Ind AS Transition Facilitation Group (ITFG) Clarification Bulletin 12
`Ind AS Transition Facilitation Group' (ITFG) of Ind AS Implementation Committee has been
constituted for providing clarifications on timely basis on various issues related to the
applicability and /or implementation of Ind AS under the Companies (Indian Accounting
Standards) Rules, 2015, raised by preparers, users and other stakeholders. Ind AS Transition
Facilitation Group (ITFG) considered some issues received from members and decided to
issue following clarifications1 on October 23, 2017:
Issue 1: (i) ABC Ltd. is covered under Phase II of Ind AS roadmap and is required to
apply Ind AS from financial year 2017-18. It has certain immovable properties such as
land or building. Whether ABC Ltd. is allowed to use revaluation model under Ind AS
16, Property, Plant and Equipment for such immovable properties instead of cost model
in its first Ind AS financial statements prepared for the period ending 31st March 2018.
(ii) Whether ABC Ltd. can opt for cost model for some class of property, plant and
equipment and apply revaluation model for other class of property, plant and equipment
in its first Ind AS financial statements prepared for the period ending 31st March 2018.
Response: (i) An entity will first be required to evaluate that whether the land and building
that it holds is an investment property or its property, plant and equipment (PPE).
Ind AS 40, Investment Property provides that Investment property is property (land or a
building--or part of a building--or both) held (by the owner or by the lessee under a finance
lease) to earn rentals or for capital appreciation or both, rather than for:
(a) use in the production or supply of goods or services or for administrative purposes; or
(b) sale in the ordinary course of business.
Further Ind AS 16, Property, Plant and Equipment, states that-
Property, plant and equipment are tangible items that:
(a) are held for use in the production or supply of goods or services, for rental to others, or
for administrative purposes; and
(b) are expected to be used during more than one period.
In accordance with the above, if land or building is classified as PPE, then the same shall be
initially measured at cost and for subsequent measurement the entity has the option to choose
cost model or revaluation model as per paragraph 29 of Ind AS 16 as stated below:
1
Clarifications given or views expressed by the Ind AS Transition Facilitation Group (ITFG) represent the
views of the members of the ITFG and are not necessarily the views of the Ind AS Implementation Committee
or the Council of the Institute. The clarifications/views are based on the accounting principles as on the date the
Group finalises the particular clarification. The date of finalisation of each clarification is indicated along with
the clarification. The clarification must, therefore, be read in the light of any amendments and/or other
developments subsequent to the issuance of clarifications by the Group
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"An entity shall choose either the cost model in paragraph 30 or the revaluation model in
paragraph 31 as its accounting policy and shall apply that policy to an entire class of
property, plant and equipment."
However, if land or building has been held to earn rentals or for capital appreciation or both
then the same shall be classified as investment property and only cost model as per paragraph
30 of Ind AS 40 can be used.
As per paragraph 20 of Ind AS 40, "An investment property shall be measured initially at its
cost." Further paragraph 30 requires that, "An entity shall adopt as its accounting policy the
cost model prescribed in paragraph 56 to all of its investment property."
Further, paragraph 56 of Ind AS 40 states as follows:
Cost model
56 After initial recognition, an entity shall measure all of its investment properties in
accordance with Ind AS 16's requirements for cost model, other than those that meet the
criteria to be classified as held for sale (or are included in a disposal group that is classified
as held for sale) in accordance with Ind AS 105, Non-current Assets Held for Sale and
Discontinued Operations. Investment properties that meet the criteria to be classified as held
for sale (or are included in a disposal group that is classified as held for sale) shall be
measured in accordance with Ind AS 105.
(ii) As per paragraph 31 of Ind AS 16,"After recognition as an asset, an item of property,
plant and equipment whose fair value can be measured reliably shall be carried at a revalued
amount, being its fair value at the date of the revaluation less any subsequent accumulated
depreciation and subsequent accumulated impairment losses. Revaluations shall be made
with sufficient regularity to ensure that the carrying amount does not differ materially from
that which would be determined using fair value at the end of the reporting period."
Further, paragraphs 36 and 37 of Ind AS 16, inter alia, state:
36 If an item of property, plant and equipment is revalued, the entire class of property, plant
and equipment to which that asset belongs shall be revalued."
37 A class of property, plant and equipment is a grouping of assets of a similar nature and
use in an entity's operations......
