additional line items may be needed when such a presentation is
relevant to an understanding of the entity’s financial position
Separate line items for assets measured on different basis
Option to disclose further sub-classifications of assets either on the
face of balance sheet or in the notes
Structure and Content: Balance Sheet
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Profit and Loss (PL)
Total of income less expenses, excluding the components of other comprehensive income.
Other Comprehensive Income (OCI)
Comprises items of income and expense (including reclassification adjustments*) that are not recognised in PL as required or permitted by other Ind ASs.
Total Comprehensive Income
Change in equity during a period resulting from transactions and other events, other than those changes resulting from transactions with owners in their capacity as owners.
These are amounts reclassified to PL in the current period that were
recognised in OCI in the current or previous periods.
Structure and Content: Statement of Profit and Loss
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Requirement to present minimum line items in the Statement of Profit and
Loss:
Revenue (presenting separately interest revenue calculated using the
effective interest method)
Gains and losses arising from the derecognition of financial assets
measured at amortised cost;
Finance costs
Impairment losses (including reversals of impairment losses or
impairment gains)
Share of the profit or loss of associates and joint ventures accounted for
using the equity method
If a financial asset is reclassified out of the amortised cost measurement
category so that it is measured at fair value through profit or loss, any
gain or loss arising from a difference between the previous amortised
cost of the financial asset and its fair value at the reclassification date
Structure and Content: Statement of Profit and Loss
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Requirement to present minimum line items in the Statement of Profit and
Loss (continued):
If a financial asset is reclassified out of the fair value through other
comprehensive income measurement category so that it is measured at
fair value through profit or loss, any cumulative gain or loss previously
recognised in other comprehensive income that is reclassified to profit or
loss
Share of the profit or loss of associates and joint ventures accounted for
using the equity method
Tax expense
A single amount comprising the total of
The post-tax profit or loss of discontinued operations, and
The post-tax gain or loss recognised on the disposal of the assets or
disposal group(s) constituting the discontinued operation
Structure and Content: Statement of Profit and Loss
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Each component of other comprehensive income classified
by nature (including share of OCI of associates and JV
accounted for using the equity method)
Total Comprehensive Income
Allocation of profit or loss for the period must be presented
on the face of statement of profit and loss as
Profit or loss attributable to non-controlling interests;
Profit or loss attributable to owners of the parent
Additional line items/subtotals may be needed to give a true
and fair the financial performance
Extraordinary items - Prohibited
Structure and Content: Statement of Profit and Loss
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Need to disclose following items separately, if material:
Write-down of inventories to net realisable value as well as
reversal of such a write-down
Write-down of PPE to recoverable amount as well as reversal of
such a write-down
Restructuring provisions as well as reversal of such a provision
Disposals of items of property, plant and equipment
Disposal of investments
Discontinued operations
Litigation settlements
Other reversal of provisions
Structure and Content: Statement of Profit and Loss
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Requirement to present an analysis of expenses
using a classification based on the nature of
expense method – functional classification of
expenses prohibited
Disclose dividends per share, declared or
proposed
Structure and Content: Statement of Profit and Loss
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Presentation of Profit and Loss (based on the nature of expense method)
Revenue
Other income
X
X
Changes in inventories of finished goods and work
in progress
Raw materials and consumable used
Employee benefit expense
Depreciation and amortisation expense
Other expenses
Total expense
X
X
X
X
X
(X)
Accounting Profit
Tax expense
Profit for the period
X
(X)
X
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Nature of Expense presentation
Revenue X
Other income X
Changes in inventories of finished goods and work in progress X
Raw materials and consumables used X
Employee benefits expense X
Depreciation and amortization expense X
Other expenses X
Total expenses (X)
Profit before tax X
Presentation of Income Statements
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An entity shall disclose the amount of income tax relating to
each component of other comprehensive income, including
reclassification adjustments, either in the statement of profit
and loss or in the notes.
An entity may present components of other comprehensive
income either:
net of related tax effects, or
before related tax effects with one amount shown for the
aggregate amount of income tax relating to those
components.
An entity shall disclose reclassification adjustments relating
to components of other comprehensive income.
Structure and Content: Other Comprehensive Income
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1. changes in the revaluation surplus for property, plant
and equipment and intangible assets,
2. certain actuarial gains/losses on defined benefit
plans,
3. gains/losses arising on translation of financial
statements of foreign operations,
4. gains/losses arising from re-measuring available for
sale securities and
5. gains/losses on cash flow hedges.
Structure and Content: Other Comprehensive Income
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Structure and Content: Other Comprehensive Income
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Changes in Equity
Share capital
Reserves
Other components
of equity
Statement of Changes in Equity (SOCIE)
Other
Comprehensive
Income
Directly in
equity
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This statement presents the following:
1. total comprehensive income
2. for each component of equity, the effects of
retrospective application/restatement
3. reconciliation between the carrying amount of
each component of equity at the beginning and
end of the period.
Structure and Content: Statement of Changes in Equity
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Notes:
– augment the basic statements
– include information about the way they have been
prepared
– provide additional descriptive and supportive
information
– should be cross-referenced
– accounting policies
– key sources of estimation uncertainty
– nature and structure of an entity’s capital and how
it is managed
Structure and Content: Statement of Changes in Equity
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Statement of Changes in Equity includes the following :
a. total comprehensive income for the period, showing separately the total
amounts attributable to owners of the parent and to non-controlling
interests;
b. for each component of equity, the effects of retrospective application or
retrospective restatement recognised in accordance with Ind AS 8;
c. for each component of equity, a reconciliation between the carrying
amount at the beginning and the end of the period, separately disclosing
each changes resulting from:
i. profit or loss;
ii. each item of other comprehensive income;
iii. transactions with owners in their capacity as owners, showing
separately contributions by and distributions to owners and changes
in ownership interests in subsidiaries that do not result in a loss of
control; and
iv. any item recognised directly in equity such as amount recognised
directly in equity as capital reserve with paragraph 36A of Ind AS 103.
