Applicability - PuneICAI

Applicability - PuneICAI

IndAS Presented by CA Kusai Goawala For WICASA jointly with Pune Branch of WIRC 14h February 2016 INTRODUCTION CA KUSAI Why Convergence to IFRS ? Globalization of Indian Economy Common Accounting Language IFRS widely accepted world over CA KUSAI More than 100 countries, including the members of the European Union and much of Asia, have already adopted and implemented IFRS. Israel is adopting IFRS this year, with Chile and South Korea set for 2009, Brazil for 2010, and Canada for 2011. CA KUSAI

Entire Europe converged to IFRS US already permits IFRS to Non US holdco having operations in US Road map of US to converge to IFRS over a period IFRS vs US GAAP Principle based vs Rule based CA KUSAI

12 new Standards compared to Indian GAAP Several AS are replicated from IFRS All standards is made applicable at one time rather than phase wise In order to be IFRS compliant country it is not required to make SME comply. Two options Primary and Alternative CA KUSAI Indian Convergence Road Map : IFRS modified to suit Indian conditions 39 IndAS notified Retrospective implications will impact 31.3.2015

accounts Once an entity applies IndAS, it shall continue forever even if criteria subsequently not met. Indian Holding Co Foreign Subsidiary/JV/Associates Foreign Holdco Indian Subsidiary/JV/Associates CA KUSAI ROAD MAP APPLICABILITY OF Ind AS FINANCIAL YEAR 2015-16

FINANCIAL YEAR 201617 FINANCIAL YEAR 201718 All Listed /Process Listed /Process of of Listing Listing and Net Companies Worth 500Cr or more Unlisted Companies having Unlisted NW 250 Cr or Companies having more NW 500 Cr or more

Holding ,Subsidiar y, JV and Holding, Associates of Subsidiary, JV andwill be taken The net worth for the purpose of the above as on above. Associates of if covered subsequently. 31.3.2014 or as per previous Balance Sheet CA on KUSAI Note : Listed SME Stock above. Not Mandatory

(Voluntary) IndAS-19 EMPLOYEE BENEFITS CA KUSAI Actuarial gains/losses IFRS had two options recognize all actuarial gains/losses do not recognize/amortize corridor approach

IndAS does not give two options CA KUSAI Comparisons Sr. No. IFRS IAS 19 1 Actuarial Valuation to be done at regular intervals Actuarial Valuation to be done Permitted to obtain Actuarial at regular intervals Valuation once in three years

2 Actuarial Gains/losses to be amortised as per Corridor Approach Actuarial Gain/Losses to be written off immediately to OCI Actuarial Gains/losses to be written off immediately to Profit and Loss 3 Discount rate High quality Corporate Bonds Discount Rate Market yields in

Government Bonds Discount Rate Market yields in Government Bonds IndAS 19 (The Effects of Changes in Foreign Exchange Rates) AS 11 (The Effects of Changes in Foreign Exchange Rates) CA KUSAI IndAS-21 THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES

CA KUSAI IndAS 21 : The Effects of Changes in Foreign Exchange Rates Foreign Currency v/s Functional Currency (FC) v/s Presentation Currency (PC) Definition :Presentation currency is the currency in which the financial statements are presented Functional currency is the currency of the primary economic environment in which the entity operates Foreign currency is a currency other than the functional currency of the entity.

Determination of Functional Currency Primary Economic Environment Exceptions IAS 39 Derivatives / hedge IAS 7 Cash Flow transactions for Foreign Operations CA KUSAI How to identify Functional Currency : Sales/Purchases - influenced by Country, Competitive forces, Determine Sales Prices

Labour/Material Funds and Financing Currency in which funds from operations are retained Integral or Non Integral Operations Cash flows from Foreign Operations impacts entitys cash flow

Cash flows of FO are self sufficient does not require entity to fund. CA KUSAI In case of change in functional currency, apply translation procedures applicable to the new functional currency prospectively from the date of the change. If FC is a currency of Hyperinflationary economy, first apply IAS 29 (restate Financial

Statement) and cannot avoid by changing FC. If PC = FC : Initial Recognition All transactions to be translated as per spot rate on date of transaction. Average rate can be used provided it is does not fluctuate significantly CA KUSAI

Subsequent Recognition : All monetary items to be translated at closing rate Non Monetary items are to be translated as per the date of acquisition. If revalued than the date of revaluation. Impairment of assets in FC may not be as per Foreign Currency or vise versa. CA KUSAI Comparisons

Sr. No. Point for Consideration IAS 21 (The Effects of Changes in Foreign Exchange Rates) AS 11 (The Effects of Changes in Foreign Exchange Rates) Based on the integral and nonintegral foreign approach 1 Approach Based on functional currency approach

2 Exchange Differences Arising on net investment in a Arising on net investment in a foreign operation : foreign operation : Separate FS P&L a/c Separate FS and CFS Foreign CFS OCI Currency Translation Reserve (FCTR) 3 Functional/ Reporting/ Presentation Currency

Presentation Currency currency in which FS are presented Functional Currency currency of the primary economic environment in which the entity operates Reporting Currency currency in which FS are presented No such concept as Functional Currency 4 Translation of financial statement At the closing rate at the date

of financial statement Depends on classification of operations as integral and nonintegral. CA KUSAI IndAS-10 EVENTS AFTE THE REPORTING P CA KUSAI IndAS 10 : Events after the Reporting Period Adjusting and Non adjusting Events

Condition existed prior to the end of the Accounting Period Condition arose after the reporting period Going Concern is an adjusting event Authorisation for Issue Date Non Adjusting Event disclose in notes Dividend declared in AGM non adjusting event under IndAS.

CA KUSAI Comparisons Sr. No. 1 Point for Considerati on Proposed Dividends IAS 10 (Events after the reporting period) Non-adjusting event AS 4 (Contingencies and Events occurring after BS Date) Adjusting event

CA KUSAI IndAS-8 ACCOUNTING POLI CHANGES IN ACCOUNTING ESTIM AND ERRORS CA KUSAI IndAS 8 : Accounting Policies, Changes in Accounting Estimates and Errors Changes in Policies Changes in Estimates Errors Accounting Policies : Relevant Reliable Consistent Framework

Changes in Accounting Estimates vs Policies Conservative approach is not fair Accounting Estimate Current year change Accounting Policies Prospective subject to exceptions (like voluntary application) No prior year adjustment in P&L CA KUSAI Everything Ordinary Nothing extra-ordinary Restate to earliest period reported

Materiality subjective not objective : Influences decisions Changes in Depreciation Method Change of Estimate Prospective Problem Areas What happens if a prior expenses is restated to earlier years and dividend declared now exceeds the amount of profit available ?? Audit Report books of accounts and profit and

loss account matching ?? CA KUSAI Prior Period Adjustments In accounts for YE 2010, following income/expenses relating to YE 2009 were observed : Interest Income 100 Advertisement Expenses -200 Net Prior Period (Expenses)

-100 CA KUSAI Under Indian GAAP YE 2010 Sales Under IFRS YE 2009 YE 2010 YE 2009 1000 800

1000 800 200 100 200 200 1200 900 1200 1000 Cost and other expenses

700 600 700 600 Advertisement Expenses 200 100 200 300 900

700 900 900 Net Profit before Tax 300 200 300 100 Tax 100 60

100 60 Net Profit after tax 200 140 200 40 140 200 40

Interest Income Prior Period Adjustments Net Profit -100 100 CA KUSAI Under Indian GAAP YE 2010 Sales Under IFRS YE 2009 YE 2010 YE 2009

