Ind AS Transition Facilitation Group (ITFG) Clarification Bulletin 1

The Accounting Standards Board (ASB) of the ICAI has constituted `Ind AS Transition
Facilitation Group' (ITFG)1 for providing clarifications on urgent 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.

At the First (1st) Ind AS Transition Facilitation Group (ITFG) meeting held on January
16, 2016 at New Delhi, issues received from some members were discussed. The Group
after due deliberations decided to issue following clarifications2 on the issues considered
at the meeting.

Issue 1. Company X, on standalone basis, had a net worth of above Rs. 250 crore but below
Rs. 500 crore in financial year 2013-14 as well as financial year 2014-15 and is expected to
exceed Rs. 500 crore in financial year 2015-16.

Whether the Company X be required to comply with Ind AS from financial year 2017-18 i.e.
under Phase II, given that the net worth as on 31st March 2014 was below Rs. 500 Crore and
the Company X was a company existing as on 31st March 2014 and was already falling under
the threshold as on 31st March 2014 itself irrespective of the fact that the net-worth as on
31st March 2016 might be above Rs. 500 crore.

Response: Rule 4(2) of the Companies (Indian Accounting Standards) Rules, 2015, states as
          under:
"For the purposes of calculation of net worth of companies under sub-rule (1), the following
principles shall apply, namely:-
                     (a) the net worth shall be calculated in accordance with the stand-alone
                         financial statements of the company as on 31st March, 2014 or the first
                         audited financial statements for accounting period which ends after that
                         date;
                     (b) for companies which are not in existence on 31st March, 2014 or an
                         existing company falling under any of thresholds specified in sub-rule (1)
                         for the first time after 31st March, 2014, the net worth shall be calculated
                         on the basis of the first audited financial statements ending after that date
                         in respect of which it meets the thresholds specified in sub-rule (1).
Explanation.- For the purposes of sub-clause (b), the companies meeting the specified
1
  Announcement on the Constitution of Ind AS Transition Facilitation Group (ITFG) is available at the ICAI's website at
http://www.icai.org/new_post.html?post_id=12289&c_id=219
2
  Although the `Ind AS Transition Facilitation Group' (ITFG) has been constituted by the Accounting Standards Board (ASB),
clarifications given or views expressed by the ITFG represent the views of the members of the Ind AS Transition Facilitation Group
(ITFG) and are not necessarily the views of the ASB 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. Members and others may send any further issues for
clarification by ITFG by writing to asb@icai.in.
thresholds given in sub-rule (1) for the first time at the end of an accounting year shall apply
Indian Accounting Standards (Ind AS) from the immediate next accounting year in the
manner specified in sub-rule (1)".
In view of the requirement at (b) above, any company that meets the thresholds as specified
in the Rules in a particular financial year, The Companies (Indian Accounting Standards)
Rules, 2015, will become applicable to such company in immediately next financial year.
Therefore, in the given case, company X which had net worth of above Rs. 250 crore but
below Rs. 500 crore in financial year 2013-14 as well as financial year 2014-15 and is
expected to exceed Rs. 500 crore in financial year 2015-16, will have to prepare financial
statements on the basis of Indian Accounting Standards ( Ind AS), from the financial year
beginning on April 1, 2016.
Issue 2. Company A is a listed company and has three Subsidiaries Company X, Company Y
and Company Z. As on 31st March 2014, the net worth of Company A is Rs 600 Crores, net
worth of Company X is Rs 100 Crores, Company Y is Rs 400 Crores and Company Z is Rs
210 Crores. All the three subsidiaries are non-listed public companies.

Case A During the financial year 2014-15, Company A has sold off its entire investment in
Company X on 31st December 2014. Therefore, Company X is no longer a subsidiary of
Company A for the purposes of preparation of financial statements as on 31 March 2015.
Should Company X prepare its financial statements as per the Companies (Accounting
Standards) Rules, 2006 or the Companies (Indian Accounting Standards) Rules, 2015?

Case B During the financial year 2015-16, Company A has sold off its investment in
Company Y on 31st December, 2015. Therefore, Company Y is no longer a subsidiary of
Company A for the purposes of preparation of financial statements as on 31 March 2016.
Should Company Y prepare its financial statements as per the Companies (Accounting
Standards) Rules, 2006 or the Companies (Indian Accounting Standards) Rules, 2015?






Case C During the financial year 2016-17, Company A has sold off its investment in
Company Z on 31st December 2016, therefore company Z is no longer a subsidiary of
Company A for the purposes of preparation of financial statements as on 31 March 2017.
Should Company Z prepare its financial statements as per the Companies (Accounting
Standards) Rules, 2006 or the Companies (Indian Accounting Standards) Rules, 2015?

