The results of operations of any entity for a specified period and purpose are represented by a set of presentable formats, called as financial statements (‘FS’). Some of the requirements for preparing and presenting the FS are regulated by the law of land of that entity; couple of them is governed by other generally accepted accounting principles of that country and a few are established by practices followed by its peers. The ultimate objective of these FS is to provide the requisite and reliable information to the users of these FS, including stakeholders. Ranging from compulsory to voluntary disclosures, the FS should also provide the true and fair view of the state of affairs of the entity so as to place reliance thereon.

With the promulgation of the Indian Accounting Standards, converged with IFRS (Ind AS) in India, the format and the requisites for preparation of FS in India have been drastically changed. Right from the new formats to the auxiliary information now required to be presented will give a new look and feel to the FS what we have ever seen so far.

This article is aimed to provide brief summary of the new standard viz. Ind AS 1 ‘Presentation of FS’ and discussion around what has changed from the current practices and the way forward.

Ind AS 1 and its objective

This standard establishes the overall requirements for the presentation FS of an entity and also sets the guidelines for their structure and its contents. The basis for presentation of FS, as prescribed by Ind AS 1 ensures its comparability with the entity’s FS of previous periods and with the FS of other entities. This standard is applicable for:

- preparation and presentation of the entity’s general purpose FS, together with other standards with respect to specific transactions and other events.

- consolidated FS in accordance with Ind AS 110, Consolidated Financial Statements; and

- separate FS in accordance with Ind AS 27, Separate Financial Statements.

Generally, Ind AS 1 is not applicable to the structure and content of condensed interim FS prepared in accordance with Ind AS 34, Interim Financial Reporting. However, some of the guidance contained in this standard is also limitedly applicable to these FS.

Financial statements

A complete set of FS comprises:

(a) balance sheet as at the end of the period ;

(b) statement of profit and loss for the period;

(c) statement of changes in equity for the period;

(d) statement of cash flows for the period;

(e) notes, comprising a summary of significant accounting policies and other explanatory information; and

(ea) comparative information in respect of the preceding period

(f) balance sheet as at the beginning of the preceding period when an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its FS, or when it reclassifies items in its FS

 

Specific requisites of FS

Presentation of true and fair view and compliance with Ind ASs

FS of an entity shall present a true and fair view of its:

- financial position;

- financial performance; and

- cash flows

An entity whose FS comply with Ind ASs shall make an explicit and unreserved statement of such compliance in the notes.

In certain extremely rare circumstances if the management concludes that compliance with an Ind AS would be so misleading that it would conflict with the basic objective of the FS; the entity shall depart from that requirement of Ind AS and make necessary disclosures.

Going concern

An entity shall prepare FA on a going concern basis unless management either anticipates to liquidate the entity or to cease trading, or has no realistic alternative but to do so. The management would make necessary disclosures in all circumstances either in case of material uncertainties related to entity’s ability to continue as a going concern or when an entity does not prepare FS on a going concern basis for any reason.

Accrual basis of accounting

Except for cash flow information, an entity shall prepare its FS using the accrual basis of accounting.

Materiality and aggregation

An entity shall present material items separately or aggregated with other items if not material.

Offsetting

An entity shall not offset assets and liabilities or income and expenses, unless required or permitted by an Ind AS.

Frequency of reporting

An entity shall present a complete set of FS, including comparatives at least annually.

Comparative information

Except when Ind ASs permit or require otherwise, an entity shall present comparative information in respect of the preceding period for all amounts reported in the current period’s FS. An entity may also present additional comparative information; however, this information has to be in accordance with Ind ASs.

Consistency of presentation

An entity shall consistently follow the presentation and classification principles, unless:

(a) apparently, another presentation or classification is more appropriate; or

(b) an Ind AS requires a change in presentation.

Structure and content

Balance Sheet

Information to be presented in the balance sheet

This standard provides minimum line items which are to be presented as a part of the balance. An entity shall present additional line items, headings and subtotals in the balance sheet when such presentation is relevant to an understanding of the entity’s financial position. This Standard does not prescribe the order or format in which an entity presents items.

Current/non-current distinction

An entity shall present current and non-current assets/liabilities, as separate classifications in its balance sheet unless liquidity basis of presentation provides reliable and more relevant information. The classification of current and non-current depends upon various factors, including the operating cycle of a company, which may or may not be a period of 12 months. The hybrid basis of presentation might be warranted in case an entity has diverse operations.