In accordance with the above, it may be noted that the standard requires that if revaluation
model is chosen then that should be applied to the entire class and not to an individual item of
property, plant and equipment. Accordingly, in the given case, the entity may elect to opt for
revaluation model for a particular class of assets and cost model for another class of assets
which are classified as property, plant and equipment.
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Issue 2: ABC Ltd. is a first-time adopter of Ind AS from the financial year 2016-17. It
had received the government grant from the Central Government during the financial
year 2012-13 to purchase a fixed asset. The grant received from the Government was
deducted from the carrying amount of fixed asset as permitted under previous GAAP,
i.e. AS 12, Accounting for Government Grants. ABC Ltd. has opted for the option under
paragraph D5 of Ind AS 101, First-time Adoption of Indian Accounting Standards and
chosen to measure the item of PPE at its fair value and use that as its deemed cost on the
date of transition to Ind AS. As per Ind AS 20, Accounting for Government Grants and
Disclosure of Government Assistance, such a grant is required to be accounted by setting
up the grant as deferred income on the date of transition and deducting the grant in
arriving at the carrying amount of the asset is not allowed.
In this situation, whether ABC Ltd. is required to adjust the carrying amount of fixed
assets as per previous GAAP to reflect accounting treatment of the government grant as
per Ind AS 20?
Response: Paragraph D5 of Ind AS 101 states that, An entity may elect to measure an item of
property, plant and equipment at the date of transition to Ind ASs at its fair value and use
that fair value as its deemed cost at that date.
Further, as per paragraph 24 of Ind AS 113, Fair Value Measurement, "Fair value is the
price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction in the principal (or most advantageous) market at the measurement date under
current market conditions (i.e. an exit price) regardless of whether that price is directly
observable or estimated using another valuation technique."
In accordance with the above, it is pertinent to note that the fair value of the asset that will be
derived as per Ind AS 113 will be the exit price that would be received to sell an asset in an
orderly transaction and which is a market-based measurement, not an entity-specific
measurement.
Accordingly, in the given case, fair value of the asset is independent of the government grant
received on the asset and no adjustment with regard to the government grant should be made
to the fair value of the property, plant and equipment taken as deemed cost on the date of
transition to Ind AS.
Further, Ind AS 101 provides certain mandatory exceptions and voluntary exemptions from
retrospective application of some aspects/requirements of Ind AS.
In absence of any mandatory exception applicable in this case, the company shall recognise
the asset-related government grants outstanding on the transition date as deferred income in
accordance with the requirements of Ind AS 20, Accounting for Government Grants and
Disclosure of Government Assistance and the resultant adjustment will be made in retained
earnings or, if appropriate, another category of equity at the date of transition to Ind AS.
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Issue 3: P Ltd. (parent company) has issued a comfort letter to its subsidiary company,
S ltd. S Ltd. was able to obtain funds from the banker on the basis of comfort letter
issued by P Ltd.
Whether the same will be accounted for as a financial guarantee contract in accordance
with Ind AS 109, Financial Instruments?
Response: As per Ind AS 109, financial guarantee contract is, "A contract that requires the
issuer to make specified payments to reimburse the holder for a loss it incurs because a
specified debtor fails to make payment when due in accordance with the original or modified
terms of a debt instrument."
Paragraph B2.5 of Ind AS 109 inter-alia states that, "Financial guarantee contracts may
have various legal forms, such as a guarantee, some types of letter of credit, a credit default
contract or an insurance contract. Their accounting treatment does not depend on their legal
form."
In accordance with the above, it may be noted that a significant feature of a financial
guarantee contract is the contractual obligation to make specified payment in case of default
by the credit holder. As such the contract may not necessarily be called as financial guarantee
contract and it may take any name or legal form, however the treatment will be same as that
of a financial guarantee contract. If a contract legally meets these requirements, then it would
be accounted for as the financial guarantee contract as per Ind AS 109
Accordingly, in the given case, P Ltd. will be required to evaluate as to whether it is
contractually obliged to make good the loss in case S Ltd. fails to make the payment. If yes,
then such comfort letter would be considered to be a financial guarantee contract and will be
accounted for in accordance with Ind AS 109.
