INTRODUCTION TO IFRS HYDERABAD CA. GANESH BALAKRISHNAN

Transcription

1 INTRODUCTION TO IFRS HYDERABAD CA. GANESH BALAKRISHNAN

2 Agenda What is IFRS Purpose of Financial reporting Standards How are IFRS developed IFRS framework Objectives of Financial reporting Characteristics of Financial Reporting Elements of financial statements Why IFRS Principle based standards IFRS in India Benefits in Indian Context Opportunities and Challenges The way ahead

3 WHAT IS IFRS?

4 What is IFRS? IFRS is a globally recognised set of Standards for the preparation of financial statements by business entities. Those Standards prescribe: the items that should be recognised as assets, liabilities, income and expense how to measure those items; how to present them in a set of financial statements; and related disclosures about those items.

5 FINANCIAL REPORTING STANDARDS - PURPOSE

6 Purpose Transparency: Enhances international comparability and quality of information Enables market participants to make informed decision Accountability: Reducing the information gap between the providers of capital and the people to whom they have entrusted their money. vital importance to regulators around the world. Efficiency: Helps investors to identify opportunities and risks across the world, For businesses, the use of a single, trusted accounting language lowers the cost of capital and reduces international reporting costs.

7 HOW ARE IFRS DEVELOPED

8 IFRS is developed by the IASB How are IFRS developed It is supported by an external IFRS Advisory Council, an Accounting Standards Advisory Forum (ASAF) of national standard-setters and an IFRS Interpretations Committee (the Interpretations Committee ) to offer guidance when divergence in practice occurs. It follows a thorough, open, participatory and transparent due process. Engages with investors, regulators, business leaders and the global accountancy profession at every stage of the process. The due process includes: opportunities for public comment at various stages in the development of a Standard; IASB deliberations at meetings that are open to public observation and are webcast; and public availability of all of the agenda papers that form the basis for the IASB s deliberations as well as all of the comments received from interested parties. collaborates with the worldwide standard-setting community.

9 Structure of IFRS Foundation

10 Standards development process

11 Standards development process

12 IFRS FRAMEWORK

13 IFRS Framework The IFRS Framework addresses: the objective of financial reporting the qualitative characteristics of useful financial information of the reporting entity the definition, recognition and measurement of the elements from which financial statements are constructed concepts of capital and capital maintenance

14 IFRS Framework Role of Conceptual Framework Conceptual Framework sets out agreed concepts that underlie financial reporting objective, qualitative characteristics, element definitions. IASB uses Conceptual Framework to set standards which enhances consistency across standards enhances consistency over time as Board members change provides benchmark for judgments

15 OBJECTIVE OF FINANCIAL REPORTING

16 Objective of Financial Reporting Provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity The users need information about the resources of the entity to assess an entity's prospects for future net cash inflows effectively and efficiently management has discharged their responsibilities to use the entity's existing resources

17 Objective of Financial Reporting Investors, lenders and other creditors expectations about returns depend on their assessment of the amount, timing and uncertainty of (the prospects for) future net cash inflows to the entity. Decisions by investors about buying, selling or holding equity and debt instruments depend on the returns that they expect from an investment in those instruments, eg dividends, principal and interest payments or market price increases. Decisions by lenders about providing or settling loans and other forms of credit depend on the principal and interest payments or other returns that they expect.

18 Objective of Financial Reporting To assess an entity s prospects for future net cash inflows, existing and potential investors, lenders and other creditors need information about: the resources of the entity claims against the entity and how efficiently and effectively the entity's management and governing board have discharged their responsibilities to use the entity's resources Eg: Protecting the entity's resources from unfavourable effects of economic factors such as price and technological changes

19 CHARACTERISTICS OF FINANCIAL REPORTING

20 Characteristics of Financial Reporting Fundamental Qualitative Characteristics Relevance: capable of making a difference in users decisions predictive value confirmatory value materiality (entity-specific) Faithful representation: faithfully represents the phenomena it purports to represent completeness (depiction including numbers and words) neutrality (unbiased) free from error (ideally)

21 Characteristics of Financial Reporting Enhancing Qualitative Characteristics Comparability: Information is more useful if it can be compared with similar information about other entities and information about the same entity for another period. Verifiability: knowledgeable and independent observers could reach consensus, but not necessarily complete agreement, that a depiction is a faithful representation Timeliness: having information available to decision-makers in time to be capable of influencing their decisions Understandability: Classify, characterize, and present information clearly and concisely