1000 800 1000 800 200 100 200 200 1200 900

1200 1000 Cost and other expenses 700 600 700 600 Advertisement Expenses 200 100 200

300 900 700 900 900 Net Profit before Tax 300 200 300 100

Tax 100 60 100 60 Net Profit after tax 200 140 200 40 140

200 40 Interest Income Prior Period Adjustments Net Profit -100 100 CA KUSAI Comparisons Sr. No . Point for

Considerati on IAS 8 (Accounting Policies, Changes in Accounting Estimates and Errors) AS 5 (Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies) 1 Changes in Accounting Policies

Retrospective application by adjusting opening reserves for the earliest period presented and the other comparative amounts for each period presented Prospectively/ Retrospectively application - AS is silent ; hence option to entity 2 Errors Retrospectively Restated

Separately disclosed CA KUSAI IndAS-103 BUSINESS COMBINATION CA KUSAI Key Definition What is Business Combination ? Business Combinations: The bringing together of separate entities or businesses into one reporting entity. Nearly all business combinations entail in an acquirer obtaining control of one or more acquirees. Example : 1. One or more corporations become subsidiaries. 2. One company transfers its net assets to another. 3. Each company transfers its net assets to a newly

formed company. CA KUSAI Scope Exclusion: Example: Mr. X (100 %) Mr. Y (100 %) A Ltd. B Ltd. (50%). (50%). C Ltd.

Whether BC ? CA KUSAI Scope Exclusion: Example: Mr. X (100 %) Mr. Y (100 %) Acting in concert by agreement A Ltd. B Ltd. (75%). C Ltd.

(25%). Whether BC ? CA KUSAI Key Requirements Step Acquisition : Increases in ownership interest Apply : IndAS 28 IndAS 109/39 IndAS 107 Initial Investment Business Combination-FIRS 3: : Fair Value existing holding Fair Value acquired net assets Calculate Goodwill Control

Obtained Equity Transaction : No Adjustment to Goodwill No P&L Gain/ Loss Buy further Minorities Obtaining control is a significant economic event that triggers remeasurement CA KUSAI Key Requirements First Time Adopter : A first time adopter may elect not to apply IndAS 103 retrospectively to past business combinations. If a first time adopter restates any business combination to comply with IndAS 103

It shall restate all later business combinations CA KUSAI IndAS 103 : Business Combinations a) Even Intangibles not recognized earlier can be now recognized for instance internally generated brands. b) Exceptions to recognition and measurement principles Deferred Tax Potential tax effects of temporary differences/Employee Benefits as per relevant IndAS c) Bargain purchases - Negative Goodwill OCI reassess all identified assets and liabilities CA KUSAI

Comparisons Sr. No. Point for Consideration IndAS103 BC AS 14 Accounting for Amalgamation 1. Recording of Assets, Liabilities & Reserves Only Purchase Method ; Acquirer to be identified

Common Control mergers allowed under Pooling of Interest Method Under Purchase method : fair value or at book values Under Pooling of Interest Method : Carrying amounts 2. Goodwill Amortisation in subsequent period Not to amortise but to test for impairment on year to year basis Under Purchase method amortise not exceeding 5 years

No specific provision for Goodwill on acquisition of subsidiary. 3. Contingent consideration Consideration may include contingent consideration. Changes to contingent consideration resulting from events after the end of the reporting period recognised in profit & loss. No specific guidance CA KUSAI IndAS-101

FIRST TIME IMPLEMENTATION CA KUSAI IFRS 1 : First Time adoption of IFRS Retrospective Applications Restate previous comparable period Opening IndAS Statement of Financial Position Say first time adoption in 2017-18 : Full IndAS compliance for year ended 31.3.2017 and 2016. Only Statement of Financial Position (B/s) to be restated as of 31.3.2015. Transitional provisions in each IndAS does not apply to first time adoption It applies to changes in policies due to introduction of new standard

CA KUSAI Apply IndAS in Its First IndAS FS Interim Financial report- Part of period covered by its 1st IndAS FS Opening IndAS Balance Sheet Prepare IndAS BS 1st day E.g. 1st FS is for 31.03.2017 Op.Bal. for 31.03.2015 Apply latest version of IndAS. Can apply not yet mandatory IndAS Provided the same allows early application. CA KUSAI IndAS First Balance Sheet

Shall include Three BS Two P&L Two CF Two statements of changes in equity Recognise Assets & Liabilities which is required under IndAS Derecognise Assets & Liabilities if IndAS does not permit Reclassify Assets & liabilities as per IndAS Measure Assets & Liabilities as per IndAS Explanation of transition to IndAS Reconciliation of previous GAAP & IndAS Equity CA KUSAI Exceptions

Para 14-17 Para 14 Estimates . No change as given in previous GAAP Para 15 Information received after date of transition. Non adjusting events. (Prospective not retrospective) Para 16 Previous GAAP estimates not required. No need to make retrospective Para 17 Comparative figures The above apply Appendix C and D Previous GAAP carrying amounts can be considered as deemed cost CA KUSAI

Appendix C 1. Business Combinations i) May not consider BC before date of transition. ii) However, if apply to one than apply to all subsequent BC. iii) Carrying amount of Goodwill on transition date will be continued subject to impairment test and reclassification. CA KUSAI IndAS-12 INCOME TAXES CA KUSAI

Tax No Rate Substantially Enacted discounting Absolute Figures] Tax Losses Recognition of DTA- Virtual Certainty vs Probable Offset rules Business ESOP Combinations

related tax assets/liabilities Non Current Asset/Liability CFS eliminated profit on intra group transaction temporary difference. Tax Holiday ?? India specific may get customized. CA KUSAI Case Study Elimination of Intragroup Profit H an entity taxed at 30% - S subsidiary at 34%

S Sells inventory cost Rs.100000/- to H for Rs.120000/Eliminate DTA unrealised profit of Rs.20000 of 6000 = 30% of 20000/-. CA KUSAI Comparisons Sr. No. Point for Consideration IndAS 12 (Income taxes)

AS 22 (Accounting for taxes on income) 1 Deferred Income Taxes Temporary differences Timing differences 2 Recognition of DTA and DTL Recognized for all Temporary differences except which arise from Initial recognition of goodwill or which

is not at a BC Recognized for all Timing differences 3 Recognition of DTA Recognized to the extent it is probable that future taxable profits will be available. Recognized only when virtual certainty is present support by convincing evidence. 4 Investments in subsidiaries,

branches & associates and interest in JV DTL for all taxable Temporary differences are recognized. Except Investor can control reversals. Temporary differences will not reverse. Not recognized. 5 Deferred Tax on Unrealised intragroup profits Recognized at Buyers rate Not recognized . 6

Classification Always classified as Non-Current DTA after Investments and DTL after Unsecured Loans (ASI 7) CA KUSAI IndAS-23 BORROWING COSTS CA KUSAI Interest cost to be worked on effective interest method. Does not include imputed cost of owners

equity What is a Qualifying Asset Takes substantial time (more than 12 months rebuttable) for completion. How to compute borrowing cost for capitalisation First specific borrowing for QA If general purpose borrowing used, apply weighted average rate.