Issue 4: PQR Ltd. is covered under phase II of Ind AS Implementation and is required
to adopt Ind AS from financial year 2017-18. It had obtained term loan from Bank A in
2013-14 and paid loan processing fees and commitment charges. In May 2017, PQR
Ltd. has availed fresh loan from Bank B as take-over of facility i.e. the new loan is
sanctioned to pay off the old loan taken from Bank A. The company paid prepayment
premium to Bank A to clear the old term loan and paid processing fees to Bank B for
the new term loan.
Whether the prepayment premium and the processing fees both will be treated as
transaction cost (as per Ind AS 109, Financial Instruments) of obtaining the new loan, in
the financial statements of PQR Ltd. prepared in accordance with Ind AS for the
financial year 2017-18.
Response: As per Appendix A of Ind AS 109, Financial Instruments, transaction costs are
"Incremental costs that are directly attributable to the acquisition, issue or disposal of a
financial asset or financial liability (see paragraph B5.4.8). An incremental cost is one that
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would not have been incurred if the entity had not acquired, issued or disposed of the
financial instrument."
Further paragraph B5.4.8 of Ind AS 109 provides that the Transaction costs include fees and
commission paid to agents (including employees acting as selling agents), advisers, brokers
and dealers, levies by regulatory agencies and security exchanges, and transfer taxes and
duties. Transaction costs do not include debt premiums or discounts, financing costs or
internal administrative or holding costs.
Paragraph B5.4.2 of Ind AS 109, inter alia, provides that fees that are an integral part of the
effective interest rate of a financial instrument include origination fees paid on issuing
financial liabilities measured at amortised cost. These fees are an integral part of generating
an involvement with a financial liability.
It is assumed that the loan processing fees solely relates to the origination of the new loan
(i.e. does not represent loan modification/renegotiation fees), In accordance with the above,
the processing fees paid to avail fresh loan from Bank B will be considered as transaction
cost in the nature of origination fees of the new loan and will be included while calculating
effective interest rate as per Ind AS 109.
Further, as per paragraph 3.3.3 of Ind AS 109, the difference between the carrying amount of
a financial liability (or part of a financial liability) extinguished or transferred to another party
and the consideration paid, including any non-cash assets transferred or liabilities assumed,
shall be recognised in profit or loss.
Paragraph B3.3.6 of Ind AS 109, provides that if an exchange of debt instruments or
modification of terms is accounted for as an extinguishment, any costs or fees incurred are
recognised as part of the gain or loss on the extinguishment.
Since the original loan was prepaid, the prepayment would result in extinguishment of the
original loan. As per paragraph 3.3.3 of Ind AS 109 as stated above, the difference between
the carrying amount of the financial liability extinguished and the consideration paid shall be
recognised in profit or loss. Further paragraph B3.3.6 of Ind AS 109 states that where
modification of terms is accounted for as an extinguishment, any costs or fees incurred are
recognised as part of the gain or loss on the extinguishment. Accordingly, the prepayment
premium shall be recognised as part of the gain or loss on extinguishment of the old loan.
Further, the unamortised processing fee related to the old loan will also be required to be
charged to the statement of profit and loss.
Issue 5: XYZ Ltd. is a first-time adopter of Ind AS from financial year 2016-17. ABC
Ltd. was an associate company of XYZ Ltd. under the previous GAAP and the same
was accounted under equity method in the consolidated financial statements of XYZ
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Ltd. ABC Ltd. became its subsidiary considering the principles of de-facto control as
per the requirements of Ind AS 110, Consolidated Financial Statements.
Before transition to Ind AS, XYZ Ltd. had sold goods to ABC Ltd. at profit margin of
10%, which is being used by ABC Ltd for its operation, i.e., represents property, plant
and equipment for ABC Limited. XYZ Ltd. has chosen to avail deemed cost exemption
provided in paragraph D7AA of Ind AS 101, First-time Adoption of Indian Accounting
Standards, i.e., to continue with carrying value of property, plant and equipment as per
the previous GAAP which requires the values appearing in the subsidiary's financial
statements to be taken without any adjustment.
Will such unrealised profits existing in the property, plant and equipment at
consolidated level require elimination?
