Dear professionals  LET US DISCUSS  IFRS  September 7,

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IFRS OVERVIEW ICSI WITH RELIANCE September 7, 2015

IFRS September 7, 2015

Where are we moving  Global vs Indian approach  Fair value vs historical cost  Reporting vs Accounting  Substance over Form  Group vs Standalones  Principles over rules

IFRS 8 Standards – what is most critical?  1 first time adoption  2  3 Business combination  4  5  6  7 financial instruments  8

An Overview of IFRS (what we are moving towards) ProposedCurrent Global Approach vsIndian Approach Fair Value A/cing vs Historical Value A/cing Group vsStandalones Substance over Form Principles over Rules

An Overview of IFRS (Boards/Committees Involved)  IFRS are standards and interpretations adopted by the International Accounting Standards Board (IASB)  International Accounting Standards (IAS) were issued by the International Accounting Standard Committee (IASC) between 1973 and 2000.

An Overview of IFRS (Boards/Committees Involved)  The IASB replaced the IASC in 2001 and made a couple of changes -  Amended some IASs  Replaced some IASs with new IFRSs  Issued certain new IFRSs on topics for which there was no previous IAS.  Through committees, both the IASC and the IASB have also issued interpretation of standards.

An Overview of IFRS (Boards/Committees Involved)  IFRS Comprises:  8 IFRSs and 30 IASs  18 IFRIC (International Financial Reporting Interpretations Committee) and 12 SICs (Standard Interpretations Committee)  There is also a framework for the Preparation & Presentation of Financial Statements which describes some of the principles underlying IFRS.

IFRS in India - Why  One language  Comparability enhanced  Understanding enhanced  One set of books  Access to Global capital markets  Low cost of capital  Attract foreign investment  Elimination of multiple reports  Reflect true value of acquisitions  Schedule VI in today’s environment

IFRS in India - Who  All public interest entities are required to adopt IFRS -  Listed companies  Banks, insurance companies, and financial institutions  Turnover > Rs 100 crores  Borrowing > Rs 25 crores  Holding or subsidiary of any of the above

IFRS in India - When  ICAI has set up a Task Force on Convergence with IFRS  The task force has decided on date of adoption of IFRS as April 1, 2011  This means that date of transition is April 1, 2010

Calendar for IFRS Conversions  The timetable below shows the illustrative transition timetable Opening IFRS balance sheet* 01/04/ /03/2012 1/4/2010 Reporting date for FS IFRS adoption date IFRS Comparatives 1st IFRS Financial Statements 31 March 2012 seems a long way off, but there is a lot of work required to convert, as we have seen in countries which have already adopted IFRS *For a March year -end, adopting IFRS in 2011 with one year comparative

IFRS in India – How (Practical implications for companies)  Converting to IFRS is more than a technical exercise; it presents many business challenges and opportunities.  Major conversions can take months to complete.

IFRS in India – How (Practical implications for companies)  Senior management will need the time to understand the full impact of IFRS on the company and to develop the right messages for the marketplace.  Companies that fail to appropriately implement IFRS may lose competitive advantage or may present an inconsistent picture compared with competitors. They may face regulatory actions too.

International Financial Reporting Standards IFRS 1 – First time adoption of IFRS IFRS 2 – Share Based Payment IFRS 3 – Business Combinations IFRS 4 – Insurance Contracts IFRS 5 – Non-current assets held for sale and discontinued operations IFRS 6 – Exploration for and evaluation of mineral resources IFRS 7 – Financial Instruments-Disclosures IFRS 8 – Operating Segments

Overview of differences  Though Indian AS are based on IFRS, there are significant differences between the two in many areas – for eg.:  Legal differences  Schedule VI  Depreciation rates under schedule XIV  Court schemes  Shift from Historical cost basis to Fair Value  Derivative Financial Instruments  Tangible and intangibles acquired in business combinations  Loans and advances e.g. Interest free deposits

Key accounting concepts affected by IFRS  Presentation of Financials – governed by IAS 1 instead of Schedule VI  Prior period items – coverage of Balance Sheet items and restatement  IFRS 1 on First Time Adoption  Business combination – no pooling  Consolidation of Financial Statements  Control definition  Uniform accounting policies

Key accounting concepts affected by IFRS  Tangible assets  Component accounting  Repairs, maintenance and overhauling – major expenses  Revaluation  Change in method of depreciation – prospective  Deferred payment liability – recognition of interest  Intangible assets- revaluation permitted if active market  Provision, contingent liability and contingent asset  Discounting  Disclosure of contingent asset  Discounting of deferred revenue  Events after balance sheet date – proposed dividend  Deferred tax asset recognition - no virtual certainty

Consolidated Financial Statements (CFS) Indian GAAPIFRS Preparation of CFSNot mandatory, except for listed entities as per SEBI rules Mandatory (Exceptions: Intermediate company, where ultimate holding presenting CFS under IFRS. Potential voting rights AS 21 is silent. Per ASI 18 potential voting rights not considered for determining significant influence in case of associate Potential voting rights currently exercisable should be considered control. However such rights at a future date are not considered control. Control - definitionOwnership of more than one half of the voting power or control of the composition of board of directors’ Control is based on substance. Control may exist even pursuant to agreement with other shareholders.