Cannot capitalise Biological Assets atCA FV, KUSAI IndAS-24 RELATED PARTY DISCLOSURES CA KUSAI IAS 24 : Related Party Disclosures Related Parties Definition : Category 1 Holding Subsidiaries Joint Ventures Associates Category 2 Key Management Personnel of Entity or parent Close Relatives of KMP Entities which are controlled/jointly controlled/ having significant

influence of KMP/Relatives Employees Retirement Benefit Plans CA KUSAI KMP who has authority and responsibility for planning/directing Common director need not mean Related Party Common KMP Yes KMP in one and director in another ability to exercise significant influence Relatives Spouse/Domestic Partner, Children of both, Dependants of self/partner. Names to be given in cases where absolute control exists even if no transactions. - Parent/Subsdiary only CA KUSAI All kinds of transactions to be reported :

Sales Purchase Services received/rendered Loans received/given Guarantees given/received Dues from/to KMP Compensation Any other transactions Lease, Transfer of R & D, transfer under license agreements, Management contracts. CA KUSAI Case Study

Related party relationship are wider under IndAS24 as against AS18 If Entity P has control over A and has significant influence over B. Under AS18 A and B are not related However they are related party under IndAS24 Comparisons Sr. Point for No. Consideration 1 2 3 IAS 24 (Related Party

Disclosures) AS 18 (Related Party Disclosures) Related Parties Includes post employment benefit plans of the reporting entity or its related party Definition of Uses the term a close relative member of that persons family . Post employment benefit plans not included Compensation to KMP

Disclosed as aggregate of all items of compensation Disclosed as aggregate and separately for (a) short term employee benefits (b) post employment benefits (c) other long term benefits (d) termination benefits and (e) share based payments Uses the term relatives of an individual CA KUSAI IndAS -108 OPERATING SEGMENTS CA KUSAI

IndAS 108 Operating Segments Identification of Operating Segment (OS) As per internal reporting norms to CEO Qualitative thresholds To provide Quantitative thresholds 10% of revenue / profits / assets If OS does not cover 75% then add other segments also CA KUSAI Information to be disclosed Measurement Reconciliations Restatement Product & services Geographical Segments Major Customers >10% CA KUSAI

Comparisons Sr. Point for No. Consideratio n 1 2 3 InAS 8 (Operating Segments) Identificatio Based on financial n of information on how to segments allocate resources and in

assessing performance Measureme Segment nt Revenue/Expense/Result/ Asset/Liability not defined Disclosures Revenue from a customer if exceeds 10% of total segment revenue AS 17 (Segment Reporting) 2 sets of segments i.e. business and geographical using risks and rewards approach Segment Revenue/Expense/Result/ Asset/Liability have been defined No such requirement

CA KUSAI IndAS-16 PROPERTY, PLANT & EQUIPMENT CA KUSAI IndAS 16 : Property Plant and Equipments Definition of Asset Only Tangible Items are covered Recognition of an item of PPE

Measurement of an item of PPE : Cost model or Revaluation model If Revaluation model Assess at regular intervals Accounting for changes in decommissioning and restoration costs First Time application Deem Cost CA KUSAI Revaluation of an item of PPE : Upward = Revaluation Surplus a/c OCI and Downward = P&L a/c

Depreciation method : SLM or WDV Change in method of Depreciation : Change in accounting policy Prospective effect Derecognition Gain/loss on derecognition Component Accounting To depreciate significant components separately if Useful life differs Replacement of Components The new part shall be capitalized if it fulfills the recognition criteria and the replaced part shall be derecognised

Replaced part to be derecognized CA KUSAI Comparisons Sr. No. Point for Consideration IAS 16 (Property, Plant & Equipment) AS 6 & 10 (Depreciation Accounting & Accounting for Fixed Assets) 1

Measurement Models Cost or Revaluation model Only Cost model allowed ; revaluation permitted subject to conditions 2 Change in method of depreciation Change in Accounting Estimate, prospectively Change in Accounting Policy, retrospectively

3 Deferred Receipt on Disposal Deferred Consideration Effective Interest Not required 4 Replacement Costs The new part shall be capitalized if it fulfills the recognition criteria and the replaced part shall be derecognized The new part shall be capitalized if it fulfills the recognition criteria ;

otherwise expensed out 5 Cost of major inspection Capitalised Expensed out 6 Frequency of Revaluation If Revaluation model is adopted, at the end of every reporting period Not prescribed

7 Revaluation Both Upward and Downward Revaluation allowed subject to carrying amount of asset not exceed its fair value. Only Upward No concept of fair value while revaluation 8 Frequency of estimation of Residual Value To review at least at each reporting period

Not prescribed 9 Scope All fixed assets covered, except property under as investment property (included in IAS 40). All fixed assets covered 10 Depreciation Fixed Assets are REQUIRED to be componentized and depreciated Fixed Assets are NOT REQUIRED to be

CA KUSAI componentized and depreciated IndAS-36 IMPAIRMENT OF ASSETS CA KUSAI In AS top down or bottoms up test. Treatment of Impairment Loss : CA-RA = P&L

If CA is revalued first reduce Revaluation reserve to that extent and balance to P&L If RA is negative = provide a liability Reversals of Impairment No reversals for impairment loss on goodwill earlier version allowed. Corporate Assets If possible to allocate to a unit allocate If not possible go to CGU allocate If not possible exclude Corporate Assets CA KUSAI Impairment Loss in case of CGU with Goodwill First impact Goodwill then balance distribute to assets in CGU on pro-rata The value cannot reduce below zero

Reversals Tested on an annual basis or earlier when there is an impairment indication. If external/internal sources favorable, check for reversals. Reversals to be given effect only if there is a change in estimates since last impairment loss. Change due to reduction in period of cash flow cannot reverse impairment. Cannot exceed Carrying Amount if Impairment loss was not recognized Impairment reversals (other than on Goodwill) to be taken to P&L except in case of revaluation impact. CA KUSAI Sr. No. Point for Consideration

AS 28 (Impairment of Assets) IndAS 36 (Impairment of Assets) 1 Goodwill Tested for impairment by Allocated to the lowest level allocating its carrying at which goodwill is internally amount to CGU. monitored by management. 2 impairment test On indication Tested on an annual basis or

for Goodwill Also AS-26 requires earlier when there is an and Intangibles intangibles that are not impairment indication. available for use and that are amortized over a period exceeding 10 years to be assessed for impairment every F.Y and even if there is no indication of impairment. 3 Reversal of Favorable external events Reversal is prohibited (even in impairment loss have occurred. subsequent interim periods). for goodwill CA KUSAI

IndAS-37 PROVISIONS, CONTINGENT LIABILITIES & CONTINGENT ASSETS CA KUSAI Provision to be made for warranties, returns, money back offers, claims etc. High level of estimates required. Not necessary to know the identity of the payee. Provision to be made on the present value of the liability to be incurred. Contingent Liability to be given in notes. If chances of such liability is remote no need to disclose in notes. Joint and Several Liabilities Contingent Liabilities share of other joint parties.