Response: Paragraph D7AA of Ind AS 101 states that where there is no change in its
functional currency on the date of transition to Ind ASs, a first-time adopter to Ind ASs may
elect to continue with the carrying value for all of its property, plant and equipment as
recognised in the financial statements as at the date of transition to Ind ASs, measured as per
the previous GAAP and use that as its deemed cost as at the date of transition after making
necessary adjustments in accordance with paragraph D21 and D21A, of this Ind AS. For this
purpose, if the financial statements are consolidated financial statements, the previous GAAP
amount of the subsidiary shall be that amount used in preparing and presenting consolidated
financial statements. Where a subsidiary was not consolidated under previous GAAP, the
amount required to be reported by the subsidiary as per previous GAAP in its individual
financial statements shall be the previous GAAP amount. If an entity avails the option under
this paragraph, no further adjustments to the deemed cost of the property, plant and
equipment so determined in the opening balance sheet shall be made for transition
adjustments that might arise from the application of other Ind ASs."
Further, paragraph B86 of Ind AS 110, Consolidated Financial Statements, inter alia, states
that:
(c) eliminate in full intra group assets and liabilities, equity, income, expenses and cash
flows relating to transactions between entities of the group (profits or losses resulting
from intra group transactions that are recognised in assets, such as inventory and fixed
assets, are eliminated in full). Intra group losses may indicate an impairment that
requires recognition in the consolidated financial statements. Ind AS 12, Income Taxes,
applies to temporary differences that arise from the elimination of profits and losses
resulting from intra group transactions.
Accordingly, in the given case XYZ Ltd. in its consolidated financial statements will first
eliminate the intra group profit of 10% recognised in separate financial statements of ABC
Ltd. and then will apply the deemed cost exemption under paragraph D7AA of Ind AS 101.
Issue 6: ABC & Company incorporated in US with limited liability, has established a
branch office in India, with the permission of the Reserve Bank of India (RBI), to
provide consultancy services in India. The branch office remits the amounts earned by
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it to ABC & Co. (i.e. Head office) net of applicable Indian taxes and subject to RBI
guidelines.
As on April 1, 2016, it has more than 500 crore balance as "Head office account".
Whether the India branch office of ABC Co. will be required to comply with Ind AS?
Response: As per the roadmap issued by the MCA, "company" as defined in clause (20) of
section 2 of the Companies Act, 2013 is required to comply with Ind AS. Section 2(20) of the
Act defines company as follows:
"company" means a company incorporated under this Act or under any previous
company law;
The branch office of a foreign company established in India is not incorporated under the A
ct. It is only an establishment of a foreign company in India. The Branch office is just an
extension of the foreign company in India.
Further, as per Rule 6 of the Companies (Indian Accounting Standards) Rules, 2015, "Indian
company which is a subsidiary, associate, joint venture and other similar entities of a foreign
company shall prepare its financial statements in accordance with the Indian Accounting
Standards (Ind AS) if it meets the criteria as specified in sub-rule (1)."
In accordance with the above, it may be noted that Branch office of a foreign company is not
covered under rule 6 as mentioned above. Accordingly, in the given case, the branch office of
ABC& Co. is not required to comply with Ind AS.
Issue 7: (i) P Ltd., had obtained a below-market rate of interest loan of INR 10,00,000
from Government as on April 1, 2014 for 5 years. The date of transition to Ind AS for
Entity P is April 1, 2016. Paragraph B10 of Ind AS 101, First-time Adoption of Indian
Accounting Standards, requires a first-time adopter to use its previous GAAP carrying
amount of government loans existing at the date of transition to Ind AS as the Ind AS
carrying amount of such loans at that date.
Under previous GAAP, the carrying amount was INR 10,00,000 at the date of transition
to Ind AS. The amount repayable will be INR 10,05,000 at April 1, 2019. No other
payment is required under the terms of the loan and there are no future performance
conditions attached to the loan. Whether the exemption under paragraph B10 is only
for the date of transition to Ind AS or all the subsequent period till the existing loan is
presented i.e. 31.3.2019.
(ii) Further P Ltd., also has deferment of liability payable to government based on
agreement i.e. liability similar to sales tax deferment for 10 years, can the P Ltd take
exemption under B10 stating it is similar to government loan?
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Response: (i) Paragraph B10 of Ind AS 101, First-time Adoption of Indian Accounting
Standards states as follows:
"B10 A first-time adopter shall classify all government loans received as a financial liability
or an equity instrument in accordance with Ind AS 32, Financial Instruments: Presentation.