22 ELEMENTS OF FINANCIAL STATEMENTS

23 Recognition. Elements of Financial Statements Asset resource controlled by the entity result of past event expected inflow of economic benefits Liability present obligation arising from past event expected outflow of economic benefits Income recognised increase in asset/ decrease in liability in current reporting period that result in increased Expense recognised decrease in asset/ increase in liability in current reporting period that result in decreased

24 Asset: An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. Asset is recognised in the balance sheet when it is probable that the future economic benefits will flow to the entity and the asset has a cost or value that can be measured reliably. Liability. Elements of Financial Statements A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. A liability is recognised in the balance sheet when it is probable that an outflow of resources embodying economic benefits will result from the settlement of a present obligation and the amount at which the settlement will take place can be measured reliably Equity. Equity is the residual interest in the assets of the entity after deducting all its liabilities

25 Income Recognised when an increase in future economic benefits related to an increase in an asset or a decrease of a liability has arisen that can be measured reliably. In effect, recognition of income occurs simultaneously with the recognition of increases in assets or decreases in liabilities. Elements of Financial Statements Ex: the net increase in assets arising on a sale of goods or services or the decrease in liabilities arising from the waiver of a debt payable. Expenses Recognised when a decrease in future economic benefits related to a decrease in an asset or an increase of a liability has arisen that can be measured reliably. In effect, that recognition of expenses occurs simultaneously with the recognition of an increase in liabilities or a decrease in assets. Eg: the accrual of employee entitlements or the depreciation of equipment

26 Elements of Financial Statements Recognition Recognition is the process of incorporating in the balance sheet or income statement an item that meets the definition of an element and satisfies the following criteria for recognition It is probable that any future economic benefit associated with the item will flow to or from the entity and The item's cost or value can be measured with reliability.

27 MEASUREMENT CONCEPTS

28 Measurement Concepts Measurement involves assigning monetary amounts at which the elements of the financial statements are to be recognised and reported. The IFRS Framework acknowledges that a variety of measurement bases are used today to different degrees and in varying combinations in financial statements, including: Historical cost Current cost Net realisable (settlement) value Present value (discounted) Historical cost is the measurement basis most commonly used today, but it is usually combined with other measurement bases. The IFRS Framework does not include concepts or principles for selecting which measurement basis should be used for particular elements of financial statements or in particular circumstances.

29 Fair value measurement concept The concept, defined in IFRS 13 Measurement Concepts Fair value is the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction (not a forced sale) between market participants (market-based view) at the measurement date (current price). Fair value is a market-based measurement (it is not an entity-specific measurement) Consequently, the entity s intention to hold an asset or to settle or otherwise fulfill a liability is not relevant when measuring fair value. Information about an entity s financial performance in a period, reflected by changes in economic resources is useful in assessing the entity s past and future ability to generate net cash inflows

30 Net realizable Value concept Measurement Concepts Net realizable value (of an asset): The estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

31 Historical cost concept Measurement Concepts Assets are recorded at the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire them at the time of their acquisition. Liabilities are recorded at the amount of proceeds received in exchange for the obligation, or in some circumstances (for example, income taxes), at the amounts of cash or cash equivalents expected to be paid to satisfy the liability in the normal course of business.

32 Framework s role in applying IFRSs Preparers use the Framework to make the judgments that are necessary to apply IFRSs Auditors and regulators assess those judgements Investors, lenders and others consider those judgements when using IFRS financial information to inform their decisions If no specific IFRS requirement Use judgement to develop a policy that results in relevant information that faithfully represents (i.e., complete, neutral and error free)

33 WHY IFRS?

34 Benefits to Capital Markets Credibility of local market to foreign investors More cross-border investment Efficient capital allocation Comparability across political boundaries Facilitates global education and training

35 Benefits to Companies Lower cost of capital Facilitates raising capital abroad Integrated IT systems One set of books + easier consolidation Better understanding of financial statements from business partners abroad

36 PRINCIPLE BASED STANDARDS

37 Principle based Standards Principles Rules

38 A Principle based standard.. No exceptions Core principles (objectives) No inconsistencies Tied to conceptual framework Judgement Minimum guidance

39 UPCOMING CHANGES

40 Upcoming Changes The IASB has issued its proposal to revise the Conceptual Framework (the ED or the proposed Framework ). The primary purpose of the Framework is to assist the IASB by identifying concepts it will use when developing and revising standards. It will not be GAAP The IASB has proposed new guidance to encourage entities to use a consistent description of segments across all forms of reporting to investors. Segment disclosures to bring in more insight on the management view. Discussion on the Principles of Disclosure project as part of its Disclosure Initiative More guidance on presentation on face vs notes.

