Ind AS Transition Facilitation Group (ITFG) Clarification Bulletin 3
`Ind AS Transition Facilitation Group' (ITFG) of Ind AS (IFRS) 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.
At the third and fourth (3rd and 4th) meeting of Ind AS Transition Facilitation Group (ITFG)
held on May 23, 2016 and June 22, 2016, respectively at Mumbai, issues received from some
members were discussed. The Group after due deliberations decided to issue following
clarifications1 on the issues considered at the meetings:
Issue 1
Companies which have chosen for voluntary adoption of Ind AS from the financial year
2015-16 do not have clear format that should be used for the preparation of financial
statements. In the absence of any specific format, whether a company may apply Ind AS
based Schedule III (i.e. the Division II of Schedule III notified by MCA)?
Response
The Ministry of Corporate Affairs, by notification dated April 6, 2016, amended Schedule III
by incorporating Division-II for preparation of financial statements as per Ind AS with effect
from the date of publication in the Official Gazette i.e. April 6, 2016. It may be noted that as
on March 31, 2016, there was no specific Schedule prescribed under the Companies Act 2013,
for companies voluntarily adopting Ind AS from financial year 2015-16. However, it may
further be noted that there is no prohibition in amended Schedule III incorporating Division II
for its early or voluntary adoption.
In view of the above, a company voluntarily adopting Ind AS from financial year 2015-16 may
use the format specified in Division II of Revised Schedule III (which is in compliance with
Ind AS notified as Companies (Indian Accounting Standards) Rules, 2015) for the preparation
of financial statements as per Ind AS for financial year 2015-16, as going forward also the same
format shall be applied.
Issue 2
Company A is a Core Investment Company (CIC) having net worth of more than 500
crore as on March 31, 2014. During the year 2014-15, the Reserve Bank of India (RBI)
had exempted Company A from certain regulations/directions governing CIC in India.
1
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 Ind AS (IFRS) 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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Whether Company A (exempted CIC) will be regarded as Non-Banking Financial
Company (NBFC) for the purpose of applicability of Ind AS?
Response
Rule 2(g) of Companies (Indian Accounting Standards) Rules, 2015, read with Companies
(Indian Accounting Standards) (Amendment) Rules, 2016, states as follows:
"(g) "Non-banking Financial Company" means a Non-Banking Financial Company as defined
in clause (f) of section 45-I of the Reserve Bank of India Act, 1934 and includes Housing
Finance Companies, Merchant Banking Companies, Micro Finance Companies, Mutual
Benefit Companies, Venture Capital Fund Companies, Stock Broker or Sub-broker
Companies, Nidhi Companies and Chit Companies, Securitisation and Reconstruction
Companies, Mortgage Guarantee Companies, Pension Fund Companies, Asset Management
Companies and Core Investment Companies."
It may be noted from above, that core investment companies are specifically included in the
definition of NBFC. Accordingly, exempted CIC will be regarded as `NBFC' for the purpose
of roadmap for implementation of Ind AS irrespective of the fact that RBI may have given
some exemptions to certain class of core investment companies from its regulations.
Further, as per rule 4 of Companies (Indian Accounting Standards) Rules, 2015, read with the
Companies (Indian Accounting Standards) (Amendment) Rules, 2016, NBFCs having net
worth of more than 500 crore shall comply with Ind AS for accounting periods beginning on
or after the 1st April, 2018, with comparatives for the periods ending on 31st March, 2018.
In view of the above, in the given case, Company A will be required to apply Ind AS from the
financial year 2018-19. It may further be noted that it cannot voluntarily adopt Ind AS before
1st April 2018.
Issue 3
XY Ltd. is being covered under Phase I of Ind AS and needs to apply Ind AS from the
financial year 2016-17. It has two businesses, Business X and Business Y. As per
Accounting Standards, the financial statements of the Company are prepared in Indian
Rupee ("INR"), as required by the Companies Act 2013 and thereby, all transactions of
both business X as well as business Y are recorded and measured in INR.
Under Ind AS, the functional currency of the Business X is concluded to be US Dollar
("USD") while the functional currency of the Business Y is concluded to be INR. In which
currency, Company XY will prepare its financial statements as per Ind AS?