Except as permitted by paragraph B11, a first-time adopter shall apply the requirements in
Ind AS 109, Financial Instruments, and Ind AS 20, Accounting for Government Grants
and Disclosure of Government Assistance, prospectively to government loans existing at the
date of transition to Ind ASs and shall not recognise the corresponding benefit of the
government loan at a below-market rate of interest as a government grant. Consequently, if
a first-time adopter did not, under its previous GAAP, recognise and measure a government
loan at a below-market rate of interest on a basis consistent with Ind AS requirements, it shall
use its previous GAAP carrying amount of the loan at the date of transition to Ind ASs as the
carrying amount of the loan in the opening Ind AS Balance Sheet. An entity shall apply Ind AS
109 to the measurement of such loans after the date of transition to Ind ASs."
Paragraph 10A of Ind AS 20 states that, "The benefit of a government loan at a below-market
rate of interest is treated as a government grant. The loan shall be recognised and measured
in accordance with Ind AS 109, Financial Instruments. The benefit of the below market rate of
interest shall be measured as the difference between the initial carrying value of the loan
determined in accordance with Ind AS 109, and the proceeds received. The benefit is
accounted for in accordance with this Standard. The entity shall consider the conditions and
obligations that have been, or must be, met when identifying the costs for which the benefit of
the loan is intended to compensate."
In accordance with the above, a first-time adopter is required to use its previous GAAP
carrying amount of government loans existing at the date of transition to Ind AS as the Ind AS
carrying amount of such loans at that date. A first-time adopter applies Ind AS 32, Financial
Instruments: Presentation to classify such a loan as a financial liability or an equity
instrument. It shall apply the requirements of Ind AS 20 and Ind AS 109 prospectively to
government loans existing at the date of transition to Ind AS, unless the necessary
information needed to apply the requirements of Ind AS 109 and Ind AS 20,
retrospectively was obtained at the time of initially accounting for that loan. As a result
of not applying Ind AS 20 and Ind AS 109 retrospectively to government loans at the date of
transition, the corresponding benefit of the government loan at a below-market rate of interest
is not recognised as a government grant.
It is pertinent to note that subsequently, the first-time adopter applies Ind AS 109 to such a
loan. To do so, the entity calculates the effective interest rate by comparing the carrying
amount of the loan at the date of transition to Ind AS with the amount and timing of expected
repayments to the government.
In the given case, as per Ind AS 32, the loan meets the definition of a financial liability. P Ltd.
uses the previous GAAP carrying amount of the loan at the date of transition to Ind AS as the
carrying amount of the loan in the opening Ind AS balance sheet. Further, in order to measure
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the loan after the date of transition to Ind AS, the effective interest rate starting from April 1,
2016 shall be calculated.
(ii) As per Ind AS 20, "Government grants are assistance by government in the form of
transfers of resources to an entity in return for past or future compliance with certain
conditions relating to the operating activities of the entity. They exclude those forms of
government assistance which cannot reasonably have a value placed upon them and
transactions with government which cannot be distinguished from the normal trading
transactions of the entity."
Further, paragraphs 9 and 10 of Ind AS 20 state as follows:
9 The manner in which a grant is received does not affect the accounting method to be
adopted in regard to the grant. Thus a grant is accounted for in the same manner whether it
is received in cash or as a reduction of a liability to the government.
In a scheme of deferral of sales tax, the amount of sales tax collected by the company from its
customers is retained by the company and is required to be repaid after specified years (10
years in the example above). This makes such an arrangement similar in nature to an interest
free loan and hence the treatment as mentioned in part (i) above shall also be applied to such
balances outstanding at the date of transition.
Issue 8: Company A holds 100% shareholding of Company B. Company B holds 100%
shareholding of Company C since 1 April 2000. Pursuant to a court scheme, to be filed
in February 2018, Entity C will merge with Entity B during the financial year 2018-19
(i.e. the scheme is expected to be approved during the financial year 2018-2019). All
companies (A, B and C) are covered under Phase II of Ind AS and will prepare financial
statements for year ending 31 March 2018 as per Ind AS.
In case the appointed date in the scheme is 1 April 2016, would it have any impact on
the certificate to be issued by the auditors on compliance of the scheme with Ind AS
103?
Would the response be different in case the transferor and transferee entities are not
under common control?
Response: Paragraph 8 and 9 of Ind AS 103, Business Combinations states as follows:
"Determining the acquisition date
8 The acquirer shall identify the acquisition date, which is the date on which it obtains
control of the acquiree.