Structure and Content: Statement of Changes in Equity
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Option to present the following either on the face of statement
of changes in equity or in the notes:
For each component of equity, an analysis of other
comprehensive income by item
The amount of dividends recognised as distributions to
owners during the period, and the related amount of
dividends per share.
Structure and Content: Statement of Changes in Equity
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Statement of Changes in Equity
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Basis of preparation of financial statements
Accounting policies
Disclosures required by Ind ASs
Capital management disclosure
Additional information necessary presentation of ‘true
and fair view’
‘Systematic manner’ – cross referenced
Structure and Content: Notes
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Requirement to disclose the judgments, apart from those
involving estimations, that management has made in the
process of applying the entity’s accounting policies and that
have the most significant effect on the amounts recognised in
the financial statements
Critical Accounting Judgments
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Requirement to disclose key assumptions about the future and
other sources of estimation uncertainty that have a significant
risk of causing a material adjustment to the carrying amounts
of assets and liabilities in the next year.
Disclosures may include:
Nature of assumption or other estimation uncertainty
Carrying amount at the end of the reporting period
Sensitivity analysis
Expected resolution of an uncertainty and the range of
reasonably possible outcomes within the next financial year
Changes, if any, made to the assumptions and the effect on
reported amounts
Key Assumptions/Estimation Uncertainty
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Ind AS 1 includes guidance on the meaning of presenting a ‘true and fair
view’ and emphasises that the application of Ind AS is presumed to
result in financial statements that give a ‘true and fair view’.
Ind AS 1 requires an entity to present assets and liabilities in order of
liquidity only when a liquidity presentation provides information that is
reliable and is more relevant than a current/non-current presentation
Presentation of minimum line items on the face of balance sheet and
statement of profit and loss is required
Ind AS 1 allows presentation of additional line items/subtotals if they are
needed to present a ‘true and fair view’ of the financial position or
financial performance
Key Learning Points
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Expenses are presented in the statement of profit and loss by nature-
wise classification
Ind AS 1 requires disclosure, on the face of the statement of changes in
equity, of total income and expenses for the period (including amounts
recognised directly in equity), showing separately the amounts
attributable to equity holders of the parent and to non-controlling interests
Ind AS 1 also requires presentation of critical accounting judgments and
estimates
Key Learning Points
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Ind AS 8
Accounting Policies,
Changes in Accounting
Estimates and Errors
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Accounting Policies
Changes in Accounting
Policies
Accounting Estimates
Changes in Accounting
Estimates
Prior Period Errors
Scope
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Accounting policies are the specific principles, bases, conventions, rules and
practices applied in preparing and presenting financial statements.
Principles are the guidelines which must be followed when reporting financial
transactions.
Bases are the methods in which accounting principles may be applied
to financial transactions. Eg. Method used to depreciate assets.
Conventions consists of practices that arise from the practical application
of accounting principles and is designed to help accountants overcome practical
problems that arise while reporting financial transactions.
Rules are the golden rules of debit and credit of accounting.
Practices are the ways by which its accounting policies are implemented and
adhered to on a routine basis.
Accounting Policies
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When an Ind AS specifically applies to a transaction, the accounting
policy applied to that transaction shall be determined by applying the
respective Ind AS, else management shall use its judgement in developing
and applying an accounting policy that results in information that is relevant
and reliable.
In making the judgement, management shall refer to:
a) the definitions, recognition criteria and measurement concepts for assets,
liabilities, income and expenses in the Framework;
b) Ind AS on similar and related issues;
c) Other financial reporting standards like IFRS, US GAAP.
Eg.- Accounting of spare parts, stand-by equipment and service equipment,
Accounting of De-merger.
Accounting policies should be applied consistently.
Accounting Policies
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An Accounting policy can be changed only if the change :
a) is required by an Ind AS (Mandatory change); or
b) results in providing reliable and more relevant information about the
transaction on the entity’s financial statement (Voluntary change).
Accounting treatment of Changes in accounting policy:
If transitional provisions are mentioned in the respective Ind AS, then apply
those provisions, else apply the change retrospectively unless impracticable.
Retrospective means adjust the opening balance of each affected
component of equity for the earliest prior period presented and the
comparative amounts disclosed for each prior period presented as if the new
accounting policy had always been applied.
Change in Accounting Policies
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In accordance with the transitional provisions therein.
If no Transitional Provision OR if
accounting policy is changed voluntarily
Changes shall be applied
retrospectively
How to Apply the Changes ?
Change in Accounting Policies
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Inventory as per old Accounting Policy Inventories are valued at Cost.
Item Qty Cost ValueA 10 120 1200B 20 225 4500C 30 200 6000
11700
Inventory as per new Accounting Policy Inventories are valued at lower of Cost and Net
Realizable Value (NRV).Item Qty Cost NRV Lower Value
A 10 120 125 120 1200B 20 225 220 220 4400C 30 200 150 150 4500
10100
Eg. of change in accounting policy
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Accounting estimates are the estimations used by management to recognize
amounts in the financial statements where precise values cannot be
determined.