Response
As per paragraph 8 of Ind AS 21, The Effects of Changes in Foreign Exchange Rates, functional
currency is the currency of the primary economic environment in which the entity operates.
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Further, paragraph 17 of Ind AS 21 states that:
"In preparing financial statements, each entity - whether a stand-alone entity, an entity
with foreign operations (such as a parent) or a foreign operation (such as a subsidiary
or branch)--determines its functional currency in accordance with paragraphs 914 of
Ind AS 21."
Paragraphs 9-14 of Ind AS 21, elaborate the factors that need to be considered by an entity
while determining its functional currency.
In view of the above, it is concluded that functional currency needs to be identified at the entity
level, considering the economic environment in which the entity operates, and not at the level
of a business or a division. Accordingly, in the given case, if XY Ltd. after applying paragraphs
9-14 of Ind AS 21, concludes that its functional currency is USD at the entity level, then it shall
prepare its financial statements as per USD.
Issue 4
Company B Ltd. is an associate company of Company A Ltd. Company X Ltd. is the
holding company of Company A Ltd. Company X Ltd. has decided to adopt Ind AS
voluntarily from 2015-16.
Whether Company A Ltd. and Company B Ltd. are statutorily required to comply with
Ind AS from financial year 2015-16?
Response
As per the Companies (Indian Accounting Standards) Rules, 2015, read with the Companies
(Indian Accounting Standards) (Amendment) Rules, 2016, dated 30th March, 2016, any
company and its holding, subsidiary, joint venture or associate company may comply with
the Indian Accounting Standards (Ind AS) for financial statements for accounting periods
beginning on or after 1st April, 2015, with the comparatives for the periods ending on 31st
March, 2015, or thereafter.
Since, Company X Ltd. has adopted Ind AS voluntarily from financial year 2015-16, Company
A Ltd. being subsidiary of Company X Ltd. shall comply with Ind AS from the financial year
2015-16 as per the roadmap.
As per paragraph 3 of Ind AS 28, Investments in Associates and Joint Ventures, an associate is
an entity over which the investor has significant influence.
Ind AS 28 defines `Significant influence' as the power to participate in the financial and
operating policy decisions of the investee but is not control or joint control of those policies.
Paragraph 5 of Ind AS 28, states as follows:
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"If an entity holds, directly or indirectly (eg through subsidiaries), 20 per cent or more of the
voting power of the investee, it is presumed that the entity has significant influence, unless it
can be clearly demonstrated that this is not the case. Conversely, if the entity holds, directly or
indirectly (eg through subsidiaries), less than 20 per cent of the voting power of the investee,
it is presumed that the entity does not have significant influence, unless such influence can be
clearly demonstrated. A substantial or majority ownership by another investor does not
necessarily preclude an entity from having significant influence."
In the given case, Company B Ltd. is a direct associate company of Company A Ltd. but not
of Company X Ltd. However, Company X Ltd, through its subsidiary (i.e., Company B Ltd.),
has significant influence over Company B Ltd., indirectly.
In view of the above requirements, Company B Ltd. shall also comply with Ind AS from the
financial year 2015-16.
In other words, if a parent company voluntarily or mandatorily adopts Ind AS then its holding,
subsidiary, joint venture or associate company whether through direct or indirect association
shall comply Ind AS from the financial year in which the parent company starts complying
with Ind AS.
Issue 5
Company A Ltd. has invested 26% in Company B Ltd. and accounted Company B as an
associate under Companies (Accounting Standards) Rule, 2006. Company A Ltd. is
required to comply with Ind AS from financial year 2016-17.
Company C Ltd. owns share warrants that are convertible into equity shares of Company
B Ltd. that have potential, if exercised, to give additional voting power to Company C
Ltd. over the financial and operating policies of Company B Ltd. As per the requirements
of Ind AS 28, it has been concluded that Company B Ltd. is an associate company of
Company C Ltd.
Company A concluded that it has no more significant influence over Company B Ltd
under Ind AS.
The above assessments have been done as on April 1, 2015.
However, Company A Ltd. reported Company B Ltd. as an associate company as on
March 31, 2016 for statutory reporting requirements under previous GAAP.