The date on which the acquirer obtains control of the acquiree is generally the date on which
the acquirer legally transfers the consideration, acquires the assets and assumes the
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liabilities of the acquiree--the closing date. However, the acquirer might obtain control on a
date that is either earlier or later than the closing date. For example, the acquisition date
precedes the closing date if a written agreement provides that the acquirer obtains control of
the acquiree on a date before the closing date. An acquirer shall consider all pertinent facts
and circumstances in identifying the acquisition date."
Ind AS 103, Business Combinations, prescribes significantly different accounting for
business combinations which are not under common control and those under common
control. Hence, it is pertinent to note that entity is required to assess whether the business
combination is under common control or not.
Business Combination is under common control
Paragraph 8 and 9 of Appendix C to Ind AS 103, Business Combinations states as follows:
"8 Business combinations involving entities or businesses under common control shall be
accounted for using the pooling of interests method.
9 The pooling of interest method is considered to involve the following:
(i) The assets and liabilities of the combining entities are reflected at their carrying
amounts.
(ii) No adjustments are made to reflect fair values, or recognise any new assets or
liabilities. The only adjustments that are made are to harmonise accounting policies.
(iii) The financial information in the financial statements in respect of prior periods
should be restated as if the business combination had occurred from the
beginning of the preceding period in the financial statements, irrespective of the
actual date of the combination. However, if business combination had occurred
after that date, the prior period information shall be restated only from that date.
(Emphasis added)"
In accordance with paragraph 9(iii) above, the entity will be required to restate its financial
statements as if the business combination had occurred from the beginning of the preceding
period in the financial statements.
In cases where the auditor is of the view that as per the proposed accounting treatment, the
date from which the amalgamation is effected in the books of accounts of the amalgamated
company is different from the acquisition date as per the Standard i.e. the date on which
control has been actually transferred, then the auditor shall state the same in the certificate as
required to be issued as per the proviso to Section 232 (3) of the Companies Act, 2013. If the
NCLT approves the scheme with a different appointed date as compared to the acquisition
date as per Ind AS 103, the appointed date as approved by the NCLT under the scheme will
be the acquisition date. In this situation, the company should provide appropriate disclosures
and the auditor should consider the requirements of relevant auditing standards.
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Business Combination is not under common control
For business combinations other than under common control the date of acquisition is the
date from which the acquirer obtains control of the acquiree.
In cases where the auditor is of the view that as per the proposed accounting treatment, the
date from which the amalgamation is effected in the books of accounts of the amalgamated
company is different from the acquisition date as per the standard i.e., the date on which
control has been actually transferred, then the auditor shall state the same in the certificate as
required to be issued as per the proviso to Section 232 (3) of the Companies Act, 2013.
However, if the NCLT approves the scheme with a different appointed date as compared to
the acquisition date as per Ind AS 103, the appointed date as approved by NCLT under the
scheme will be the acquisition date. In this situation, the company should provide appropriate
disclosures and the auditor should consider the requirements of relevant auditing standards.
Issue 9: Company A is covered under Phase II of Ind AS roadmap and is required to
apply Ind AS from financial Year 2017-18. Company A acquired Company B as per the
scheme of amalgamation sanctioned under the provisions of the Companies Act, 2013.
The amalgamation was effective from 1st April, 2015 and was accounted for in the
financial year 2015-16 under Indian GAAP.
As per the Scheme, the entire undertaking of Company B including all its assets,
liabilities and reserves and surplus stood transferred in Company A. As a result,
Company A has taken over assets /liabilities including certain financial instruments.
Under Ind AS, Company A has opted for option under paragraph C1 of Ind AS 101,
First-time Adoption of Indian Accounting Standards, not to apply Ind AS 103
retrospectively to past business combinations (business combinations that occurred
before the date of transition to Ind AS).
Whether Company A would be required to apply Ind AS 109, Financial Instruments
retrospectively (i.e. from the date of origination of the financial instrument by Company
B) to such financial instruments acquired as part of the business combination?
Response: Paragraphs C1 and C4 of Ind AS 101, First-time Adoption of Indian Accounting
Standards, state as follows:
"C1 - A first-time adopter may elect not to apply Ind AS 103 retrospectively to past business
combinations (business combinations that occurred before the date of transition to Ind ASs).
However, if a first-time adopter restates any business combination to comply with Ind AS
103, it shall restate all later business combinations and shall also apply Ind AS 110 from that
same date.