Contingent Assets : Do not recognize unless realization CA KUSAI virtually certain Key differences Constructive Obligations vs Legal Obligations Discounting of provision Restructuring provision constructive vs legal obligation Onerous contracts IndAS discounting and impairment

Contingent Assets - Disclosure Measurement : Best estimate Provisions are before taxes Risks and uncertainties not required to create excessive provision out of abundant precaution. Future events : Amount to be provided technological changes / legislation may not be passed (eg environmental requirements) End use as per provision made : adjust such provision only. Future operating losses no need to provide. Onerous contracts : Unavoidable cost exceeds benefits to provide. Reimbursements recognize as a separate asset : virtual certain to receive not to exceed the provision

CA KUSAI Comparisons Sr. No. Point for Considerati on IAS 37 (Provisions, Contingent Liabilities and Contingent Assets) AS 29 (Provisions, Contingent Liabilities and Contingent Assets) 1 Recognition

of Provisions Constructive obligation considered only if arising from customary practice In case of Legal or Constructive obligation 2 Discounting of Provisions If more than 12 months, then PV Not permitted 3

Recognition of Contingent Assets Disclosed in FS if an inflow of economic benefits is probable Not disclosed in FS but disclosed in BOD report CA KUSAI IndAS-29 FINANCIAL REPORTING HYPERINFLATIONAR ECONOMIES CA KUSAI What is indication of hyperinflation :

When cumulating price index over three years nears 100%. People prefer dealing in stable currencies People invest in Non monetary assets/other stable currencies Sales/Purchase credits built in inflationary cost Interest/Wages linked to price index. CA KUSAI Non monetary assets/liabilities, income and expenditure are indexed from the date of transaction to reporting date (Measuring Unit Current)

Monetary items are already at MUC and hence not required to be indexed. Restate FS of current as well as previous year. Recognize Gain or loss in P&L CA KUSAI Money loses purchasing power and hence comparing the transactions on absolute terms is not meaningful. How to index : Equity Capital movements to be indexed Retained earnings will automatically get adjusted due to changes in P&L Revaluation Reserve Eliminate Monetary Assets/Liabilities Assets/liabilities at carrying amount Non Monetary Assets/Liabilities Indexed by Measuring Unit Current vs index on the date of transaction. Assets/Liabilities under a contract where it

provides linked to index as per agreement. CA KUSAI In case of exact date of acquisition of FA not available first date of restatement. In case of price index not available for a period use movements in stable currency as guiding factor. CA KUSAI IndAS-38 INTANGIBLE ASSETS CA KUSAI

Development involves Application of research Alternative already selected Making prototype Ends on commencement of commercial production/use If research and development phase cannot be distinguished Consider as Research phase. Expenditure once written off cannot be subsequently capitalized. When recognition criteria is met at a later stage capitalize from that date. Intangibles acquired under Business Combination Recognize even if internally generated by

acquiree Assess recognize criteria To recognize separately from Goodwill CA KUSAI Cost includes cost of acquisition direct cost incurred for making it capable for operating as intended deferred price consideration imputed interest to be segregated Borrowing cost as per IAS 23 Cannot include : Marketing, administration, abnormal wastages etc Grant : Assets allotted without considering Airport landing rights, license to operate radio stations etc. Take Fair Value on both sides Asset and Government Grant CA KUSAI

Cost model Cost less amortization less impairment Revaluation to be done regularly. Active market : taxi licences, fishing licences, production quotas No active market brands, patents or trademark since assets are unique If active market cease it indicates - check for impairment. Effect of revaluation : When revalued asset is disposed off, revaluation surplus transferred to retained earnings directly without routing through P&L. Test for impairment CA KUSAI

Intangibles Having finite lives Having Infinite lives (no foreseeable limit to generate cash inflows) For assets having finite lives Apply IndAS 36 For assets having infinite lives Check annually and on indication of impairment. Indefinite does not mean infinite. Estimate on prudent basis. Amortization : -- For Finite lives : On straight line over the period of useful life. No amortization for intangibles having infinite lives Goodwill/brand once impaired cannot reverse. CA KUSAI

Intangibles purchased on deferred payment terms imputed interest to be segregated Expenditure on advertisement and publicity expenses Fee paid to an actor in a promotional film is charged to PL when he shoots the film. The charge is not delayed till release of the film. In case of toll roads, revenue model of amortisation not permitted. CA KUSAI Comparisons Sr. Point for IndAS 38 (Intangible No. Consideratio

Assets) n 1 Measurement Either at Cost or Revalued Amt 2 Useful life Either finite or infinite 3 Goodwill AS 26 (Intangible Assets) Only at Cost Cannot be infinite (rebuttable presumption max 10 years) Not amortised but subject to Arising on amalgamation in annual impairment test the nature of purchase :

amortized over 5 years Arising on acquisition : not amortised but tested for impairment CA KUSAI IndAS-40 INVESTMENT PROPERTY CA KUSAI Investment Property Properties that are held : for renting/already rented for capital appreciation vacant future use not decided Not held for administrative purposes or for sale in ordinary course of business Investment properties during construction period is

to be dealt with as PPE. Property let out to Group Companies Standalone vs CFS CA KUSAI Services rendered in relation to property dominant or ancillary PPE or IP Hotel or Rented Property Part PPE / IP : Segregate relevant portions. Possible to sell independently. If not possible If OOP very negligible compared to total, then treat as IP. Conditions for recognition : If Future Economic benefits will flow to entity Cost can be measured reliably CA KUSAI

Measurement after recognition Only one method available: Cost model (Fair Value model option in IFRS) CA KUSAI Disposals and Retirements : When sold or permanently withdrawn from use : no future benefit available When replacement of one part apply method used in PPE. On sale Consideration Carrying amount = P&L If consideration deferred compute imputed interest revenue. CA KUSAI

Investment Property Basis Of Comparison IndAS 40 Investment AS 13 Accounting for Definition of investment property Measurement of investment property Property Land or building held to earn rentals or for capital appreciations or both. Does not apply to owner occupied property or property held for sale or that is

leased to another entity under financial lease. Permits only cost model. Investments An investment in land or buildings that are not intended to be occupied substantially for use by, or in the operations of the investing enterprise. Classified as long term investments and measured at cost less impairment. CA KUSAI IndAS-41

AGRICULTURE CA KUSAI Biological assets livestock, crops, plantations. Bearer Plants living plant expected to bear produce for more than one period. Except plant grown as lumber Agricultural Produce harvested produce Process Agricultural transformation/Deterioration/ Procreation. Recognised only if : Control over assets. Cash flow can be estimated economic benefits. Cost or FV can be reliably determined. CA KUSAI

present location and condition minus point of sale costs. Changes in value P&L. If FV cannot be ascertained cost minus depreciation minus impairment as per PPE. If harvested the crop is to be considered as Inventories. Once taken at FV cannot change back to Cost method. Gain or loss from initial recognition take

to P&L If land and standing crops are combined deduct land value to determine value for crops. In case of Government Grant When FV used take it to P&L when becomes receivable. If contingent on fulfilling conditionsCA KUSAI Fair Value to be determined for Biological assets as well as Agricultural Produce. Do not consider forward sale price to determine FV as the same is not indicative of the current FV Group similar assets according to significant

attributes etc Gains or losses on initial recognition to P&L Subsequent measurement changes recognise to PL CA KUSAI Biological Assets Agricultural Produce Products as a result of processing harvesting Sheep Wool

Yarn Carpet Dairy Cattle Milk Cheese Cotton Plants Cotton Thread clothing Sugarcane Harvested cane Sugar