Statement of Profit and Loss

The statement of profit and loss shall present:

(a) profit or loss;

(b) total other comprehensive income;

(c) comprehensive income for the period, being the total of (a) and (b)

Total comprehensive income is the 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. The sections (a) and (b) shall further be disclosed as attributable to:

(a) non-controlling interests, and

(b) owners of the parent.

An entity shall not present any items of income or expense as extraordinary items, in the statement of profit and loss or in the notes.

Statement of changes in equity

The statement of changes in equity includes the following information:

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;

c. for each component of equity, a reconciliation between the carrying amount at the beginning and the end of the period, separately (as a minimum) disclosing changes resulting from:

i. profit or loss;

ii. 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.

Statement of cash flows

This standard sets out specific requirements for the presentation and disclosure of cash flow information.

Notes

The notes shall:

(a) present information about the basis of preparation of the FS and the specific accounting policies used

(b) disclose the information required by Ind ASs that is not presented elsewhere in the FS; and

(c) provide information that is not presented elsewhere in the FS, but is relevant to an understanding of any of them.

An entity shall cross-reference each item in the balance sheet and in the statement of profit and loss, and in the statements of changes in equity and of cash flows to any related information in the notes.

The order for presenting notes to assist users to understand the FS is as follows:

(a) statement of compliance with Ind ASs;

(b) summary of significant accounting policies applied;

(c) supporting information for items presented in all the components of FS; and

(b) other disclosures, including contingent liabilities and unrecognised contractual commitments, and non-financial disclosures

Disclosure of accounting policies

An entity shall disclose in the summary of significant accounting policies for the:

(a) measurement basis used in preparing the FS, and

(b) other accounting policies used that are relevant to an understanding of the FS.

Sources of estimation uncertainty

An entity shall disclose information about the assumptions it makes about the future, and other major sources of estimation uncertainty at the end of the reporting period, that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year.

Capital

An entity shall disclose information that enables users of its FS to evaluate the entity’s objectives, policies and processes for managing capital.

Puttable financial instruments classified as equity

The standard sets the specific disclosure requirements with respect to the puttable financial instruments classified as equity instruments, including summary quantitative data, its objectives, policies and processes for managing its obligation to repurchase or redeem the instruments etc.

Other disclosures

An entity shall disclose in the notes:

a. the amount of dividends proposed or declared before the FS were approved for issue

b. the amount of any cumulative preference dividends not recognised.

An entity shall disclose the following:

(a) the domicile and legal form of the entity, its country of incorporation and the address of its registered office etc.;

(b) a description of the nature of the entity’s operations and its principal activities;

(c) the name of the parent and the ultimate parent of the group; and

(d) if it is a limited life entity, information regarding the length of its life.

Position under the Companies Act 2013

The Companies Act 2013 (‘the Act 2013’) specifically deals with formats for preparation of FS including the Consolidated FS under Schedule III to the Act 2013. These formats and related requirements are significantly different from the ones as prescribed under Schedule VI to the Companies Act 1956 and Ind AS 1. Off late, the Institute of Chartered Accountants of India had issued an Exposure Draft for Ind-AS- compliant Schedule III to the Act 2013 which was open for comments till January, 2015.

Carve outs with respect to IAS 1, Presentation of Financial Statements

- IAS 1 provides an option either to follow the single statement approach or to follow the two statement approach for preparation of Statement of profit and loss. Ind AS 1 allows only the single statement approach.

- Different terminology is used in Ind AS 1 as compared to IAS 1, e.g. the term:

- ‘balance sheet’ is used instead of ‘Statement of financial position’;

- ‘Statement of Profit and Loss’ is used instead of ‘Statement of profit and loss and other comprehensive income’

- ‘approval of the FS for issue’ have been used instead of ‘authorisation of the FS for issue’;

- ‘true and fair view’ have been used instead of ‘fair presentation’.

- IAS 1 gives the option to individual entities to follow different terminology for the titles of FS. However, as per Ind AS 1 one terminology can only be used by all entities.

- IAS 1 permits the periodicity, for example, of 52 weeks for preparation of FS. Ind AS 1 does not permit the same.