Company B Ltd. and Company C Ltd. as a standalone entity do not meet any criteria
given in Ind AS roadmap. Whether Company B is required to comply with Ind AS?
Response
Sub-rule (2) of Rule 2 of the Companies (Indian Accounting Standards) Rules, 2015, provides
as follows:
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"Words and expressions used herein and not defined in these rules but defined in the
Act shall have the same meaning respectively assigned to them in the Act"
The term `associate' has been defined in Ind AS 28 which is notified as the part of the
Companies (Indian Accounting Standards) Rules, 2015.
As per paragraph 3 of Ind AS 28, Investments in Associates and Joint Ventures, an associate is
an entity over which the investor has significant influence.
Ind AS 28 defines `Significant influence' as the power to participate in the financial and
operating policy decisions of the investee but is not control or joint control of those policies.
Paragraph 5 of Ind AS 28, states as follows:
"5 If an entity holds, directly or indirectly (eg through subsidiaries), 20 per cent
or more of the voting power of the investee, it is presumed that the entity has significant
influence, unless it can be clearly demonstrated that this is not the case. Conversely, if
the entity holds, directly or indirectly (eg through subsidiaries), less than 20 per cent
of the voting power of the investee, it is presumed that the entity does not have
significant influence, unless such influence can be clearly demonstrated. A substantial
or majority ownership by another investor does not necessarily preclude an entity from
having significant influence."
Paragraph 7 of Ind AS 28 provide as follows:
"7 An entity may own share warrants, share call options, debt or equity
instruments that are convertible into ordinary shares, or other similar instruments that
have the potential, if exercised or converted, to give the entity additional voting power
or to reduce another party's voting power over the financial and operating policies of
another entity (ie potential voting rights). The existence and effect of potential voting
rights that are currently exercisable or convertible, including potential voting rights
held by other entities, are considered when assessing whether an entity has significant
influence. Potential voting rights are not currently exercisable or convertible when, for
example, they cannot be exercised or converted until a future date or until the
occurrence of a future event."
As per Notification G.S.R 680(E) dated 4th September, 2015 issued by Ministry of Corporate
Affairs (MCA), after rule 4 of Companies (Accounts) Rules, 2014, the following rule has been
inserted:
"4A Forms and items contained in financial statements The financial statements shall
be in the form specified in Schedule III to the Act and comply with Accounting
Standards or Indian Accounting Standards as applicable:
Provided that the items contained in the financial statements shall be prepared in
accordance with the definitions and other requirements specified in the Accounting
Standards or the Indian Accounting Standards, as the case may be."
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In view of above requirements, consistent approach would be to consider the definitions given
in Ind AS both for the purpose of preparing financial statements and determining the
relationship with another entity (i.e. subsidiary, associate, joint venture etc.) for the purpose of
applicability of Ind AS.
In the present case, by applying the relevant requirements of Ind AS 28, it has been concluded
that Company B Ltd. is an associate company of Company C Ltd. since Company C Ltd. has
potential voting rights over Company B Ltd.
In the given scenario, in accordance with Ind AS, Company B Ltd. also ceases to be an associate
of Company A Ltd. Therefore, Company B Ltd. need not to comply with Ind AS from the
financial year 2016-17 though the company was an associate company of Company A Ltd.
under previous reporting framework.
If Company C Ltd. voluntarily complies with Ind AS or meets any specified criteria on
standalone basis, then Company B Ltd. being its associate company as per Ind AS 28 shall
comply Ind AS from the same financial year from which Company C Ltd. starts preparing
financial statements as per Ind AS.
Issue 6
Company X, on a standalone basis, has a net worth of above Rs. 500 crore and hence
required to comply with Ind AS from financial year 2016-17. Company Y (listed entity),
on a standalone basis, has net worth of above INR 250 crore but below Rs. 500 crore and
therefore required to comply with Ind AS from financial year 2017-18.
Company X acquires shares of Company Y resulting in Company Y becoming an
associate of Company X on October 31, 2016, but before approval of the results for the
quarter ended September 2016.
Whether Company Y will be required to comply with Ind AS from financial year 2016-
17 or it will comply from financial year 2017-18? If the response is that compliance is
from the financial year 2016-17, would the financial results of Company Y for the quarter
ended September 30, 2016 be prepared in accordance with Ind AS?