Tea Bushes Picked leaves Tea Fruit Trees Picked Fruit Processed fruit CA KUSAI IndAS-2 INVENTORIES CA KUSAI Comparisons

Sr. Point for No. Consideration 1 Deferred Settlement Terms IAS 2 (Inventories) AS 2 (Valuation of Inventories) Purchase price under Cost is the purchase price normal credit terms () amt paid for deferred settlement = interest expense (imputed interest)

CA KUSAI IAS-20 ACCOUNTING FO GOVERNMENT GRA AND DISCLOSURE GOVERNMENT ASSIS CA KUSAI Forgivable loans considered as grant Government loans at below market interest to be accounted as per IFRS 109 (initial carrying amount amount as determined under IFRS 109) Grants relating to assets to be accounted as deferred Income Non monetary grant at fair value vs nominal value Refund of Grant prohibition to be classified as Extraordinary Item

CA KUSAI Comparisons Sr. No. Point for Considerati on IAS 20 (Accounting for Government Grants and Disclosure of Government Assistance) AS 12 (Accounting for Government Grants) 1 Recognition

Only Income approach Capital or Income approach 2 Trf to Shareholders Funds Nil In the nature of Promoters contribution 3 Repayment Cumulative additional depreciation

Immediately recognized as an expense ; prohibited to classify as an extra-ordinary item Recognized over the remaining useful life of the asset ; classified as an extra-ordinary item CA KUSAI IndAS-110/27 CONSOLIDATED & SEPARA FINANCIAL STATEMENT CA KUSAI IndAS 27 - Consolidated and Separate

Financial Statements the FS CFS is the primary FS. Single Economic Entity. Separate Financial Statement only if statute requires For an entity having no subsidiary/JV/Associate SFS is Control for the purpose of determining subsidiary status: a. Power over the investee b. Exposure or rights to variable returns due to involvement c. Ability to use the power to affect the investors return. Subsidiary may be company or non-corporate Potential voting rights (PVR) to consider for determining

control CA KUSAI PVR to be considered in totality for determining Control. However PVR not considered for computing profits/losses Minority Interest Non Controlling Interests Consolidation is compulsory Exceptions: All of the following conditions satisfied. 1. 2. 3.

4. Parent has a parent who has agreed Not listed not a potential - listing Intermediate or ultimate Parent - prepares CFS. No exemption A subsidiary under severe long-term restriction for transfer of funds All subsidiaries to be included except those acquired and held for sa CA KUSAI Group A Standalone

Holdco Sales 0 PAT 0 Equity Capital Reserves 3000 0 3000 Investments 3000

Operating Assets 3000 Group A Standalone Holdco SPV1 SPV2 SPV3 Sales 0 1000 1000

1000 PAT 0 200 200 200 3000 1000 1000 1000

0 200 200 200 3000 1200 1200 1200 1200 1200 1200

1200 1200 1200 Equity Capital Reserves Investments 3000 Operating Assets 3000 Standalone Co A Co B

Sales 0 2500 PAT 0 500 3000 3000 0 500

3000 3500 3000 0 0 3500 3000 3500 Equity Capital Reserves Investments Operating Assets

CFS A Sales PAT Equity Reserves Operating Assets B 3000 2500 600 500 3000

3000 600 500 3600 3500 3600 3500 3600 3500 Add : Cost of acquisition of share. Add :

All other cost associated with acquisition is cost of acquisition. Deduct : Dividends received in respect of income prior to acquisition reduce cost Consolidation is compulsory till Subsidiary ceases to be subsidiary. Eliminate intra group transactions/unrealized profits Deferred tax implication on such eliminations Intra group Losses may indicate impairment test for impairment Three months gap allowed between reporting dates of Parent & Subsidiaries F.S. Minority Interest disclose under Equity. Recognition of Goodwill in CFS (100% / Parent Co. Share) Uniform Accounting Policies to be followed. CA KUSAI Step disposal:

Substance of chain transactions is to lose control take total transactions as one. Accounting for disposal results in No loss of control : Account for changes in Equity owner with owner Loss of control Derecognise asset/liabilities from the date control is lost Derecognise non controlling interest Recognise consideration Retained investment at FV Recognise any profit/loss in P&L Transfer incomes held under OCI to P&L Transfer Revaluation Reserve directly to Retained Earnings In case of retained investment without control Apply IAS 39 FV on date of loss of control is FV on initial recognition In Separate FS : Account either at cost or as per IAS 39 CA

KUSAI Comparisons Sr. No. Point for Consideration IAS 27 Consolidated & Separate FS AS-21 Consolidated FS 1 Consolidation Mandatory

Mandatory to Listed/in the process of listing 2 Control Power to govern the Financial & Operating Policies of an entity 1.If voting power more than 50% 2. Able to remove major Board of Directors 3 If Dual Control Company which has control will consolidate

Both entities will consolidate 4 Potetial Voting Rights (PVR) control Only currently exercisable PVR considered for assessing control Not considered in assessing control 5 Partial Disposal Accounted as equity basis No Specific Guidance Remeasure of residual holding to fair

value. Difference between carrying value & fair value is recognise in Profit & Loss Account No Specific Guidance - Control retained - Loss of Control 6 Accounting in Separate FS Cost less impairment Loss or IAS 39 AFS Cost less impairment loss. 7

Minority Interest Under Equity Between own fund & Loan fund 8 Goodwill Either for 100% or parents holding. Only in relation to parents share 9 Special purpose entity If control exist then consolidate

Not prescribed CA KUSAI IndAS-17 LEASES CA KUSAI IndAS 17 : Leases Operating vs Finance Lease Substance over Form Cost allocation Inception and Commencement of Lease Minimum Lease Amount Gross Investment at absolute amount Net Investment in Lease PV Contingent Rent CA KUSAI

IRR Land Building Separate Finance Lease Initial Recognition : FV or PV of minimum lease payments Disclose Assets = Liability Direct cost incurred Subsequent measurement apportion finance cost and repayments Brokerage expense in P&L for lessor and capitalize for lessee Operating Leases Income and Expense over straight line method Brokerage over lease term Depreciation to be provided CA KUSAI Impairment Sales and Lease Back transaction Whether finance or operating lease If Finance Lease :

Profit on sale deferred and amortised over lease period If Operating Lease Sales at Fair Value recognize profit Sales below fair value profit/loss recognized if compensated by rentals amortise Sales above fair value excess - amortise over lease period CA KUSAI Comparisons Sr. No. Point for Considerati on IndAS 17 (Leases) AS 19 (Leases) 1

Interest in leasehold land Recognized as Operating Lease unless recognized as Investment Property Classified as Fixed Assets 2 Initial direct costs by lessor under finance lease Included in finance lease receivable and reduce the income recognized over the

lease term Recognized immediately in P&L a/c or allocated against the finance income over the lease term 3 Initial direct costs by lessor under operating lease Either deferred and allocated to income over the lease term in the proportion as rent income or recognized as an expense in the period in which they are incurred

CA KUSAI IndAS-115 REVENUE FROM CONTRACTS CA KUSAI Differences between IndAS and existing Indian Accounting Standards The Standard replaces the following Standards : AS 9 Revenue Recognition IAS18 AS 7 Construction Contracts IAS 11 Includes : Revenue from Contracts with Customers --for sale of goods --for sale of services --for other income --for construction

Scopes out : lease contracts insurance contracts CA KUSAI Recognition Recognize revenue once the performance obligations are fulfilled. Recognize revenue when the control of the promised asset is transferred by the entity. The standard provides indicators of transfer of control. Satisfaction of performance obligations over a period of time.