- IAS 1 allows classification based on either their nature or their function to present an analysis of expenses recognised in profit or loss. Ind AS 1 allows only nature-wise classification.

- As per IAS 1, an entity need not provide a specific disclosure required by IFRS, unless material. Ind AS 1 provided the same concept except that an entity need not provide a specific disclosure unless not material ‘except when required by law’.

- Under IFRS 3, Business Combinations, bargain purchase gain is recognised in the statement of profit and loss. Hence, there is no requirement to disclose the same separately in statement of change in equity, as required by IAS 1. However, Ind AS 1 has included disclosure regarding recognition of bargain purchase gain arising on business combination in line with treatment prescribed in this regard in Ind AS 103, Business Combinations.

- As per IAS 1, when the entity breaches a provision with respect to a long term loan arrangement on or before the end of the reporting period, and the liability becomes payable on demand, then this is categorized as current. However, under Ind AS 1, in this case, if before approval of FS the lender agreed not to demand the payment then, this amount need not be classified as current.

Comparison of Ind AS 1 with existing Accounting Standard (AS) 1 and other GAAP principles

- Ind AS1 requires presentation of other comprehensive income along with profit or loss for the year in single statement presented in two sections. Under AS 1, there is no concept of other comprehensive income.

- Ind AS 1 requires Statement of Change in Equity to be presented as one of the components of FS. While the similar requirement is not dealt with AS 1; is mandated by Act 2013.

- Ind AS 1 requires an entity to prepare the complete set of FS at least annually. While the similar requirement is not dealt with AS 1; the Act 2013 requires an entity to prepare FS for the year ending 31 March every year with certain exceptions.

- As per Ind AS 1, an entity whose FS comply with Ind ASs shall make an explicit and unreserved statement of such compliance in the notes. There is no similar requirement under AS 1 and other GAAP principles.

- As per Ind AS 1, an entity shall present comparative information in respect of the preceding period for all amounts reported in the current period’s FS. While the similar requirement is not dealt with AS 1; the Act 2013 requires to present one year comparative disclosures.

- Ind AS 1 requires an entity to disclose the judgments and estimates made by management while preparing the FS. There is no similar specific mandate under AS 1 or other GAAP principles

- Departure from the applicability is permitted in some rare circumstances under Ind AS 1, which is not allowed at all under AS 1 or other GAAP principles.

While offsetting of assets and liabilities is permitted under Ind AS1 in certain circumstances; AS1 does not specify so. However, some of the AS separately provides so, e.g. AS 22

*******

Disclaimer: Above expressed are the personal views of the author, and the publisher or the author disclaim all, and any liability and responsibility, to any person on any action taken on reliance of it.

 

With Ministry’s notification dated 20 February 2015, the discussion around India’s convergence plan with International Financials Reporting Standards (‘IFRS’) has been put to rest and the actual implementation strategy has taken a definitive shape. 39 Indian accounting standards (‘Ind-AS’) are notified within the roadmap with two initial phases of implementation. The first phase would cover both listed and unlisted, with a net-worth greater than Rs 500 crore to comply with Ind-AS for accounting periods beginning on or after April 1 2016 with the comparatives for the year 2015-16.

To facilitate the smooth transition from the existing Indian GAAP to Ind-AS and to understand the impact of the said transition, there is one specific standard Ind-AS 101 ‘First time adoption of Ind-AS’ (corresponding to IFRS 1) which deals with guidance on accounting conversion with specific exemptions and related precise disclosures.

This article aims at providing brief insight into Ind-AS-101 with respect to its application, scope, exclusions provided etc.

Objective of Ind-AS 101

This standard provides the principles of accounting for an Indian company while adopting Ind-AS for the first time. This standard ensures that:

· A company’s first Ind-AS financial statements (‘FS’), and its interim financial reports contained within the period covered by those FS, comprises high quality information;

· The information so used:

- is transparent and comparable over all periods presented;

- caters as an appropriate initial point for accounting as per Ind-ASs; and

- can be produced at a cost that does not exceed the paybacks.

Use of Ind-AS

A company is required to use Ind-AS for the following:

· First Ind-AS compliant FS; and

· Each interim financial report for part of the period covered by its first Ind-AS FS.

On first occasion when a company adopts Ind-AS, then in the first Ind-AS FS an explicit and unreserved statement is required to be made with respect to compliance with Ind-ASs.