C4 - If a first-time adopter does not apply Ind AS 103 retrospectively to a past business
combination, this has the following consequences for that business combination:
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(a) The first-time adopter shall keep the same classification (as an acquisition by the legal
acquirer, a reverse acquisition by the legal acquiree, or a uniting of interests) as in its
previous GAAP financial statements.
(b) The first-time adopter shall recognise all its assets and liabilities at the date of transition
to Ind ASs that were acquired or assumed in a past business combination, other than:
(i) some financial assets and financial liabilities derecognised in accordance with previous
GAAP (see paragraph B2); and
(ii) assets, including goodwill, and liabilities that were not recognised in the acquirer's
consolidated Balance Sheet in accordance with previous GAAP and also would not qualify
for recognition in accordance with Ind ASs in the separate Balance Sheet of the acquiree
(see (f)(i) below).
The first-time adopter shall recognise any resulting change by adjusting retained earnings
(or, if appropriate, another category of equity), unless the change results from the
recognition of an intangible asset that was previously subsumed within goodwill (see (g) (i)
below).
(c) The first-time adopter shall exclude from its opening Ind AS Balance Sheet any item
recognised in accordance with previous GAAP that does not qualify for recognition as an
asset or liability under Ind ASs. .........."
In accordance with the above, it may be noted that Ind AS 101 provides an optional
exemption not to apply Ind AS retrospectively to business combinations that occurred before
the date of transition to Ind AS. If previous business combinations are not restated, the
previous acquisition accounting remains unchanged. Carrying amount under previous GAAP
of assets acquired and liabilities assumed in an un-restated business combination immediately
after the business combination becomes their deemed cost at that date.
Paragraph C4(e)of Ind AS 101, states that, "Immediately after the business combination, the
carrying amount in accordance with previous GAAP of assets acquired and liabilities
assumed in that business combination shall be their deemed cost in accordance with Ind ASs
at that date. If Ind ASs require a cost-based measurement of those assets and liabilities at a
later date that deemed cost shall be the basis for cost-based depreciation or amortisation
from the date of the business combination."
In preparing its opening Ind AS Balance sheet, an entity applies the criteria in Ind AS 109 to
classify financial instruments on the basis of the facts and circumstances that exist at the date
of transition to Ind AS. The resulting classifications are applied retrospectively.
For those financial assets and financial liabilities measured at amortised cost in the opening
Ind AS balance sheet, an entity determines the cost of the financial assets and the financial
liabilities on the basis of circumstances existing when the assets and liabilities first satisfied
the recognition criteria in Ind AS 109. However, if the entity acquired those financial
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assets and financial liabilities in a past business combination, their carrying amount in
accordance with previous GAAP immediately following the business combination is
their deemed cost in accordance with Ind AS at that date.
In accordance with the above, unless there is a transitional relief under Ind AS 101 for
financial instruments, the requirements of Ind AS 109 need to be applied retrospectively. it is
pertinent to note that although Ind AS 101 does not provide for any transitional relief for
financial instruments and requires applying requirements of Ind AS 109 retrospectively.
However, Ind AS 101 specifically provides guidance with regard to treatment to be done if
entity elects to opt not to restate past business combinations. Accordingly, if financial
instruments have been acquired as part of the business combinations, then requirements of
Appendix C to Ind AS 101 shall apply.
In the given case, for the financial instruments acquired as part of the business combination
carrying amount as per the previous GAAP shall be their deemed cost at the date of business
combination. Fair value or amortised cost (as required by Ind AS 109) shall be determined
from the date of business combination and not from the date of origination of such financial
instrument by Company B. If financial instruments are classified as FVTPL/FVOCI, then
these should be measured at fair value at the date of transition to Ind AS. If these instruments
are classified at amortised cost, then the entity determine the carrying amount on the
transition date by taking the carrying amount of the loan at the date of business combination
under previous GAAP and apply the effective interest rate which is determined after
considering the amount and timing of expected settlement of such financial instrument. .
Issue 10: On the date of transition, an entity has elected to measure its assets and
liabilities at its deemed cost in accordance with previous GAAP carrying value as
permitted under Ind AS 101 First-time Adoption of Indian Accounting Standards in the
opening Ind AS Financial Statements.
Whether any adjustments arising due to application of other Ind AS is to be made to the
previous GAAP carrying amount on the date of transition, if this exemption is availed?
Response: Ind AS 101 defines `Deemed Cost' as an amount used as a surrogate for cost or
depreciated cost at a given date. Subsequent depreciation or amortisation assumes that the
entity had initially recognised the asset or liability at the given date and that its cost was equal
to the deemed cost."