A change in accounting estimate is an adjustment of the carrying amount
of an asset or a liability, or the amount of the periodic consumption of an
asset (depreciation), that results from the assessment of the present status of,
and expected future benefits and obligations associated with, assets and
liabilities.
Changes in accounting estimates result from new information or new
developments and accordingly are not corrections of errors.
Changes in Accounting Estimates
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Accounting treatment of Changes in accounting estimate:
The effects of change in accounting estimate is applied prospectively i.e.
from the date of the change in estimate by including it in profit or loss
in:
a) The period of the change, if the change affects that period only; or
b) The period of the change and future periods, if the change affects both.
If change in accounting estimate relates to items of asset, liability or
equity, it shall be recognised by adjusting the carrying amount of the
related item of asset, liability or equity in the period of the change.
Eg:- Change in amount of bad debts or change in the useful life of
depreciable assets.
Changes in Accounting Estimates
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A change in the measurement basis applied is a change in an accounting
policy, not a change in an accounting estimate.
When it is difficult to distinguish between change in accounting policy and
accounting estimate, the change is treated as a change in accounting
estimate.
Particulars Accounting Policies Accounting Estimates
What it is? Principles, bases, conventions,
rules and practices.
Amount / Patterns
Examples: Change from historical cost to
realisable value.
Change in the useful life of
depreciable asset.
Accounting
treatment when
there is a change in
Retrospectively Prospectively
Accounting Policies Versus Accounting Estimates
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Prior period errors are omissions from, and misstatements in, the entity’s
financial statements for one or more prior periods arising from a failure to use,
or misuse of, reliable information that:
a) was available when financial statement for those periods were approved for
issue, and
b) could reasonably be expected to have been obtained and taken into account
in the preparation and presentation of those financial statement.
Such errors include -
a) the effects of mathematical mistakes,
b) mistakes in applying accounting policies,
c) oversights or misinterpretations of facts, and
d) fraud.
Eg:- Forget to include borrowing cost in the cost of machinery.
Prior Period Errors
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Accounting treatment of Prior period errors:
The entity must correct material prior period errors retrospectively in
the first set of financial statements approved for issue after their
discovery by restating:
a) the comparative amounts for the prior period presented in which the
error occurred; or
b) the opening balance of assets, liabilities and equity for the earliest
period presented, if the error occurred before the earliest prior period
presented
unless impracticable.
Immaterial prior period error can be corrected in the financial
statement of the period in which it is discovered.
Prior Period Errors
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ParticularsChange in Accounting
estimatesPrior Period Errors
When there isResult from new information
or new developments.
Result from failure to use or
misuse of available
information.
Examples:Change in the useful life of
depreciable asset.
Forget to include borrowing
cost in the cost of machiney.
Accounting
treatment when
there is
Prospectively Retrospectively
CHANGE IN Accounting ESTIMATEs Versus PRIOR PERIOD ERRORS
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Non-application of new accounting pronouncements that havebeen issued but are not yet effective as at the end of thereporting period is disclosed. In such a case, known or reasonablyestimable information relevant to assessing the possible impactthat application of the new accounting pronouncements will haveon the financial statements on initial application is also disclosed.
NEW ACCOUNTING PRONOUNCEMENTS
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Accounting
Policy
Accounting
Estimate
Prior
Period
Error
Prospectively
Retrospectively Retrospectively
Q. Does restatement of prior period figures amounts to voluntary revision of
financial statements?
A. No, as entity is restating prior period figures in the current period financial
statement so it does not amounts to voluntary revision of financial statements.
Summary
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Sr. No. Particulars Ind AS / IFRS AS
1 Accounting Policy -
Definition
Wider and includes bases, conventions,
rules and practices.
Restricted to accounting principles
and methods to apply accounting
principles.
2 Accounting Policy -
SelectionWhen an Ind AS / IFRS specifically
applies to a transaction, the accounting
policy applied to that transaction shall be
determined by applying the respective Ind
AS / IFRS, else management shall use its
judgement in developing and applying an
accounting policy that results in
information that is relevant and reliable.
The major considerations governing
the selection and application of
accounting policies are:-
a. Prudence
b. Substance over Form
c. Materiality
3 Change in
Accounting Policy -
Criteria
An Accounting policy can be changed
only if the change :
a) is required by an Ind AS / IFRS; or
b) results in providing reliable and more
relevant information about the transaction
on the entity’s financial statement.
An Accounting policy can be
changed only if the change :
a) is required by an AS; or
b) is required by statute; or
c) results in more appropriate
presentation of the entity’s financial
statement.
Comparison
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Sr.
No.Particulars Ind AS / IFRS AS
4 Change in Accounting Policy -
Accounting treatment in
absence of Transitional
Provisions
Rectrospectively unless
impracticable.
Does not specify.
5 Change in Accounting Estimate
- Definition
Very clear definition. Not in such clear terms.
6 Prior period errors - Definition Very clear and wide
definition.
Not in such clear terms.
7 Prior period errors include
frauds
Specifically mentioned. Not specifically
mentioned.
8 Prior period errors -
Accounting treatment
Retrospectively unless
impracticable.
Prospectively.
9 Prior period errors – Seperately
reported in current year Profit
and Loss
Seperate disclosure not
required.
Seperate disclosure
required.
Comparison
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Presentation of Financial Statement Design of Building
Accounting policies Foundation of Building
Framework Boundary of Building
Respective standards Floors of Building
Principles of respective standards Flats at respective floor of Building
Building will be strong when its foundation is strong.
Similarly Financial statement will be strong when its accounting policies are
strong.