Consolidated Financial Statements (CFS) Indian GAAPIFRS Uniform accounting policies Required but if impracticable, disclosure of items where different policies followed Mandatorily required Preparation of FS on the date of acquisition for computing parent portion of equity in a subsidiary Required. If impracticable, the FS of immediately preceding period can be used Required (no alternative) Goodwill determination Based on carrying valueBased on fair value due to IFRS 3

IAS 16 – Property, Plant and Equipment  Component accounting: Key impact on Capital intensive industries  In-depth analysis required to identify significant components that make up a plant.  Each significant component to be depreciated over its own useful life  Application would require technical knowledge – usually cannot be provided by the accounting department on its own

IAS 32 / 39 – Financial Instruments Indian GAAPIFRS Financial Instruments & Equity AS-13 deals with investment in a limited manner. Foreign exchange hedging is covered by AS-11. IAS 32 and 39 deal with financial instruments and entity’s own equity in detail including matters relating to hedging. Classification No specific standard on financial instrument. Classification based on form rather than substance. Preference shares are treated as capital, even though in many case in substance it may be a liability The Issuer of a financial instrument shall classify the instrument, or its component parts, on initial recognition as a financial liability, a financial asset or an equity instrument in accordance with the substance of the contractual arrangement and the definitions of a financial liability, a financial asset and an equity instrument. Loans & Receivables Loans and receivables are stated at cost. Interest income on loans is recognised based on time- proportion basis as per the rates mentioned in the loan agreement. Initial measurement of loans and receivables is at fair value plus transaction cost. Subsequent measurement is at amortised cost using effective interest method.

Indian GAAPIFRS Measurement (deferred - payment) Measured by charges made to customers, discounting not normally required for deferred inflow Measured at fair value, discounting required where inflow is deferred Interest income Recognised at applicable rate. Effective interest method is followed. Dividend In case of dividends from subsidiaries, schedule VI requires dividend to recognized in the period to which it pertains even if declared after the balance sheet date. Recognition when the shareholder’s right to receive payment is established. IAS- 18 – Revenue Recognition

Indian GAAPIFRS Actuarial Gains/losses All actuarial gains and losses are recognized immediately in P&L - Actuarial Gain / loss below 10% corridor need not be recognized - Actuarial Gain / loss above 10% corridor can be deferred over remaining service period or on accelerated basis Termination benefit/VRS deferral Permitted upto April 1, 2010 as part of transitional provisions Not permitted IAS 19 – Employee Benefits Corridor Approach: A range of plus or minus 10% around the Company's best estimate of post-employment benefit obligations. Outside that range, it is not reasonable to assume that actuarial gains or losses will be offset in future years.

IAS 12 – Income Taxes Indian GAAPIFRS Approach Income statement or timing differences approach Balance sheet liability approach or the temporary differences approach. Deferred tax – In case of tax losses Virtual certaintyReasonable certainty

IAS 1 – Presentation  IAS 1 does not lay down any format of financial statements  Minimum items to be presented on face and in notes are laid down  Presentation more governed by substance; rather than form  Preference shares to be classified as liability vs. equity based on substance  Portion of long-term loans payable with in twelve months to be presented as current

Disclosures  IFRS prescribes extensive disclosures as compared to Indian GAAP  Few examples of additional disclosures required which may require substantial additional work  Critical judgements made by the management  Key sources of estimation uncertainty  Capital management policy and data  Standards/ interpretations issued but not yet effective and their impact  Determination of fair values and key assumptions used about the same  Sensitivity analysis of fair values  Various risks to which an entity is exposed, policies for management of such risks and quantitative date relating thereto

Some interesting facts ! On 6 September 2007, the IASB issued a revised IAS 1 Presentation of Financial Statements. The main changes from the previous version are to require that an entity must:  present all non-owner changes in equity (that is, 'comprehensive income' ) either in one statement of comprehensive income or in two statements (a separate income statement and a statement of comprehensive income). Components of comprehensive income may not be presented in the statement of changes in equity.  present a statement of financial position (balance sheet) as at the beginning of the earliest comparative period in a complete set of financial statements when the entity applies an accounting  'balance sheet' will become 'statement of financial position'  'income statement' will become 'statement of comprehensive income'  'cash flow statement' will become 'statement of cash flows'.

Books on IFRS that one may refer The list of reference books for IFRS are as follows: 1. International Financial Reporting Standards (IFRSs) - published by Taxmann Publications P Ltd. 2. A Guide through International Financial Reporting Standards July Published by IASB. 3. IFRS : A Quick Reference Guide by Robert Kirk 4. Wiley IFRS: Practical implementation guide and workbook by Abbas Ali Mirza, Graham J. Holt and Magnus Orrell 5. Wiley IFRS 2008: Interpretation and application of International Accounting and Financial Reporting Standards 2008 by Eva K. Jermakowicz In addition to the above, the following books can also be used for reference. 1. The IFRS Manual of Accounting authored by the UK Accounting Consulting Services team of PricewaterhouseCoopers LLP and published by CCH. 2. International GAAP® 2009 by Ernst and Young, published by Wiley.

Rammohan N Bhave and