41 IFRS IN INDIA

42 IFRS in India Surging towards IFRS 39 Ind AS have been notified

43 IFRS in India SEBI has given the option to listed entities to prepare and file consolidated financial statements in conformity with IFRS as issued by IASB. Approximately 11 companies (mainly ones with foreign listings) use the IFRS option. In 2013, India revised its Companies Act to require consolidated financial statements and to establish a two-tier system of accounting standards: Tier 1 is the new set of Indian Accounting Standards (Ind AS) described above, for listed and large companies. Tier 2 is the existing Accounting Standards, for smaller companies.

44 Ind AS - Process The process is neither endorsement nor adoption of IFRS. The IFRS are used as the base for issuing corresponding Ind ASs with changes in IFRS wherever necessary. The Ind ASs will become part of the law The drafts of the Ind ASs prepared on the basis of IFRS are exposed for public comments and discussed with the necessary interest groups wherever necessary. Thereafter, considering the comments the Accounting Standards Board of the ICAI finalises the Ind AS, which is then approved by the Council of the ICAI. The Ind AS so approved by the Council is reviewed by NACAS which recommends the Ind AS to the Government. The Government thereafter notifies the Ind AS in the Official Gazette as part of law.

45 Notified Ind AS IND AS IND AS 1 IND AS 2 IND AS 7 IND AS 8 IND AS 10 IND AS 12 IND AS 16 IND AS 17 IND AS 19 IND AS 20 IND AS 21 IND AS 23 IND AS 24 IND AS 27 Title Presentation of Financial Statements Inventories Statement of Cash Flows Accounting Policies, Changes in Accounting Estimates and Errors Events after the Reporting Period Income Taxes Property, Plant and Equipment Leases Employee Benefits Accounting for Government Grants and Disclosure of Government Assistance The Effects of Changes in Foreign Exchange Rates Borrowing Costs Related Party Disclosures Separate Financial Statements

46 Notified Ind AS IND AS IND AS 28 IND AS 29 IND AS 32 IND AS 33 IND AS 34 IND AS 36 IND AS 37 IND AS 38 IND AS 40 IND AS 41 IND AS 101 IND AS 102 Title Investments in Associates and Joint Ventures Financial Reporting in Hyperinflationary Economies Financial Instruments : Presentation Earnings per Share Interim Financial Reporting Impairment of Assets Provisions, Contingent Liabilities and Contingent Assets Intangible Assets Investment Property Agriculture First - time Adoption of Indian Accounting Standards Share-based Payment

47 Notified Ind AS IND AS IND AS 103 IND AS 104 IND AS 105 IND AS 106 IND AS 107 IND AS 108 IND AS 109 IND AS 110 IND AS 111 IND AS 112 IND AS 113 IND AS 114 IND AS 115 Title Business Combinations Insurance Contracts Non-current Assets Held for Sale and Discontinued Operations Exploration for and Evaluation of Mineral Resources Financial Instruments : Disclosure Operating Segments Financial Instruments Consolidated Financial Statements Joint Arrangements Disclosure of Interests in Other Entities Fair Value Measurement Regulatory Deferral Accounts Revenue from Contracts with Customers

48 THE APPROACH

49 The Step by Step approach Companies will have to follow a step by step approach to make the transition to Ind AS a smooth process. They will first have to prepare an opening balance sheet as per Ind AS on 1 April They will have to continue reporting their financial statements for the year ending 31 March 2016 as per the existing Indian GAAP. However, they will also need to compile their financial statements as per Ind AS for the year ending 31 March This parallel system of accounts will be required for one year ending March 2016 so that comparative Ind AS information can be provided. So for the year FY , companies will have to evaluate accounting implication of transactions both under existing accounting standards as well as Ind AS frameworks.

50 The Step by Step approach As part of this Ind AS transition process, companies will also have to prepare A reconciliation of equity between Ind AS and Indian GAAP on 1 April 2015 and 31 March 2016, and A reconciliation of income for the year ending March 2016 between Ind AS and Indian GAAP. These reconciliations will be included in the first Ind AS financial statements, so that the investors and users can ascertain the real impact of Ind AS adoption.