Ind-AS 101 is not applicable to those cases, requiring changes to the accounting policies by those companies who had already applied Ind-ASs in past. These changes would be dealt with as follows:

· As per Ind AS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’; and

· Explicit transitional provisions governed by other Ind-ASs.

Transition date

Beginning of the earliest comparative period presented on the basis of Ind-AS is the transition date. All of the adjustments arising from the transition to Ind-AS should be recorded in the retained earnings as at the transition date i.e. on 1 April 2015 for the companies covered under Phase-I

An entity shall also explain how the transition from previous GAAP to Ind ASs affected its reported BS, financial performance and cash flows.Opening Ind-AS Balance Sheet

On adoption of Ind-AS, a company is required to prepare and present an opening Ind-AS Balance Sheet (‘BS’) at the transition date.

Opening reconciliation

Ind-AS 101 also requires that a detailed quantitative reconciliation is to be included in the first Ind-AS FS. With respect to the FS for the year 2016-17, the companies covered under phase-I shall explain the reason for the difference between the net equity as at 1 April 2015 and 31 March 2016, prepared under the existing Indian GAAP and under Ind-AS.

In addition, these companies shall also provide reconciliation for its total comprehensive income for the FY 2015-16 to explain the impact of the transition.

Comparatives for first Ind-AS BS

A company’s first Ind AS FS shall have at least 3 BS, 2 Statements of profit and loss, 2 Statements of cash flows and 2 Statements of changes in equity and related notes, including comparative information for all statements presented.

For companies covered under phase-I, the first reportable period is the year 2016-17. Therefore, its transition date is 1 April 2015. This company will present its FS as per existing Indian GAAP

upto 31 March 2016. Now, this company is required to apply the Ind ASs effective for periods ending on 31 March 2017 in:

· preparing and presenting its opening Ind AS-BS at 1 April 2015;

· preparing and presenting its BS for 31 March 2017 (with comparatives for the year ended 31 March 2016);

· statement of profit and loss, statement of changes in equity and statement of cash flows for the year to 31 March 2017 (with comparatives for the year ended 31 March 2016); and

· disclosures (including comparative information for the year ended 31 March 2016).

A company who wishes to additionally provide any FS containing historical summaries or comparative information in accordance with existing Indian GAAP, then it shall:

· mark these information as not being prepared in accordance with Ind-ASs; and

· disclose the nature of the core adjustments that would make it comply with Ind ASs. However, there is no necessity to quantify these adjustments.

Accounting Policies

A company preparing the Ind-AS FS for the first time:

· shall choose the accounting policies from Ind-AS, effective at its first annual Ind-AS reporting date with certain exceptions;

· shall generally apply these accounting policies retrospectively while preparing the opening BS sheet and for all periods presented in the first Ind-AS BS;

· shall not apply different versions of Ind-ASs that were effective at earlier dates; and

· may apply a revised Ind-AS which is non-mandatory, if that Ind-AS permits early adoption

Recognition and de-recognition

With certain exceptions, a company while preparing its opening Ind-AS BS shall:

· recognise all assets and liabilities whose recognition is required in accordance with Ind-ASs;

· de-recognize all assets or liabilities in case Ind-ASs prohibit such recognition;

· reclassify asset, liability or component of equity in accordance with Ind-ASs; and

· apply Ind-ASs for the purpose of measuring all recognised assets and liabilities.

Presentation and Disclosure

IND-AS-101 does not provide any exemption from the presentation and disclosure requirements of other Ind-ASs.

Exemptions provided by Ind-AS 101

Ind AS 101 prescribes two types of exemptions for the first-time adopters to facilitate a smooth transition to Ind-AS. These may be either mandatory or voluntary exemptions. In case a company is not eligible for these exemptions, then all applicable Ind ASs are to be applied retrospectively.

Key exemptions- Mandatory

Following are the significant mandatory exemptions, which are available to the first time adopters:

Estimates

The estimates used under the existing Indian GAAP are to be consistently applied, with following exceptions:

· if there was an error, or

· the estimate used under existing Indian GAAP is no longer relevant since the entity chooses a different accounting policy on the adoption of Ind AS.

In case a company receives some information after the transition date with respect to the previous estimates then the company shall treat this as non-adjusting event.