Further, paragraph 10 of Ind AS 101, provides as follows:
"Except as described in paragraphs 1319 and Appendices BD, an entity shall, in its
opening Ind AS Balance Sheet:
(a) recognise all assets and liabilities whose recognition is required by Ind ASs;
(b) not recognise items as assets or liabilities if Ind ASs do not permit such recognition;
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(c) reclassify items that it recognised in accordance with previous GAAP as one type of
asset, liability or component of equity, but are a different type of asset, liability or
component of equity in accordance with Ind ASs; and
(d) apply Ind ASs in measuring all recognised assets and liabilities.
In view of the above, except any specific exemption /exception as laid out in Ind AS 101, all
the assets and liabilities are required to be recognised in accordance with the principles of Ind
AS 101.
There may be certain situations where no exemption /exception has been provided in respect
of an item of asset and/or liability; however, application of Ind AS principles has a
corresponding impact on another item of asset and/or liability in respect of which Ind AS 101
permits carry forward of previous GAAP amounts as at the transition date. In such situations,
since the adjustment to assets /liabilities is only consequential and arising because of
application of the transition requirements of Ind AS 101, the previous GAAP carrying
amount needs to be adjusted only to this extent. It may be noted that except such situations,
no further adjustment should be made due to application of other Ind AS, if an entity measure
its assets and liabilities at its deemed cost in accordance with previous GAAP carrying value
as permitted under Ind AS 101 on the date of transition. Please also refer Issue No. 4 and
Issue No. 5 of ITFG Clarification Bulletin 5 and Issue no. 1 of ITFG Clarification Bulletin
10.
Issue 11: V Ltd. is covered under Phase II of Ind AS roadmap and is required to apply
Ind AS from financial year 2017-18. It has given financial guarantee for five years
against the loan taken by its associate company, S Ltd. since 1.4.2014 and charging 1%
guarantee commission.
(a) At what value will the financial guarantee contract be accounted for in the opening
Ind AS balance sheet of V Ltd.
(b) Further, if on 31.3.2016, the guarantee is invoked but V Ltd. has shown it under
contingent liability in financial statement of 2015 and also 2016 contesting that it is
confident that liability shall not devolve on it.
Whether on transition date i.e. 1.4.2016 the impairment need to be calculated and
accordingly fair value of financial guarantee need to be calculated.
Response: (a) Presuming that the financial guarantee given by V Ltd. meets the definition of
financial guarantee contracts under Ind AS 109, if the associate company S Ltd. pays the
parent company V Ltd. a guarantee commission, company V Ltd. is required to determine if
this commission represents the fair value of the financial guarantee contract. If the premium
is equivalent to an amount that company S Ltd. would have paid to obtain a similar guarantee
in a standalone arm's length transaction, then at the initial recognition the fair value of the
financial guarantee contract is likely to equal the commission received.
(b) Paragraph 4.2.1 of Ind AS 109, Financial Instruments states as follows:
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"4.2.1 An entity shall classify all financial liabilities as subsequently measured at amortised
cost, except for:
c) financial guarantee contracts. After initial recognition, an issuer of such a contract shall
(unless paragraph 4.2.1(a) or (b) applies) subsequently measure it at the higher of:
(i) the amount of the loss allowance determined in accordance with Section 5.5 and
(ii) the amount initially recognised (see paragraph 5.1.1) less, when appropriate, the
cumulative amount of income recognised in accordance with the principles of Ind AS 18"
5.5.1 An entity shall recognise a loss allowance for expected credit losses on a financial
asset that is measured in accordance with paragraphs 4.1.2 or 4.1.2A, a lease receivable, a
loan commitment and a financial guarantee contract to which the impairment requirements
apply in accordance with paragraphs 2.1(g), 4.2.1(c) or 4.2.1(d).
Company V Ltd. should recognise a liability for the amount of premium received and
subsequently measure the financial guarantee contract at the higher of the amount of loss
allowance determined in accordance with Ind AS 109 and the amount initially recognised less
cumulative amount of income recognised in accordance with Ind AS 18, Revenue.
In accordance with the above, at the end of each reporting period the entity shall estimate and
recognise the expected loss in accordance with the provisions prescribed in the standard.
Accordingly, in the given case V Ltd. shall estimate and recognise the same in accordance
with Ind AS 109.
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