Response
Rule 4(1)(ii) of Companies (Indian Accounting Standards) Rules, 2015, states as under:
(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;
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(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; and".
In accordance with the above, it may be noted that holding, subsidiary, joint venture, associate
companies of companies falling under any of the thresholds specified in Rule 4(1)(ii) are
required to comply with Ind AS from financial year 2016-17 or 2017-18, as the case may be.
In the given case, Company X is required to adopt Ind AS from financial year 2016-17, since
net worth of Company X is more than INR 500 crore. Company X has acquired shares of
Company Y resulting in Company Y becoming an associate of Company X during the financial
year 2016-17. Accordingly, Company Y will prepare Ind AS financial statements for the year
ending March 31, 2017.
As far as the quarterly results are concerned, since, Company Y has become an associate as on
October 31, 2016, Company Y will prepare Ind AS financial statements from the quarter ending
December 2016 onwards.
Issue 7
Company X (Listed entity) has a net worth of above INR 500 crore and hence required
to comply with Ind AS from financial year 2016-17. Company Y (Unlisted entity), on a
standalone basis, has net worth below INR 250 crore and hence it is not required to
comply with Ind AS. Company Y acquires shares of Company X during financial year
2016-17, whereby Company Y becomes the holding company of Company X.
Whether Company Y will be required to comply with Ind AS from financial year 2016-
17, given that it has now become a holding company of Company X during FY 2016-17?
Response
Rule 4(1)(ii) of Companies (Indian Accounting Standards) Rules, 2015, states as under:
(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;
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(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; and".
In accordance with the above, it may be noted that holding, subsidiary, joint venture, associate
companies of companies falling under any of threshold specified Rule 4(1)(ii) are required to
comply with Ind AS from financial year 2016-17 or 2017-18, as the case may be.
In the given case, Company X is required to adopt Ind AS from financial year 2016-17,since
net worth of Company X is more than INR 500 crore. Company Y has acquired shares of
Company X resulting in Company Y becoming holding company of Company X during the
financial year 2016-17. Accordingly, Company Y will prepare Ind AS financial statements for
the year ending March 31, 2017.
Issue 8
As on March 31, 2014, Company A is a listed company and has a net worth of 50 crore.
As on March 31, 2015, the company is no more a listed company. Whether Company A
is required to comply with Ind AS from financial year 2017-18.
Response
Rule 4(1)(iii) of the Companies (Indian Accounting Standards) Rules, 2015, states as under:
"(iii) the following companies shall comply with the Indian Accounting Standards (Ind AS) for
the accounting periods beginning on or after 1st April, 2017, with the comparatives for the
periods ending on 31st March, 2017, 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 less than rupees five
hundred crore;
(b) companies other than those covered in clause (ii) of sub- rule (1) and subclause (a) of
clause (iii) of sub-rule (1), that is, unlisted companies having net worth of rupees two hundred
and fifty crore or more but less than rupees five hundred crore.
(c) holding, subsidiary, joint venture or associate companies of companies covered under
sub-clause (a) of clause (iii) of sub- rule (1) and sub-clause (b) of clause (iii) of sub- rule (1),
as the case may be".
Further, 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:-
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(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)."
In view of the above requirements, it may be noted that immediately before the mandatory
applicability date, if the threshold criteria for a company are not met, then it shall not be
required to comply with Ind AS, irrespective of the fact that as on March 31, 2014, the criteria
was met.
In the given case, before the mandatory applicable date (i.e 2017-18), Company A ceases to be
a listed company. Accordingly, it will not be required to apply Ind AS from FY 2017-18.
Issue 9
ABC Ltd. is covered under Ind AS roadmap and required to prepare its financial
statements as per Ind AS from financial year 2016-17 with comparatives for financial
year 2015-16. The date of transition to Ind AS is April 1, 2015. The Company has chosen
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 AS, measured as
per the previous GAAP. The Company has recorded capital spares in its previous GAAP
financial statements as a part of inventory.
How should the capital spares be accounted under Ind AS on the date of transition to Ind
AS if the Company chooses to apply the previous GAAP as deemed cost exemption?