Here, Financial Statement will be strong means that Financial Statement
comprises of Accounting Policies which are transparent, crystal clear and help
users in making economic decisions.
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Indian GAAP Vs. Ind AS
Particulars Indian GAAP IND- ASCost of acquisition Transaction value is considered as
the purchase cost of fixed assets.Amount of cash or cash equivalents paid or the fair
value of other consideration given to acquire an asset. The concept of fair value of consideration would have
implications in cases of deferred payment arrangements.
Asset retirement
obligationNo specific guidelines To be included as part of initial cost of asset and a
liability equivalent to the present value of such costs would need to be recognised.
Foreign exchange
differenceFollowing the notification issued by
MCA on 31 March 2009, several companies have elected to either
capitalise foreign exchange differences or accumulate exchange
differences in FCMITD
Ind AS does not permit the capitalisation of foreign exchange differences. However, in certain cases, exchange differences may be treated as part of
borrowing costs and accordingly be capitalised as additional interest costs.
Rate of depreciation-
reviewNo specific requirement Ind AS requires the residual value, useful life estimates
and depreciation method to be reviewed at least at the end of each financial year.
Method of
DepreciationChoice with companies to follow
either the SLM or WDVInd AS requires that the depreciation needs to reflect
the pattern in which the asset’s future economic benefits are expected to be consumed by the company.
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Indian GAAP Vs. Ind AS
Particulars Indian GAAP IND- AS
Substantial period of time
definition
A period of 12 months is ordinarily considered as a substantial period of time, unless a shorter or
longer period can be justified.
No bright line rules for determining what constitutes ‘a substantial period of time’.
Interest expensesContractual interest expense is considered as a
part of borrowing costs
Under Ind AS, the amount of interest expense to be included as borrowing costs is based on the
effectiveinterest rate method.
Borrowing rate
Borrowing costs are capitalised based on company level borrowings and no separate adjustments are made to compute group
borrowing rate.
Ind AS requires that the consolidated group’s average borrowing rate needs to be considered
for capitalisation of general borrowing costs.
Component Accounting
Recommendatory but not mandatoryInd AS requires that components, which are significant and have a significantly different useful life, should be depreciated separately
RevaluationIf revaluation does not cover all assets, selection
of asset to be revalued to be made on a systematic basis.
Choice of cost or revaluation method is applied to an entire class of PP&E.
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Tangible Items
AND
Held for Use in
• Production
• Supply• Rental• Administration
Expected to be used for more than one period
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Recognition
Start Future economic benefits will flow to the entity
Used singly or in combination to produce goods or services
Exchanged for other assets
Used to settle a liability
Distributed to the owners of the entity
Cost measured reliably
Recognition
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Measurement at Initial Recognition
Directly attributable
cost
Cost of dismantling and
restoring site
Purchase price
• Cost of employee benefit
• Costs of site preparation
• Initial delivery and handling cost
• Installation and handling cost
• Professional fees
• Import duties• Non- refundable
purchase taxes• Deducting trade
discounts• Deducting rebates
Appendix AChanges in Existing Decommissioning,
Restoration and Similar Liabilities
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Measurement : Spare parts and Replacement costs
Spare parts and servicing equipment are usually carried as inventory and recognised in profit
or loss as consumed except:
Major spare parts and stand-by equipment with expected use during more than one
period
Spare parts and servicing equipment which can only be used in connection with an item
of PPE
Cost of new component purchased for replacement will be capitalized and depreciated over
the period not exceeding the useful life of the principal asset (Refer component accounting
in next slide) .
Indian GAAP
Replacements which leads a capital asset to its full productive capacity or a contribution
after damage, accident, or prolonged use, without increase in its previously estimated
service life or productive capacity.
Should be charged to profit & loss as and when incurred.
Improvements or betterments leading to increase in estimated service life or productive
capacity.
Should be capitalized
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Measurement of Subsequent Costs
SUBSEQUENT COSTS
Spare Parts & Servicing Equipment
Day to day servicing
Replacement at regular intervals / nonrecurring replacement
Inspection Cost
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Cessation of Capitalisation
Cost incurred while item yet
to be used
Initial Operating
loss
Relocating / reorganizing
cost
Once asset is in
location and
condition to be used
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Measurement after Recognition
Cost ModelRevaluation
Model
Cost – (Accumulated Depreciation +
Impairment loss)
Current value –(Accumulated Depreciation +
Impairment loss)
or
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Revaluation Model
ABC Ltd. has the following assets:
Assets A B C
Carrying Amount 20000 24000 30000
Fair Value 24000 30000 16000
If the company decides to revalue A and B, but not C, the position will be as:
Assets A B C Total
Carrying Amount (revaluation of entire class not done)
24000 30000 30000 84000
Carrying Amount (entire class revalued)
24000 30000 16000 70000
Entire class to be revalued
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Revaluation Model
The gross carrying amount is adjusted in a manner that is consistent with the revaluation of the carrying amount of the asset; or
The accumulated depreciation is eliminated against the gross carrying amount of the asset
Carrying amount of Revalued Asset
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Restate GB & AD Reduce AD
Cost 1 2
Gross Block (GB)Accumulated depreciation (AD)
10020
11022
10012
Carrying amount 80 88 88
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Revaluation Model : 6 Treatments
Cost of Asset 25,000 Position at the end of 4th year
Life (in years) 10 Gross Block 25,000
Depreciation method SLM Acc. Dep. (2,500 x 4) 10,000
Income Tax rate 30% Carrying amount (CA) 15,000
Asset revalued at 21,000. The 6 effects are as follows:
CA of asset increases (21,000-15000) by
6,000
BS
Revaluation Surplus (RS) created (6000 x 70%) by
4,200
OCI
Deferred tax liability created (6000 x 30%) by
1,800
BS
Depreciation expense increases (6,000/6) by
1,000
PL
Income tax expenses reduces(1000 x 30%) by
300
PL
Amount from RS transferred to Retained Earning (1,000 x 70%)
700
CIE
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Component accounting
Cost of each significant item of PPE to be recognised separately which may not
have different useful life
Item of PPE means parts having a cost that is significant to total cost
Identification of such parts required to recognise replacement cost, if required
Example :
Ship costs 150, useful life 10 years,
Estimated docking cost 15, planned after 3 years
Component 1
Cost: 135
Life: 10 years
Component 2
Cost: 15
Life: 3 years
Capitalise as
incurred
Total Ship
Cost 150
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Componentization- key considerations
Componentization
Materiality/
Significant
components
Useful life of
components
Replacement
costs
Major inspection/
Overhaul
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Componentization- key considerations : Materiality/Significant components
Identification of material/ significant components separately may involve complex
judgement. Item may not be material in a particular year become so in later years.