CA KUSAI Combination of Contracts Guidance for evaluation of performance obligations Allocation of the transaction price to separate obligations Revenue recognised : -- as Control of the goods and services underlying the performance obligation is transferred to the customer Need to determine --Whether control is transferred over time, if not, at a point of time CA KUSAI If performance obligation satisfied over time, revenue is recognised by measuring progress towards complete satisfaction ( by using either output or input methods ) --and only if it can reasonably measure its progress,

else, revenue should be recognised, only to the extent of contract costs incurred of which recovery is probable Application guidance for transactions, such as --Sale with a right to return --Warranties etc. CA KUSAI Recognition : --a financial asset (right to cash/other financial asset) --an intangible asset (right to receive cash from public on use --both. Contract Cost Incremental cost for obtaining the Contract Cost is an asset to be amortised when transfer to the customer takes place. Impairment loss to be provided if consideration receivable is less than the carrying amount. Presentation Contract Asset/Contract Liability

CA KUSAI STEPS TO ACCOUNT FOR REVENUE (STEP 1) Identify the contract(s) with a customer. Contract modification. (STEP 2) Identify the separate performance obligations in the contract Non refundable upfront fees (and some related costs) (STEP 3) Determine the transaction price Variable consideration Volume discounts first specific and then proportionately Rebate and coupons Time value of money Prompt payment discounts Non cash considerations Consideration payable to a customer CA KUSAI

(STEP 4) Allocate the transaction price to the separate performance obligations. Allocation based on standalone selling prices. Allocation of a discount Allocation of variable consideration Changes in transaction prices CA KUSAI (STEP 5) Recognize Revenue when (or as) the entity satisfies a performance obligations Performance obligations completed at a point in time Customer acceptance Bill and hold arrangements Performance obligations satisfied over time Simultaneous receipt and consumption of the benefits of the entitys performance

Customer controls the asset as it is created or enhanced Alternative use to the entity CA KUSAI In cases where performance obligations are fulfilled over a period of time, revenue can be recognized if: Customer avails the benefit soon as company renders services (for e.g. cleaning services) Additional work-in-process where the asset is controlled by customer or Entity has a legal right to recover payment against part of the work done and the work so done is of no use to the company. Apply these methods only when control is transferred to customer. Any change in progress is treated as change in accounting estimate. CA KUSAI

Stage of completion can be determine as under a) Output Method : By survey of work performed By milestones achieved Units of production/deliveries b) Input Method Cost to cost method : The % completion would be estimated by comparing total cost incurred to date with total cost expected for the entire contract. However this is not acceptable method as wastages can creep in Labour Hours, Machine Hours etc Completion of Physical proportion of the contract work. Uncertainty in collection amounts to expenses to be written of as an expense and not deductible from revenue. CA KUSAI

Measurement Initial measurement Subsequent measurement Multiple performance obligations- transaction price Transaction price Variable consideration Factoring difficulties in estimating variable

consideration Financing component Non-cash consideration Consideration payable to customer At the time of recognition of revenue there is a presumption that contracts won't be cancelled. CA KUSAI Variable consideration (discounts, refunds, price concessions. Rebates, credits, performance bonus, incentives, contingent upon some event)

Customer is expecting a price concession from the company based on the past practices, policies, etc. and it is expected that the price to customer shall be less than the price stated in the contract. The company has an intention to provide price concessions to customer whichever method is applied, it should be applied consistently. Refund liabilities or contract liabilities expected to be paid should be updated at each period end. The standard contains separate guidance on sale with a right-to- return basis. CA KUSAI

Financing component Interest expense/ income Non-cash consideration Deferred Consideration At fair value Consideration payable to consumer Coupons etc Case Study : Company sells oats breakfast to a convenience stores. It pays for (a) Slotting fee for placement of its products (b) Advertisement fee for billboard Item (a) Should be deducted from Transaction Price as no separate service rendered

Item (b) should be considered as advertisement expense CA KUSAI Other principles The standard also defines specific guidance on following: Sale with a right to return Customer dissatisfaction Expectation about refund liability Exchanges will not be considered as returns

Recognise the amount expected to be retained and not return Warranties Assurance that the product will perform Above assurance with service to be provided Provide warranty cost IndAS37 Warranties purchased separately separate service A law that requires to entity to pay compensation for CA KUSAI damages does not give rise to performance obligation. Case Study Company sells 100 jeans at Rs.1000 with 30 day

return period. Cost of jean Rs.600 Estimated Expected returns 25% Sales 75 x 1000 = 75000 Cost 75 x 600 = 45000 Create Asset 25 x 600 = 15000 Create liability 25 x 1000 = 25000 CA KUSAI Principle vs Agent Agent will only recognise fee or commission when control of goods transferred Principle will recognise only when agent has performed

Customer options for additional goods or services Sales incentives, customer awards, points, contract renewal options, discount on further goods or services. Estimate the discount and benefit and deduct from Transaction price CA KUSAI Non refundable upfront fees Joining fees of health clubs, activation fee in telecom, set up fee in service industry, initiation fee in supply contracts Principle will recognise when the performance obligation has been met

Case Study Coaching classes collect 25% upfront fee no upfront recognition Licensing Software, motion pictures, franchisee fees, patents, TM. Distinct or combined with goods/services License forms part of tangible goods Granting license to access contents online Entitys promise for use of license CA KUSAI - License to use IP at point of time Repurchase Agreements Obligation to repurchase (forward) Right to repurchase (Call option)

For both the above options Do not recognise sale Account as Finance Lease Financing Arrangement If option lapses, recognise revenue derecognise liability Obligation to repurchase at the request of the customer (Put Option) If PP (Put Price) < SP account for lease as per IndAS17 However, if customer does not have any incentive since PP < Market Price Account If as normal sale minus provision for right of return

PP (Put Price) >= SP account as financing transaction However, if customer does not have any incentive since PP < CA KUSAI Market Price Consignment Arrangements Donot recognise unless controlled by third parties Indication of consignment nature Product controlled by entity until delivered to customer or specific period expires Dealer is able to return the goods No obligation to pay for the products although he may give a deposit

Bill and Hold Transfers effective control although no physical delivery Indicators Goods should be identifiable Ready for despatch the reason must be substantive customer requests entity should not have the ability to use the goods CA KUSAI Recognise the sales except for pending performance for Customer Acceptances To objectively determine Customers acceptance is a formality. Acceptance is based on specifications supplied. If supplied as per specifications, recognise.