Response
As per paragraph 8 of Ind AS 16, Property, Plant and Equipment, items such as spare parts are
to be recognised in accordance with Ind AS 16, when they meet the definition of `property,
plant and equipment'. Otherwise such items are classified as inventory.
As per Ind AS 16, `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.
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Paragraph 7 of Ind AS 16, Property, Plant and Equipment, states as under:
"The cost of an item of property, plant and equipment shall be recognised as an asset if, and
only if:
(a) it is probable that future economic benefits associated with the item will flow to
the entity; and
(b) the cost of the item can be measured reliably."
Therefore, if an item of spare part meets the definition of `property, plant and equipment' as
mentioned above and satisfies the recognition criteria as per paragraph 7 of Ind AS 16, such an
item of spare has to be recognised as property, plant and equipment. If that spare part does not
meet the definition and recognition criteria as cited above that spare is to be recognised as
inventory.
Paragraph 10 of Ind AS 101, First-time Adoption of Indian Accounting Standards, inter alia,
states that an entity, shall in its opening Ind AS Balance Sheet, recognise all assets and
liabilities whose recognition is required by Ind AS.
As per paragraph D7AA, once the company chooses previous GAAP as deemed cost as
provided in paragraph D7AA of Ind AS 101, it is not allowed to adjust the carrying value of
property, plant and equipment for any adjustments other than those in accordance with
paragraph D21 and D21A of Ind AS 101. In this case, a question arises whether the company
may capitalise spares as a part of property, plant and equipment on the date of transition to Ind
AS. It may be noted deemed cost exemption as the previous GAAP is in respect of carrying
value of property, plant and equipment capitalised under previous GAAP on the date of
transition to Ind AS. This condition does not prevent a company to recognise an asset whose
recognition is required by Ind AS on the date of transition.
In the given case, the capital spares were recognised as inventory under previous GAAP and
they were not appearing under carrying amount of PPE.
In view of the above, it is clear that ABC Ltd. should recognise `capital spares' if they meet
definition of PPE as on the date of transition, in addition to continuing carrying value of PPE
as per paragraph D7AA of Ind AS 101.
Issue 10
XYZ Ltd. had obtained a long term foreign currency loan and had availed option given
in paragraph 46/46A of AS 11, The Effects of Changes in Foreign Exchange Rates under
previous GAAP. Accordingly, exchange gain/loss on such foreign currency loan had been
added to or deducted from the cost of fixed assets.
XYZ Ltd. is a first time adopter of Ind AS from April 1, 2016. The Company wants to
avail the option available under paragraph D13AA of Ind AS 101, i.e., to continue the
policy adopted for accounting for exchange difference arising from translation of long-
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term foreign currency monetary items recognised in the previous GAAP financial
statements.
The entity has also entered into foreign currency swap transaction for such long term
foreign currency items. The swaps fall within the definition of cash flow hedge. As per
Ind AS 109, Financial Instruments, in case of cash flows hedge, portion of gain or loss on
the hedging instrument that is determined to be an effective hedge shall be recognized in
the Other Comprehensive Income (OCI) and ineffectiveness gain or loss shall be
recognized in the profit or loss.
How to give the effect of swaps in the financial statements, as gain/loss on hedged item is
considered in the fixed assets whereas gain/loss on hedging instrument as per Ind AS 109
is either recognised in OCI or in profit and loss?
Response
Paragraph D13AA of Ind AS 101 provides that 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 6.1.1 of Ind AS 109 states as under:
"The objective of hedge accounting is to represent, in the financial statements, the effect
of an entity's risk management activities that use financial instruments to manage
exposures arising from particular risks that could affect profit or loss (or other
comprehensive income, in the case of investments in equity instruments for which an
entity has elected to present changes in fair value in other comprehensive income in
accordance with paragraph 5.7.5)."
In the present case, the entity has decided to avail the option available under paragraph D13AA
of Ind AS 101. It may be noted that if an entity avails the exemption specified in paragraph
D13AA then it has no corresponding foreign currency exposure that affects profit or loss as it
capitalizes the exchange differences to the cost of the asset.