Materiality is a matter of management and needs to be decided on the facts of
each case. Normally, a component having original cost
equal to or less than 5% of the original cost - Not material
equal to 25% of the original cost - material
As per ICAI, the Company may consider 10% of original cost of asset as threshold
to determine whether a component is material/significant.
Consider impact on
retained earnings
current year profit or loss
future profit or loss
to decide materiality. Component with material impact will require separate
identification.
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Componentization- key considerations :Useful life of components
Each significant component of the asset having useful life, which is different from the useful
life of the remaining asset, is depreciated separately.
*higher useful life for a component can be used only when management intends to use the
component even after expiry of useful life for the principal asset.
Illustration
Useful life of an asset under Schedule II is 10 years. The management has estimated that
useful life of principal asset is 10 years. If a component of asset has useful life of 8 years,
AS 6 requires the company to depreciate the component using 8 year life only.
If the component has 12 year life, the company has an option to either depreciate the
component using either 10 year life as prescribed in the Schedule II or over its estimated
useful life of 12 years, with appropriate justification.
However, higher useful life for the component can be used only when management intends
to use the component even after expiry of useful life for the principal asset.
Useful life of
component < Useful life of principal asset - Consider lower life
Management’s
estimate of useful life < Statute - Consider lower life
Useful life of the
component > Useful life of the principal asset -
Option to use either the
higher or lower useful life*
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Componentization- key considerations Replacement costs
Currently, replacement costs are expensed off
Under component accounting, companies will capitalize these costs as a
separate component of the asset, with consequent expensing of net carrying
value of the replaced component. i.e. derecognised previous part.
If it is not practicable to determine carrying amount of the replaced component,
it may use the cost of the replacement as an indication of what the cost of the
replaced part was at the time it was acquired or constructed.
Under component accounting also, the costs of the day-to-day servicing of the
item are not recognised in the carrying amount of an item of fixed asset. These
costs are expensed in the statement of profit and loss as incurred.
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Componentization- key considerations : Major inspection/overhaul
Under Indian GAAP, no specific guidance is available on component
accounting, particularly, major inspection/ overhaul accounting. Ind AS
specified some guidelines for the same.
For assets requiring major inspection/ overhaul on a periodic basis,
companies have an option of either:
identifying major inspection/ overhaul as a separate component, or
treating it as repair expense.
Note:
Options selected should be applied consistently.
If a company selects the first option, major inspection/ overhaul will
constitute separate identifiable part which is aggregated with other parts
having similar life for depreciation purposes. In other case, it would be
expensed through profit and loss account.
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Componentization- key considerations : Major inspection/overhaul
Option 1 – Identifying major inspection/overhaul as a separate component
As per Ind-AS 16, major inspection/ overhaul is treated as a separate part, regardless of
whether any physical parts of the asset are replaced.
On purchase a new asset, it is received after major inspected/ overhaul by the manufacturer.
Hence, it is identified and depreciated separately.
If major inspection/ overhaul has been identified at the time of original purchase, there is no
issue in application of this principle.
However, if it had not previously been identified, the recognition and de-recognition principles
will apply. In such a case, estimated cost of a future similar inspection/ overhaul to be used as
an indication of the cost of the existing inspection/ overhaul component to be derecognized
after considering the depreciation impact.
Option 2 – Treating major inspection/overhaul as a repair expense
It may be argued that under AS 10 approach, all repair expenditure (including major inspection/
overhaul) need to be charged to P&L as incurred. Though schedule II mandates component
accounting, it does not state that application of component accounting is based on Ind-AS 16
principles.
Hence, AS 10 applies for repair expenditure (including major inspection / overhaul).
Under this option, the application of component accounting is restricted only to physical parts. Neither
on initial recognition nor subsequently, the company identifies major inspection/ overhaul as separate
component. Rather, any expense on major inspection/ overhaul is charged to P&L as incurred.
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Example 1 - Furnace
A new furnace was installed on 1 January 2008 in a heat treatment plant.
Total expenditure on the furnace amounted to Rs. 5 million.
The furnace’s expected useful life, given the nature of the plant’s production, is
estimated to be 20 years, which is in accordance with the useful lives normally
recommended by technical experts for this type of asset.