Pending performance installations etc Cannot determine transfer of control do not recognise Trial period lapses recognise CA KUSAI Real Estate Sales in India and IndAS115 Under Indian GAAP Guidance Note AS7 Transfer of significant risk and reward, revenue can be determined Conditions of threshold limits are met Conditions under AS 9 and AS7 are met Recognise on percentage completion basis IndAS115

requires compliance of the following conditions : Customer simultaneously receives and consumes benefit Developers performance enhances the value of the asset controlled by customer No alternative use to the developer Enforceable right to recover payment for performance completed upto date Compliance is difficult. with last two is possible. However, first two CA KUSAI Disclosures The standard prescribes various disclosures as under : Qualitative and Quantitative aspects about the

contract Disaggregation of revenue Contract Balances Performance obligations Transaction price allocation Significant judgments applied Timing of satisfaction of performance obligation Determination of transaction price and amount allocated to performance obligation CA KUSAI IndAS-109 FINANCIAL INSTRUMEN RECOGNITION & MEASUREMENT CA KUSAI Appetizers :

The Accounting Standards are constituted to bring out real profit or loss of an entity The financial engineering in various products are exposed and impact on profit and loss is correctly reflected Financial Instruments are complex in nature due to its creation out of fertile minds of financial wizards They are common in nature and found everywhere. Derivative is one of the most complicated aspect of this Standard CA KUSAI

Appetizers : One may find such derivatives in many contracts. For example : Sale proceeds determined based on lease rentals Lease rentals linked to sales of tenants Technical consultancy kicker incentive by way of stock option Variable Interest rates in bank loans Convertible Preference Shares CA KUSAI Appetizers :

IFRS is replaced IAS 39 with a new simplified standard IFRS 9. CA KUSAI Presentation IndAS 32 Substance over Form Redeemable Preference Shares Compulsorily Convertible Debentures CA KUSAI Standards under discussion : CA KUSAI Standards under discussion :

Description Under Indian GAAP AS30 IFRS 9 Financial Instruments Presentation AS31 IAS 32 Financial Instruments Disclosures AS32

IFRS 7 Financial Instruments Recognition and Measurement Under IFRS CA KUSAI Basic Principles underlying these Standards (a) Fair Value Concept (b) Present Value method (c)

Effective Interest Method (d) IRR and Amortised Value (e) Substance over form - Presentation (f) Off Balance Sheet Items will be recognised CA KUSAI What is a Financial Instrument (FI) ?? CA KUSAI

Financial Instrument (FI) Any contract : That creates a Financial Asset (FA) for one entity And Creates Either a Financial Liability (FL) or Equity (E) for other entity CA KUSAI Example Financial Instrument (FI) Entity A Entity B Loan Given ( FA )

Loan Taken ( FL ) Debtor ( FA ) Creditor ( FL ) Shares of B ( FA ) Equities Debentures ( FA ) Debentures ( FL ) CA KUSAI What is a Financial Asset (FA) ??

CA KUSAI Financial Asset (FA) Any asset that is: (a) Cash (b) Equity of another entity (c) Right to receive cash or any other FA (d) Right to exchange FA or FL (e) Derivative CA KUSAI What is a Financial Liability (FL) ??

CA KUSAI Financial Liability (FL) Any liability that is: (a) Contract to deliver cash or any FA of the entity (b) Exchange FA or FL with another entity (c) Contract to settle by issuing own variable numbers of equity (for e.g. Conversion of a liability to Equity) CA KUSAI Classification of FA and FL CA KUSAI

Classification based on business model Characteristics of cash flow from contract Types FA that are subsequently measured at : 1. Amortised Cost (Earlier HTM and LR) 2. Fair Value through OCI (earlier AFS) 3. Fair Value through PL (Earlier FVPL) Classification can change if the business model changes Entity cannot reclassify its liabilitiesCA KUSAI Classification of FA and FL (a) (b)

(c) Fair Value through OCI At amortised cost Fair Value through Profit and Loss (FVPL) CA KUSAI At amortised cost CA KUSAI At Amortised Cost Includes debt / assets acquired by entity to hold till maturity Having business model to collect cashflows CA KUSAI Fair Value

through OCI CA KUSAI Fair Value through OCI (a) (b) (c) Debt Instruments Business Model to collect cash flows and sale Equity Instruments not held for trading can opt for irrevocable election CA KUSAI Fair Value through Profit or Loss (FVPL)

CA KUSAI Fair Value through Profit or Loss (FVPL) (a) (b) (c) FA or FL acquired and held for trading (purchasing and selling in near term) Derivatives other than - hedge and Financial Guarantee contract This is a Residue Section (All Derivatives will be classified under this category only) CA KUSAI

Treatment in accounts for each of the above classification CA KUSAI Treatment in accounts for each of the above classification Initial Recognition ++ Unquoted shares ++ Short term receivables Subsequent ++ Unquoted shares FVPL Fair Value

AC Fair Value FVOCI Fair Value Cost Fair Value Amortised Cost Fair Value Cost CA KUSAI Treatment in accounts for each of the above classification Difference

Test for impairment Impairment Loss Transaction Cost Reclassification FVPL P&L AC P&L as interest No Yes FVOCI Revaluati on

Reserve Under Equity No NA P&L Yes P&L FA Yes NA Reserve Yes CA KUSAI General Reclassification of liabilities not permitted

Reclassification of assets permitted (a) (b) (a) (b) (c) (d) a) FVOCI to FVTPL = recognise gain/loss in PL FVTPL to FVOCI = FV will be new amortised cost AC to FVOCI = recognise gain/loss in OCI FVOCI to AC = whatever was in OCI adjust against FV Modification in Cash flows revised value and carrying amount difference in Profit and Loss

CA KUSAI How to calculate Fair Value : CA KUSAI How to calculate Fair Value : (a) (b) (c) Active Market quoted price Arms length price Non active market Valuation Techniques i) Discounted Cash Flow Method ii) Similar transactions of similar products iii) Options Model pricing

CA KUSAI How to calculate Fair Value : Options model pricing : Binomial Method Black Scholes Model Greeks Model (Delta, Gamma, Theta, Vega) Cost to carry model CA KUSAI How to calculate Fair Value : Fair value of a loan given can be calculated by

applying market rate of interest and discounting the cash flows from the same to the present value. This will determine the effective interest loaded in FA. CA KUSAI How to calculate amortised cost CA KUSAI How to calculate amortised cost The stream of cash flows including interest and other receivables or transaction cost payables

from the FA/FL to be calculated in such a way that the net present value of the cash flows reduces to zero. The effective interest worked out as above will be carried to profit and loss and the actual interest received/paid will be considered as cash inflow/outflow for the said FA/FL CA KUSAI What is a Derivative CA KUSAI What is a Derivative 1) 2) 3)

A Financial instrument that meets all the following criteria : The fair value of the entire instrument changes with the changes in the value of that underlying asset Net investment is zero or negligible compared to the total value Settled in future CA KUSAI Derivatives No Smoke Derivatives without

Fire underlying CA KUSAI Derivatives Loan sanctioned @ 12% fixed rate not yet availed Market rate goes up to 12.5% Embedded Derivative 0.5% CA KUSAI Derivatives Derivative

Underlying Mentioned Amount Settlement Amount Stock Option Market Price of Shares Number of Shares (MP at settlement stock price) * No. of Shares

Currency forward Currency Rate Number of Currency Units (Spot rate at settlement forward rate ) * no. of currency units CA KUSAI Derivatives Derivative Underlying

Mentioned Amount Settlement Amount Interest Rate Swap Interest Rate Index ( e.g. Receive 5% fixed and pay LIBOR) No forward Amt. Amount in Currency (Interest rate

index- fixed rate )*amount in currency CA KUSAI Embedded Derivative CA KUSAI Embedded Derivatives v/s Compound Instruments To explain in simple terms : any variable component of a contract which can impact the cash flows. For Holder Embedded Derivatives For Issuer