In view of the above, hedge accounting under Ind AS 109 will not be applicable for foreign
currency swaps against an item, if for that item, the entity avails the option available under
paragraph D13AA of Ind AS 101. Hence, such derivatives will be considered as held for trading
and any change in fair value will be recognised in profit or loss.
Issue 11
Can a company elect the option available under Para D7AA of Ind AS 101 for capital
work in progress items?
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Response
Para D7AA of Ind AS 101, First-time Adoption of Indian Accounting Standards, states as
under:
"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.
This option can also be availed for intangible assets covered by Ind AS 38, Intangible
Assets and investment property covered by Ind AS 40, Investment Property."
In accordance with the above, it may be noted that a company may elect to choose previous
GAAP carrying value for all the items of PPE as its deemed cost when there is no change in its
functional currency on the date of transition to Ind AS.
Capital work in progress is in the nature of property, plant and equipment under construction
and accordingly, provisions of Ind AS 16, Property, Plant and Equipment apply to it.
Accordingly, in the given case, option under paragraph D7AA of Ind AS 101 is available with
regard to capital work in progress also.
Issue 12
Company A has made investment in subsidiary S Ltd. Company A elects to measure the
investment in S Ltd. at fair value on the date of transition as per Ind AS 101. Can
Company A opt to carry the investment in S Ltd. at cost after the date of transition as per
Ind AS 27?
Response
Paragraph D15 of Ind AS 101, First-time Adoption of Indian Accounting Standards states as
under:
"If a first-time adopter measures such an investment at cost in accordance with Ind AS 27,
it shall measure that investment at one of the following amounts in its separate opening Ind
AS Balance Sheet:
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(a) cost determined in accordance with Ind AS 27; or
(b) deemed cost. The deemed cost of such an investment shall be its:
(i) fair value at the entity's date of transition to Ind ASs in its separate financial
statements; or
(ii) previous GAAP carrying amount at that date.
A first-time adopter may choose either (i) or (ii) above to measure its investment in each
subsidiary, joint venture or associate that it elects to measure using a deemed cost."
Further, paragraph 10 of Ind AS 27, Separate Financial Statements, inter-alia states as
under:
"When an entity prepares separate financial statements, it shall account for investments in
subsidiaries, joint ventures and associates either:
(a) at cost, or
(b) in accordance with Ind AS 109."
In accordance with the above, it may be noted that for a first-time adopter cost of investment
in a subsidiary shall be one of the following amounts:
cost determined in accordance with Ind AS 27 (i.e. retrospective application of Ind AS 27)
fair value at the entity's date of transition to Ind AS
previous GAAP carrying amount
Accordingly, if a company chooses to measure its investment at fair value at the date of
transition then that is deemed to be cost of such investment for the company and, therefore, it
shall carry its investment at that amount (i.e. fair value at the date of transition) after the date
of transition.
Accordingly, in the given case, Company A can carry investment in S Ltd. at transition date
fair value which is deemed to be its cost as per paragraph 10 of Ind AS 27.
Issue 13
Paragraph 7AA of Ind 38, Intangible Assets read with paragraph D22 of Ind AS 101,
First-time Adoption of Indian Accounting Standards permits revenue based amortisation
for the intangible assets arising from service concession arrangements in respect of toll
roads recognised in the financial statements for the period ending immediately before the
beginning of the first Ind AS reporting period. However, Schedule II to the Companies
Act, 2013, permits revenue based amortisation for such intangible asset without any
reference to any financial year. Whether a company is permitted to follow revenue based
amortisation even for such new arrangements entered into after Ind AS become
applicable?
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Response
Paragraph D22 of Ind AS 101, inter alia, states as follows:
"D22 A first-time adopter may apply the following provisions while applying the
Appendix A to Ind AS 11:
(i) Subject to paragraph (ii), changes in accounting policies are accounted for in
accordance with Ind AS 8, i.e. retrospectively, except for the policy adopted for
amortization of intangible assets arising from service concession arrangements
related to toll roads 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 D7AA of Ind AS 38, Intangible Assets, states as follows:
"7AA The amortisation method specified in this Standard does not apply to an entity that
opts to amortise the intangible assets arising from service concession arrangements in
respect of toll roads recognised in the financial statements for the period ending
immediately before the beginning of the first Ind AS reporting period as per the exception
given in paragraph D22 of Appendix D to Ind AS 101."