Various components identified at the time of capital expenditure are:
Useful life Amt
1. Hearth brickwork, vault, walls 6 Yrs 1500000
2. Heating system: burners, pipe work, lever, ventilators 10 Yrs 60000
3. Control mechanism, cervo motors, mechanism for controlling the
temperature and operating parameters 5 Yrs 300000
4.Visits and overhauls by an external maintenance company every
two years of the mechanical sections, input and output feeds, rollers,
etc.
2 Yrs 200000
Furnace (main element and others) 20 Yrs 2400000
Total capital expenditure 500000
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Example 4: Components of a Building
Roof covering
Fire protection
system
Elevators
Plumbing
system
Floor
coverings
Electrical and
lightning
system
HVAC system
Interior
finishing
Building (Main
Building Shell)
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Hull
Keel
Engine
Navigation
system
Other fit out
assets
Major overhaul/
inspections
Ship
Example 4: Components of a Ship
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Companies are required to determine the values of all major components of
the assets.
Significant change in accounting for replacement costs. Currently companies
expense such costs in the year of incurrence. Under the component accounting,
companies will capitalize these costs, with consequent expensing of net carrying
value of the replaced part.
Major inspection/overhaul costs can be capitalized in certain cases and
depreciated over the period during which the benefits of such costs are utilized
e.g. 3 years or 5 years as the case may be.
Componentization will involve significant effort in capital intensive industries
to determine the various components in production lines and their separate
useful lives.
Significant changes are required in the processes including the ERP and
other IT software for identification of components and computation of
depreciation accordingly.
Key impact of componentization
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Componentization approach
The key steps, which can be followed while identifying the components of plant
& machinery and building are as follows:
Review of asset entries in the fixed assets register;
Review of componentisation of major fixed assets based on certain
threshold limits (e.g. INR 10 Lacs) so as to ensure adequate coverage of
the total gross block;
The componentization to be carried out in certain cases where :
The gross block of the major components of major parent assets make
up for at least 10% of the gross block of the respective major parent
asset; and
The lives of major component parts are materially different from the
useful lives considered for the respective major parent asset.
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Componentization approach
To identify possible components (including replacement, major inspection), the
company should obtain inputs from:
Vendor from which particular machinery has been purchased
Technical Engineer/ Production In charge/Maintenance head
Going through EPC contracts and O & M contracts to identify major components
Parameters to be considered for estimating useful lives:
Building
Useful lives as given in Schedule II of Companies Act 2013
Usage – in use / not in use
Alternative use of Building
State of repairs and maintenance policy of the company
Historical trends of decommissioning
Company’s plan for future usage
Benchmarking with best/global industry practice being followed
Plant and Machinery (In addition to the points as specified above):
Nature & type of asset
Number of shifts working/Continuous process
Supplier recommended lives
Refurbishment status
Technological obsolescence / product obsolescence etc.
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Site restoration and decommissioning obligations
Recognition
Recognised at the time of initial recognition
of PPE
Discounting Accounting
Measurement
Requires significant judgment due to:
Dependency on scale of
operations,
Environmental damage caused,
Uncertainty regarding timing of
decommissioning, Costs which may
be directly attributable to
decommissioning etc.
Where the effect of the time
value of
money is material, the amount
of a provision shall be at discounted value.
The periodic unwinding of the discount
shall be recognised in profit or loss as a
finance cost as it occurs. The same cannot
be capitalised under Ind AS 23.
The associated decommissioning
costs should also be capitalised
It should form part of the cost of the
assets acquired or constructed
It may also be necessary to
recognise a further
decommissioning provision during
the production phase
Site-restoration
and
Decommissioning
Obligations
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Site restoration and decommissioning obligations - Case study
The facts relevant to well are summarized below:
Decommissioning costs : INR 14000
Discount rate : 10%
Net present value : INR 800
Period : 30
Show accounting treatment of site restoration and decommissioning obligation.
Response:
Management should include INR 800 in the carrying amount of the asset at the
time of installation and corresponding provision with equivalent amount.
Each year an adjustment is made for the amount of borrowing cost; calculated
as the current balance of provision multiplied by the discount rate Year 1 : INR 800*10% = INR 80
Year 2 : INR (800 + 80)*10% = INR 88
Similarly for the rest of the years
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Response (Contd.):
Site restoration and decommissioning obligations- Case study (Contd.)
Year Opening balance Provisions Interest @ 10% Closing Balance Provision
1 800 80 880
2 880 88 968
….
30 12727 1273 14000
Entries:
Recognition of decommissioning costs while recognising asset
PPE-Dr 800
Provisions decommissioning-Cr 800
Year 1 for interest
Interest expense –Dr 80
Provisions decommissioning-Cr 80
Year 30 for interest
Interest expense – Dr 1273
Provisions decommissioning-Cr 1273
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Depreciation
Each part of an item of PPE with a cost that is significant in relation to thetotal cost of the item shall be depreciated separately.
The depreciation charge for each period shall be recognised in PLunless it is included in the carrying amount of another asset.
The depreciable amount of an asset shall be allocated on a systematicbasis over its useful life.
The depreciation method (SLM, DBM, UOPM) used shall reflect the patternat which the asset’s future economic benefits are expected to be consumedby the entity.
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FV > CA – but as long as
Residual value < CAResidual Value => CA
Asset unused/available for
sale
Depreciation charged
Depreciation zero
Depreciation ceases
Recognition of Depreciation
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Derecognition
No future economic benefits are expected
from its use or disposal
On disposal
Gain not classified as Revenue
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Example – Profit before depreciation 100 per year. Asset 100. Income Tax rate 40%. Depreciation (SLM) –Financial 20%, Tax 25%. Fair value 75 at the end of year 2.