Response : Rule 4(1)(ii)(c) of the Companies (Indian Accounting Standards) Rules, 2015,
           states as under:
       (4) (1) The Companies and their auditors shall comply with the Indian Accounting
       Standards (Ind AS) specified in Annexure to these rules in preparation of their
       financial statements and audit respectively, in the following manner, namely:-
            (ii) the following companies shall comply with the Indian Accounting
                  Standards (Ind AS) for the accounting periods beginning on or after 1st
                  April, 2016, with the comparatives for the periods ending on 31st March,
                  2016, or thereafter, namely:-

                   (a) companies whose equity or debt securities are listed or are in the
                       process of being listed on any stock exchange in India or outside India
                       and having net worth of rupees five hundred crore or more;
                   (b) companies other than those covered by sub-clause (a) of clause (ii) of
                       sub-rule(1) and having net worth of rupees five hundred crore or
                       more;
                   (c) holding, subsidiary, joint venture or associate companies of
                       companies covered by sub-clause (a) of clause (ii) of sub- rule (1) and
                       sub-clause (b) of clause (ii) of sub- rule (1) as the case may be;
   Rule 4(2) of the Companies (Indian Accounting Standards) Rules, 2015, states as under:
       (2) For the purposes of calculation of net worth of companies under sub-rule (1), the
       following principles shall apply, namely:-
               (a) the net worth shall be calculated in accordance with the stand-alone
                   financial statements of the company as on 31st March, 2014 or the first
                   audited financial statements for accounting period which ends after that
                   date;
               (b) for companies which are not in existence on 31st March, 2014 or an
                   existing company falling under any of thresholds specified in sub-rule (1)
                   for the first time after 31st March, 2014, the net worth shall be calculated
                   on the basis of the first audited financial statements ending after that date
                   in respect of which it meets the thresholds specified in sub-rule (1).
       Explanation.- For the purposes of sub-clause (b), the companies meeting the specified
       thresholds given in sub-rule (1) for the first time at the end of an accounting year
       shall apply Indian Accounting Standards (Ind AS) from the immediate next
       accounting year in the manner specified in sub-rule (1).
Rule (9) of the Companies (Indian Accounting Standards) Rules, 2015, states that:
"Once a company starts following the Indian Accounting Standards (Ind AS) either
voluntarily or mandatorily on the basis of criteria specified in sub-rule (1), it shall be
required to follow the Indian Accounting Standards (Ind AS) for all the subsequent financial
statements even if any of the criteria specified in this rule does not subsequently apply to it".

In view of the above requirements, Company A meets the criteria as specified in the Rule
4(2) (a) of the Companies (Indian Accounting Standards) Rules, 2015, on 31st March, 2014.
Accordingly, the Companies (Indian Accounting Standards) Rules, 2015, will become
applicable to the Company on mandatory basis from accounting periods commencing 1st
April, 2016.

As per the Rule 4(1)(ii)(c) of the Companies (Indian Accounting Standards) Rules, 2015 , a
holding, subsidiary, joint venture or associate company of a Company to which the
Companies (Indian Accounting Standards) Rules, 2015 applies will be required to follow the
Companies (Indian Accounting Standards) Rules, 2015 for preparing and presenting its
financial statements.

In the abovementioned case, Company A has net worth of more than Rs.500 crore in the
financial year ending 31 March 2014. Therefore, ordinarily Company A along with its
subsidiaries will have to apply Indian Accounting Standards (Ind ASs) for preparing financial
statements for the accounting periods commencing 1st April, 2016, except in situations
covered by Case A and Case B as discussed below.

Case A
Company A has sold off its entire investment in Company X on 31st December, 2014;
Company X is no longer a subsidiary of Company A as at the beginning of 1st April, 2016.
Therefore, in this case, Company X would continue to prepare financial statements for the
accounting periods commencing 1st April, 2016, as per the Companies (Accounting
Standards) Rules, 2006.

Case B
Company A has sold its investment in subsidiary Company Y on 31st December, 2015, in
consequence of which Company Y is no longer subsidiary of Company A as at the beginning
of 1st April, 2016. Therefore, the Companies (Indian Accounting Standards) Rules, 2015 will
not be applicable to Company Y. Therefore, Company Y would continue to prepare financial
statements for accounting periods commencing April 1, 2016 under the Companies
(Accounting Standards) Rules, 2006.

Case C
In the given case, Company A has sold its investment in subsidiary Company Z on 31st
December, 2016; therefore, Company Z was a subsidiary of Company A as at the beginning
of 1st April, 2016. Company Z being subsidiary of Company A as at the beginning of 1st
April, 2016, would have to prepare financial statements for the accounting periods
commencing 1st April, 2016 as per the Companies (Indian Accounting Standards) Rules,
2015.