Schedule II to the Companies Act, 2013, provides that for intangible assets, the provisions of
the accounting standards applicable for the time being in force shall apply, except in case of
intangible assets (Toll Roads) created under `Build, Operate and Transfer', `Build, Own,
Operate and Transfer' or any other form of public private partnership route in case of road
projects. Amortisation in such cases may be done on the basis of revenue as specified Schedule
II.
Paragraph 7AA of Ind 38 read with paragraph D22 of Ind AS 101, specifically provides
exemption for service concession arrangements in respect of toll roads recognised in the
financial statements for the period ending immediately before the beginning of the first Ind AS
reporting period as per the previous GAAP, i.e., as per Schedule II to the Companies Act, 2013,
considering the requirements contained in that Schedule. Companies (Accounts) Rules, 2014
prescribes to follow Ind AS in preparation of financial statements.
Hence, in harmonisation of Rules and Ind AS 38 read with Ind AS 101, principles of Ind AS
38 should be followed for all service concession arrangements including roll roads once Ind
AS is applicable to an entity.
Issue 14
A Ltd. (first-time adopter to Ind AS) chooses to measure its property, plant and
equipment by applying Ind AS 16, Property, Plant and Equipment retrospectively. Under
previous GAAP, A Ltd. had been applying depreciation rates specified in Schedule XIV
to the Companies Act, 1956. Whether A Ltd. is required to recompute depreciation based
on useful lives from the date of initial capitalisation of property, plant and equipment or
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it will have to apply depreciation rates applied under previous GAAP till the date of
opening balance sheet.
Response
Ind AS 101 requires retrospective application of Ind AS effective at the end of a first-time
adopter's first Ind AS reporting period. However, as an exception to this rule, Ind AS 101, inter
alia, provides deemed cost exemption, wherein as at the date of transition to Ind AS, a first
time adopter may elect to measure all of its items of property, plant and equipment (PPE) at
the carrying amounts as per its previous GAAP.
In case the first-time adopter does not elect to choose deemed cost exemption, then the
requirements of Ind AS 16 would have to be applied as if the first-time adopter had always
applied the Standard. Accordingly, PPE will be measured based on historical cost determined
in accordance with Ind AS 16.
Paragraph 50 of Ind AS 16, Property, Plant & Equipment states as under:
"The depreciable amount of an asset shall be allocated on a systematic basis over its useful
life."
Further, paragraph 57 of Ind AS 16, states as follows:
"The useful life of an asset is defined in terms of the asset's expected utility to the entity. The
asset management policy of the entity may involve the disposal of assets after a specified time
or after consumption of a specified proportion of the future economic benefits embodied in the
asset. Therefore, the useful life of an asset may be shorter than its economic life. The estimation
of the useful life of the asset is a matter of judgement based on the experience of the entity with
similar assets."
As per the above requirements, it may be noted that as per Ind AS 16, a company is required
to compute depreciation based on an assessment of useful lives of an asset.
Further, paragraph 13 & 14 of Ind AS 101, First-time Adoption of Indian accounting Standards
states as follows:
"13 This Ind AS prohibits retrospective application of some aspects of other Ind ASs. These
exceptions are set out in paragraphs 1417 and Appendix B."
"14 An entity's estimates in accordance with Ind ASs at the date of transition to Ind ASs shall
be consistent with estimates made for the same date in accordance with previous GAAP (after
adjustments to reflect any difference in accounting policies), unless there is objective evidence
that those estimates were in error."
In accordance with the above paragraphs, it may be noted while transitioning to Ind AS, a first-
time adopter's estimate of depreciation under previous GAAP can only be changed if those
estimates were in error. However, when a company has been computing depreciation as per
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rates prescribed under Schedule XIV of Companies Act, 1956, then it has not estimated the
useful life of an asset but has depreciated its assets as per the minimum requirements of law.
Accordingly, when a first-time adopter chooses to measure its PPE by retrospective application
of Ind AS 16, then it will be required to re-compute depreciation by assessing the useful life of
an asset in accordance with Ind AS 16 which is consistent with Schedule II to the Companies
Act, 2013.
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