Year 1 2 3 4 5
Profit before depreciationDepreciation
10020
10020
10025
10025
10025
Accounting ProfitTax expense –
Current taxDeferred tax expenseDeferred tax liability
80
302 32
80
302 32
75
3030
75
3030
75
40
(10) 30
Profit for the periodOther Comprehensive IncomeRevaluation surplus Less: Deferred tax liability
48 48
15(6) 9
45 45 45
Total comprehensive income 48 57 45 45 45
Year 2 3 4 5
Revaluation surplus (net of tax)Balance bfCreatedTransferred to retained earnings
–9–
9–
(3)
6–
(3)
3–
(3)
Balance cf 9 6 3 –
Statement of Profit and Loss and Other Comprehensive Income
Statement of Changes in Equity
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Intangible asset
An identifiable non-monetaryasset without physical substance
Can be contractual/non-contractual
Obtain their worth from the rights and benefits approved to
their owner/creator
Derive value from their economic
condition and do not have a fixed
exchange value for money
May be confined ina physical form
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ConditionsAn intangible asset should meet the following conditions –
is separable (can be sold without disposing of the business as a
whole)or
arises from contractual or other legal rights, irrespective of
separability
controlled by an entity
enjoys the future economic benefits
can restrict the access of other entities to those benefits
identifiable
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Intangible Asset - Characteristics
Characteristics of an intangible asset:
identifiable non-monetary asset without physical substance.
Control
Existence of future economic benefits
Examples are brands, trademarks and customer related intangibles
An asset is identifiable if it is either:
a. is separable, ie is capable of being separated or divided from the entity and sold,
transferred, licensed, rented or exchanged, either individually or together with a
related contract, identifiable asset or liability, regardless of whether the entity intends
to do so; or
b. arises from contractual or other legal rights, regardless of whether those rights are
transferable or separable from the entity or from other rights and obligations.
An entity controls an asset if the entity has the power to obtain the future economic
benefits flowing from the underlying resource and to restrict the access of others to
those benefits. The capacity of an entity to control the future economic benefits from
an intangible asset would normally stem from legal rights that are enforceable in a
court of law.
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Intangible Asset - Characteristics
The future economic benefits flowing from an intangible asset may include revenue
from the sale of products or services, cost savings, or other benefits resulting from the
use of the asset by the entity. For example, the use of intellectual property in a
production process may reduce future production costs rather than increase future
revenues.
Not all the items meet the definition of an intangible asset, i.e. identifiability, control over
a resource and existence of future economic benefits.
If an item within the scope of this Standard does not meet the definition of an intangible
asset, expenditure to acquire it or generate it internally is recognised as an expense
when it is incurred. However, if the item is acquired in a business combination, it forms
part of the goodwill recognised at the acquisition date. Goodwill is not amortized but
tested for impairment atleast annually.
Under IGAAP goodwill
is amortized over a
period not exceeding 5
years
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Recognition criteriaAn intangible asset is recognised when both the following criteria are
satisfied –
It is probable that future economic benefits will flow
The cost can be measured reliably
Sale of products or services or cost savings/other benefits
Cost of purchasing or developing the asset
the definition of an intangible asset
the recognition criteria of an asset
An intangible asset shall be measured initially at cost
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Initial measurement
Initially measured at cost
Separate
acquisition
Cost includes
purchase price,
duties and taxes,
after deducting
trade discounts and
rebates and
includes any
directly attributable
cost of preparing
the asset for its
intended use.
Acquisition as part
of a Business
combination
a. Cost is the fair
value on date of
acquisition
b. Probability
recognition
criterion is
presumed to be
satisfied
c. Reliable
measurement
presumed to be
satisfied
Acquisition by
government grant
a. Acquired free
of charge or for
nominal
consideration
by way of a
government
grant.
b. Recorded at
either fair value
or cost which
may be
nominal
Exchange of
assets
a. Cost is the fair
value except
when exchange
transaction has
no commercial
substance or
the fair value of
either the asset
received/ asset
given up is not
reliably
measurable
Internally
generated
intangible asset
Cost is the sum
of expenditure
incurred from the
date when the
intangible
asset first meets
the recognition
criteria.
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Internally generated Intangible assets:
Internally generated goodwill shall not be recognised as an asset.
It is sometimes difficult to assess whether an internally generated intangible asset
qualifies for recognition because of problems in:
a. identifying whether and when there is an identifiable asset that will generate
expected future economic benefits; and
b. determining the cost of the asset reliably. In some cases, the cost of generating an
intangible asset internally cannot be distinguished from the cost of maintaining or
enhancing the entity’s internally generated goodwill or of running day-to-day
operations.
Therefore, in addition to complying with the general requirements for the recognition and
initial measurement of an intangible asset, an entity applies the requirements and guidance
in Ind AS 38 to all internally generated intangible assets.
If an entity cannot distinguish the research phase from the development phase of an
internal project to create an intangible asset, the entity treats the expenditure on that
project as if it were incurred in the research phase only.
Internally generated brands, mastheads, publishing titles, customer lists and items
similar in substance shall not be recognised as intangible assets.
Internally generated intangible assets
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Internally generated intangible assets
Internally generated intangibles are classified into research phase and development phase:
Research Phase Development Phase
No intangible asset arising from research (or
from the research phase of an internal project)
shall be recognised.
Expenditure on research (or on the research
phase of an internal project) shall be
recognised as an expense when it is incurred.