Issue 3. Company XYZ ltd. having net worth of Rs. 600 crores as on March 31, 2014 has
taken a loan having term of 5 years for importing fixed assets as on July 1, 2014, February 1,
2016 and May 3, 2016. The Company has followed the policy of recognising the exchange
differences arising from long term foreign currency monetary items in the cost of fixed assets
where such monetary item has arisen for purchase of fixed assets pursuant to paragraph 46/
46 A of AS 11, The Effects of Changes in Foreign Exchange Rates, notified under the
Companies (Accounting Standards) Rules, 2006. Considering the requirements of paragraph
D13AA of Ind AS 101, First-time adoption of Indian Accounting Standards, whether the
company can continue to recognise the exchange differences arising from the abovesaid loans
in the cost of Property, Plant and Equipment, when adopting Ind AS for the first time?

Response: Paragraph D13AA of Ind AS 101, First-time Adoption of Indian Accounting
Standards states as follows:
       "A first-time adopter may continue the policy adopted for accounting for exchange
       differences arising from translation of long-term foreign currency monetary items
       recognised in the financial statements for the period ending immediately before the
       beginning of the first Ind AS financial reporting period as per the previous GAAP."
Paragraph D13AA of Ind AS 101, First-time adoption of Indian Accounting Standards,
provides an option to continue the policy of recognising the exchange differences on long
term foreign currency monetary items as per paragraph 46/46A of AS 11, The Effects of
Changes in Foreign exchange Rates, only for those long term foreign currency monetary
items which were recognised in the financial statements before the beginning of first Ind AS
reporting period.
In the above case, the beginning of the first Ind AS reporting period for company XYZ is
April 1, 2016. Therefore, the option given in paragraph D13AA of Ind AS 101 will be
available for loans taken as on July1, 2014 and February 1, 2016 and will not be available for
the loan taken after March 31, 2016.
Issue 4: Company ZED Ltd., having net worth of Rs. 600 crores as on March 31, 2014, has
assessed that its functional currency as per the requirements of Ind AS 21, The Effects of
Changes in Foreign Exchange Rates, is USD. The Company has taken loans in USD as well
as in INR for importing fixed assets before 1st March 2014. The Company follows the policy
of recognising the exchange differences arising from long term foreign currency monetary
items in the cost of fixed assets where such monetary item has arisen for purchase of fixed
assets. Considering the requirements of paragraph D13AA of Ind AS 101, First-time
Adoption of Indian Accounting Standards, whether the company can continue to recognise
the exchange differences arising from the above said loans in the cost of Property, Plant and
Equipment, when adopting Ind AS for the first time?


Response : Paragraph D13AA of Ind AS 101, First-time Adoption of Indian Accounting
Standards states as follows:
       "A first-time adopter may continue the policy adopted for accounting for exchange
       differences arising from translation of long-term foreign currency monetary items
       recognised in the financial statements for the period ending immediately before the
       beginning of the first Ind AS financial reporting period as per the previous GAAP."
Paragraph D13AA as stated above provides an option to continue the policy of recognising
the exchange differences on long term foreign currency monetary items as per paragraph
46/46A of AS 11, The Effects of Changes in Foreign Exchange Rates, only for those long
term foreign currency monetary items which were recognised in the financial statements
before the beginning of first Ind AS reporting period. Therefore, the option given in
paragraph D13AA of Ind AS 101, will be available in case of those long term foreign
currency monetary items which were recognised in the financial statements ending on or
before 31st March, 2016 and are regarded as foreign currency monetary items under Ind AS
21.






 In the given case, the functional currency of Company ZED has changed from INR to USD.
Therefore, the USD loans will no longer be regarded as foreign currency monetary items
under Ind AS. Hence, such a company cannot continue the policy of recognising the
exchange differences, arising from USD loans, in the cost of fixed assets.
Issue 5. ABC ltd. having net worth of Rs. 500 crores as on March 31, 2014 wants to assess its
functional currency. From which date should company ABC Ltd. assess its functional
currency i.e whether from date of transition or retrospectively as per paragraph 10 of Ind AS
101, First-time Adoption of Indian Accounting Standards?

Response: Paragraphs 13-19 of Ind AS 101 First-time Adoption of Indian Accounting
Standards provide `Exceptions to the retrospective application of other Ind ASs' and
Appendices B-C of Ind AS 101 First-time Adoption of Indian Accounting Standards, provide
certain `Exceptions to retrospective application of other Ind ASs' and `Exemptions for
Business Combination' respectively.

Paragraphs 13-19 and Appendices B-C are silent on the assessment of functional currency by
an entity, i.e, from date of transition or retrospectively. Since neither any exception nor any
exemption has been specified for assessment of functional currency, an entity will have to
assess its functional currency retrospectively as per paragraph 10 of Ind AS 101 stated as
below.
Paragraph 10 of Ind AS 101 First-time Adoption of Indian Accounting Standards, states 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;
       (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".