Compound Instrument Deliberate Financial Engineering and intentional shifting of certain risks between parties Causes modification to a contracts cash flow, based on changes in a specified variable. CA KUSAI X Ltd. Invest in following two products of A Ltd. Product 1 Product 2 Type 10% Convertible Debentures

10% Convertible Debentures Numbers Debentures 50000 @ ` 10/- 50000 @ ` 10/- Conversion 1 equity share for each debentures Such numbers of equity shares work out based on price on date of conversion Amount Invested Conversion

Period ` 5,00,000/2 Yrs ` 5,00,000/2 Yrs CA KUSAI Product 1 Product 2 MV of shares on date of conversion ` 50/- ` 50/- No. of shares

to be allotted 50000 10000 Value of Product Value changes ` 25,00,000/- ` 5,00,000/- (50000*50) (10000*50) Yes No

Hence Classified as For Issuer Equity (CI) Liabilities For Holder Embedded derivatives Loan CA KUSAI Embedded Derivative : (a) (b)

Host agreement could be financial as well non financial instrument. Derivative component If Host agreement is financial instrument do not split CA KUSAI Embedded Derivative : (a) (b) (c) (d) If the entire FI is covered under FVPL, then it need not be separated irrespective whether CR or NCR.

If Derivative component is closely related no need to separate account with the host component If Derivative is NCR, then account the same separately at FV. If Value of a Derivative cannot be computed, directly apply FV of total contract FV of host contract CA KUSAI Embedded Derivative Loan fixed rate contracts with an option to borrow, to repay the loan any time it chooses Embedded Derivatives Embedded Derivative can be in Debtor /Equity Investments / lease / Normal Sale / Purchase /

Service Agreements / Loan Agreements CA KUSAI Compound Instrument from the perspective of Issuer CA KUSAI Compound Instrument from the perspective of Issuer First identify whether : Liability Compound CA KUSAI Pure

Liability : CA KUSAI Pure Liability : Settlement by paying cash or issuing another FA Examples : Loans Compulsorily redeemable Debentures Compulsorily redeemable Preference Shares Option to the issuer to issue variable number of its shares CA KUSAI Compound (Liability

+ Equity) CA KUSAI Compound (Liability + Equity) The instrument provides for conversion option with fixed number of its shares for a fixed amount. Examples : Convertible Debentures/Preference Shares with fixed number of shares CA KUSAI Treatment in the books

CA KUSAI Treatment in the books of Issuer : (a) (b) Split Equity and Liability by first working out PV of the cash flows discounted on market rate of Interest applicable to similar instruments without conversion options. The remaining portion to be classified as equity CA KUSAI Treatment in the books of Holder : (a)

(b) (c) (d) (e) If the entire instrument is classified as FVPL, then do not split If not, then check whether the embedded derivative is closely related to the host or not If risks of derivative closely related to the risks associated with host, do not split. Recognise the same together wherever the host is classified If not closely related, then split by working out FV of derivative and classify the derivative component as FVPL and the remaining host wherever the same would have been classified If fair value cannot be worked out classify the entire contract as FVPL.

(This is to prevent some companies to avoid classifying the Derivative at Fair Value for its negative impact in P&L) CA KUSAI Treatment of Financial Guarantee. (a) (b) To recognize to the extent there is a probable outflow of resources. For example Bills Discounted to be continued as debtors as well as liability to the discounter as the continued involvement is of the entity. CA KUSAI Derecognition :

CA KUSAI Derecognition : If future cash flow ceases to exists If all substantial risks and rewards transferred If although substantial risks and reward not transferred but control transferred In case where the term of loan is changed substantially which changes the FV of the loan by 10% - derecognize the old loan and recognize the loan with revised term as new loan. CA KUSAI Impairment

CA KUSAI Impairment of Financial Assets Assess at each balance sheet date for any objective evidence that a FA or group of FA is impaired and determine the amount Method for working impairment amount follow AS-28 Impairment of Assets Compare credit risk Recognise loss allowance for expected credit losses

CA KUSAI Impairment of Financial Assets The objective evidence that FA is impaired includes but not restricted to following loss events. a) Significant financial difficulties of the issuer or obligor b) A breach of contract, such as default or delinquency in interest or principal payments c) It becoming probable that the borrower will enter bankruptcy or other financial reorganization Collateral security will not affect the impairment of FA CA KUSAI

Hedge Accounting CA KUSAI Hedge Accounting Three types of Hedges : (a) Fair Value Hedge (FVH) (b) Cash Flow Hedge (CFH) (c) Net investment in Non integrated foreign investment Foreign currency hedge can either be FVH or CFH CA KUSAI Fair Value Hedge (a) (b) Recognised Asset or Liability for its changes in fair value

Unrecognised Firm Commitment CA KUSAI Cash Flow Hedge Highly probable forecast transaction CA KUSAI Hedge Firm Commitment Non Cancelable PO Forecast Transaction Cancelable PO but transaction Possible

CA KUSAI How does FV Hedge works Contract 1 : $ 100000 :- payable on 30/06/2011 (With Supplier ) Contract 2 : Forward rate $100000 @ `45: buy on 30/06/2011.(with Bank) On Settlement- 30/06/2011-spot rate ` 48 100000 * 48 4800000 Net Bank ` 3 - 300000 4500000 CA KUSAI When to recognize

Hedge in Financial Accounts CA KUSAI When to recognize Hedge in Financial Accounts (a) (b) A written agreement with third party Hedge is effective If the above conditions are met The hedge is accounted at initial recognition at fair value which will be zero. CA KUSAI On subsequent reporting dates

before settlement CA KUSAI On subsequent reporting dates before settlement : (a) (b) Fair Value the difference to the derivative asset and credit to firm commitment Cash Flow Hedge to Hedge reserve account in equity and on settlement transfer to the respective account. CA KUSAI Disclosures CA KUSAI

Disclosures : General Principles for disclosure : An entity should disclose information that enables users of its financial statements to evaluate the significance of financial instruments for its financial position and performance. Specific principles : (a) Accounting policy for recognition of FA and FL (b) Classifications - basis (c) Valuation techniques used and assumptions made (d) Reclassification (e) Derecognition CA KUSAI Disclosures : (f)

(g) (h) (i) (j) (k) (l) Collateral Allowances account for credit losses (RDD) Defaults and breaches Financial assets that are either past due or impaired Risk assessment strategy and policy Credit Risk for debtors and receivables Liquidity risk for liabilities CA KUSAI Disclosures : (m)

(n) (o) (p) (q) Market risk Hedging policy and coverage Impact of open exposures to variable risks. Sensitivity analysis (impact on P&L if interest rate to go up by 0.5% basis on variable interest loan) Quantitative and Qualitative Risk assessment CA KUSAI Stringent Disclosures (a) (b)

(c) (d) (e) Note on Interest income Note on Financial Instruments Recognition and Measurement Change in method due to implementation of Accounting Standard. Credit Risk management of receivables Risk on fluctuation of Interest Rates for variable interest loans CA KUSAI Miscellaneous

Regular way Purchase or Sale of financial assets Treasury Shares Offsetting FA and FL CA KUSAI Posers : CA KUSAI Posers : (a) (b) (c) Interest free loans given to Subsidiaries/JV/Associates whether covered

under IndAS 109 or their respective standards. Bills discounting to continue to show the same as liability and not contingent liability ICD where terms of repayment is not specified. CA KUSAI Any Doubts CA KUSAI CA Kusai Goawala [email protected] 9823140520

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