Hedge accounting

A company in its opening Ind-AS BS shall not reflect in a hedging relationship of a type that does not qualify for hedge accounting in accordance with applicable Ind-AS with certain exceptions.

Impairment of financial assets

Impairment requirements as per applicable Ind-AS are to be applied retrospectively, with certain exceptions.

Classification and measurement of financial assets

With respect to classification and measurement of financial assets, assessment needs to be made based on the conditions that exist at the transition date.

De-recognition of financial instruments

De-recognition requirements with respect to financial instruments are applicable from the prospective effect with certain exceptions.

Key exemptions- Optional

Some of the significant optional exemptions from other Ind-AS are as follows:

Business combinations

A company may choose not to apply the applicable Ind-AS retrospectively to past business combinations. However, if that company restates any business combination to comply with the requirements of applicable Ind AS, then it shall restate all later business combinations.

Non-current assets held for sale and discontinued operations

A company may use the transitional date circumstances to measure such assets or operations at the lower of carrying value and fair value less cost to sell.

Long term foreign currency monetary items

A company may continue with the previous policy adopted for accounting for exchange differences arising from translation of long-term foreign currency monetary items recognised in the previous FS as per the existing Indian GAAP.

Leases

A company may evaluate whether an arrangement existing at the transition date contains a lease on the basis of facts and circumstances existing at transition date, except where the effect is expected to be immaterial.

Deemed cost

A company may choose to measure an item of property, plant and equipment at transition date at its deemed cost as prescribed under Ind-AS 101.

Share-based payment transactions

A company is encouraged, however not required to apply the principle of relevant Ind-AS to the liabilities arising from share-based payment transactions that were settled before the transition date.

Carve-outs-Differences with IFRS

While Ind-ASs are largely based on IFRS; however, still there are some of the variances between Ind-AS and its corresponding IFRS due to certain reasons, including the Indian economic and regulatory environment. Hence Ind-AS 101 also defers from IFRS 1 for some of the items as enumerated below:

· Under IFRS 1, the first-time adopter shall exclude from its opening IFRS BS any item recognised in accordance with previous GAAP that does not qualify for recognition as an asset or liability under IFRS and shall account for the resulting change in the retained earnings as at transition date, except in certain instances where it requires adjustment in the goodwill. In such specific instances, Ind AS 101 allows this amount to be adjusted with the capital reserve in place of goodwill.

· Ind AS 101 in addition to exemptions provided under IFRS 1, also provides certain optional exemptions relating to the long-term foreign currency monetary items and service concession arrangements relating to toll roads.

· IFRS 1 provides certain short-term exemptions from IFRS; however Ind AS 101 does not provide these short-term exemptions.

· IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers are effective from annual period beginning on or after January 1, 2018 and January 1, 2017, respectively hence the consequential amendments due to these standards have not been incorporated in existing IFRS 1. However, corresponding Ind AS 109 and Ind AS 115 are applicable from the earlier dates in India; therefore, the consequential amendments have been incorporated in Ind AS 101.

Foreseeable implications

While Ind-AS 101 will certainly facilitate a smooth transition to Ind-AS; however, still there seems to be certain areas where corporates would soon seek clarifications from MCA and other regulatory bodies to cope with these difficulties. Some of the evident glitches include:

· For the FY 2015-16, the companies covered under phase-I will continue to report under the existing Indian GAAP. However, when these companies start reporting quarterly results effective 1 April, 2016, then:

- as per Ind-AS 101, they would be required to re-state the prior period’s comparative results as per Ind-AS. Therefore, for the year FY 2015-16, these companies would have to prepare two sets of quarterly financial results - one under the existing Indian GAAP and the other under Ind- AS.

- not sure if the Securities Exchange Board of India would accept these re-stated financial results as such.

- not sure if these restated financial results would be re-adopted by the management and the shareholders.

- not sure if these financial results if results into material restated results, then would the consequent adjustments are required to be made to the managerial remuneration, dividend etc., as approved on the basis of the existing Indian GAAP.

· In cases where the adjustments are made to the retained earnings as on 1 April 2015, pursuant to Ind-AS 101 mandate, would the reserve so created/ increased be considered as free reserves or not.

*******

Disclaimer: Above expressed are the personal views of the author, and the publisher or the author disclaim all, and any liability and responsibility, to any person on any action taken on reliance of it.