Examples of research activities are:
a. activities aimed at obtaining new knowledge;
b. the search for, evaluation and final selection
of, applications of research findings or other
knowledge;
c. the search for alternatives for materials,
devices, products, processes, systems or
services; and
d. the formulation, design, evaluation and final
selection of possible alternatives for new or
improved materials, devices, products,
processes, systems or services.
Recognised if, and only if, an entity can
demonstrate all of the following:
a. the technical feasibility of completing the
intangible asset so that it will be available for use
or sale.
b. its intention to complete the intangible asset and
use or sell it.
c. its ability to use or sell the intangible asset.
d.how the intangible asset will generate probable
future economic benefits. Among other things,
the entity can demonstrate the existence of a
market for the output of the intangible asset or
the intangible asset itself or, if it is to be used
internally, the usefulness of the intangible asset.
e. the availability of adequate technical, financial
and other resources to complete the
development and to use or sell the intangible
asset.
f. its ability to measure reliably the expenditure
attributable to the intangible asset during its
development.
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• Words, names, symbols or devices used in business to indicate the source of a product and to distinguish it from the products of other entities
Trademarks
• Set of exclusive rights, granted by the jurisdiction to a creator of an artificial work, to copy, distribute and adapt the work
Copyright
Computer software
• Protected legally such as a patent or copyright
Examples of intangible assets when separately acquired
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Cost Less: Accumulated
amortisation (if any)
Less: Accumulated
impairment losses (if
any)
Cost Model
Revaluation Model
Under IGAAP only
the cost model is
allowed
Revalued amount (being
fair value with reference
to an active market)
Less: Accumulated
amortisation
(if any)
Less: Accumulated
impairment losses (if
any)
The revaluation option is only available if there is an active market for the intangible asset.
Active market is defined by IFRS 13.
Subsequent measurement
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Subsequent measurement
After initial recognition, an entity must choose either of the following for subsequent measurement –
Cost model (Generally used)
• Intangible assets should be carried at costless any amortisation and impairment losses.
Revaluation model (Rarely used)
• This can only be used if the intangible assethas a readily ascertainable market value.
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Revaluation model
Subsequent carrying value increased as a result of revaluation
increase recognised as revaluation surplus in OCI under equity
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.
Subsequent carrying value decreased as a result of revaluation
decrease shall be recognised in profit or loss.
decrease shall be recognised in OCI to the extent of any credit balance in the
revaluation surplus in respect of that asset.
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Derecognition
An intangible asset should be derecognised either –
The gain or loss that arises on derecognition should bedetermined as the difference between net disposalproceeds, if any, and the carrying amount of the asset.The gain should not be classified as revenue but shouldbe recognised as other income in profit or loss.
on disposal (that can either be a sale or by entering into a lease
or by donation)
when no future economic benefits are expected from its use
or disposal.
or
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Useful life
Entity shall assess whether useful life of an intangible asset is finite or
indefinite. ‘Indefinite’ does not mean ‘infinite’.
Finite lived intangibles Indefinite lived intangibles
Under IGAAP no concept of indefinite lived IA
Factors to consider in determining useful life:
typical product life cycles for the asset and
information on estimates of useful lives of similar
assets;
technical, technological or other types of
obsolescence;
changes in the market demand for the products
or services output;
expected actions by competitors or potential
competitors; and
the level of maintenance expenditure required
and period of control over the asset (licenses)
Classified as such when useful life
cannot be determined.
Useful life reviewed at each period
end (finite-change in accounting
estimate)
‘Indefinite’ life does not mean
‘infinite’.
Not amortized but only tested for
impairment at least annually
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Impairment of assets
The following assets need impairment testing atleast annually-
CGU to which goodwill has been allocated
Intangible asset with an indefinite useful life
Intangible asset not yet available for use
The most recent detailed calculation of recoverable amount made in an earlier
period can continue to be used, provided all of the following conditions are met:
If the intangible asset is part of a cash-generating unit, the cash-generating
unit’s assets and liabilities have not changed significantly since the previous
calculation
The earlier calculation resulted in an amount that exceeded the carrying
amount by a substantial margin
Analysis of intervening events shows that the likelihood of impairment is
remote
The impairment test may be performed at any time during an annual period,
provided the test is performed at the same time every year
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Questions
Identify which of the following assets will be investment properties under IAS 40?
1.Land held for long-term capital appreciation rather than for short-term sale in the ordinary course of
business:
1.YES
2.Land held for a currently undetermined future use. (The entity has not determined that it will use the land
as owner-occupied property or for short-term sale in the ordinary course of business, the land is regarded
as held for capital appreciation.
1.YES
3.Property being constructed or developed on behalf of third parties.
1.NO
4.Building owned by the entity (or held by the entity under a finance lease) and leased out under one or
more operating leases.
1.YES
5.Building that is vacant but is held to be leased out under one or more operating leases.
1.YES
6.Property that is being constructed or developed for future use as investment property.
1.YES (Investment properties after Jan 2009 & PPE before Jan 2009)
7.Property that is leased to another entity under a finance lease.
1.NO.
8.Parking which is attached to an apartment building which given on rent and resident of which can only
utilise such parking. Parking fee is included in monthly rent of apartment building. Whether such parking is
an investment property?
YES, such parking shall form part of larger building used for same business purpose
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THANK YOU
Since 1968
S. K. AGRAWAL & CO.CHARTERED ACCOUNTANTS
www.skagrawal.co.in
For further information please
contact
VIVEK AGARWAL
Partner
Email: [email protected]
Handheld : +91 96817 06868