51 Ind AS - ROADMAP

52 Applicability The Indian Accounting Standards ( Ind AS ) were notified on 16 February 2015 by the Ministry of Corporate Affairs ( MCA ). MCA notified the Companies (Indian Accounting Standards) Rules, 2015 which specified the Ind AS applicable to certain class of companies and set out the dates of applicability.

53 Voluntary Adoption Companies may voluntarily adopt Ind AS for financial statements for accounting periods beginning on or after 1 April 2015, with the comparatives for the periods ending 31 March 2015 or thereafter. Once a company opts to follow the Ind AS, it will be required to follow the same for all the subsequent financial statements.

54 Mandatory Adoption For the accounting periods beginning on or after 1 April 2016 Criteria Companies whose equity and/or debt securities are listed or are in the process of listing on any stock exchange in India or outside India (listed companies) and having net worth Unlisted companies having a net worth of Holding, subsidiary, joint venture or associate companies of the listed and unlisted companies covered above. Threshold ` 500 crores or more ` 500 crores or more Comparative for these financial statements will be periods ending 31 March 2016 or thereafter.

55 Mandatory Adoption For the accounting periods beginning on or after 1 April 2017 Criteria Listed companies having net worth of Unlisted companies having a net worth of Holding, subsidiary, joint venture or associate companies of the listed and unlisted companies covered above. Threshold Less than ` 500 crores More than ` 250 crores but less than ` 500 crores or more Comparative for these financial statements will be periods ending 31 March 2017 or thereafter.

56 Road Map will not be applicable to Companies whose securities are listed or in the process of listing on SME exchanges. Companies not covered by the roadmap in the Mandatory adoption. Insurance companies, banking companies and non-banking finance companies. These companies should continue to apply existing Accounting Standards prescribed in the Annexure to the Companies (Accounting Standards) Rules, 2006, unless they opt for voluntary adoption. Insurance companies, banking companies and non-banking finance companies cannot voluntarily adopt the Ind AS.

57 THE CARVE OUTS

58 The Carve Outs Ind AS 21 (corresponding to IAS 21 The Effects of Changes in Foreign Exchange Rates) permits an option to recognise exchange differences arising on translation of certain long-term monetary items from foreign currency to functional currency directly in equity. IAS 28 Investments in Associates requires that difference between the reporting period of an associate and that of the investor should not be more than three months, in any case. The phrase unless it is impracticable has been provided in Ind AS 28.

59 The Carve Outs An exception has been included to the definition of financial liability Ind AS 32 (corresponding to IAS 32 Financial Instruments: Presentation) to consider the equity conversion option embedded in a convertible bond denominated in foreign currency to acquire a fixed number of entity s own equity instruments as an equity instrument if the exercise price is fixed in any currency. IFRS 3 requires bargain purchase gain arising on business combination to be recognised in profit or loss. Ind AS 103 (corresponding to IFRS 3 Business Combinations) requires the same to be recognised in other comprehensive income and accumulated in equity as capital reserve, unless there is no clear evidence for the underlying reason for classification of the business combination as a bargain purchase, in which case, it shall be recognised directly in equity as capital reserve.

60 The Carve Outs Ind AS 101 First-time Adoption of Indian Accounting Standards, provides an entity an option to use carrying values of all items of property, plant and equipment as on the date of transition in accordance with previous GAAP as an acceptable starting point under Ind AS.

61 OPTIONS REMOVED

62 Options removed Presentation of Financial Statements Option to follow different terminology for the titles of financial statements has been removed; only one terminology for the titles is required uniformly. Option to present analysis of expenses function-wise is removed; only nature-wise classification of expenses permitted. Statement of Cash Flows Option to classify interest paid and interest and dividends received as items of operating cash flows is removed for entities other than financial entities; these items are required to be classified as financing activity and investing activity, respectively. Option to classify dividend paid as an item of operating activity removed; it has to be classified as financing activity only.

63 Options removed Accounting for Government Grants and Disclosure of Government Assistance Option to measure non-monetary government grants at nominal value removed; such grants are required to be measured at fair value only. Option to present the grants related to assets by deducting the amount of grants in arriving at the carrying amount of the asset is removed; Intangible Assets The option to measure intangible asset acquired by way of government grant at nominal amount plus any expenditure that is directly attributable to prepare the asset has been removed; only fair value measure is required for recognising such intangible assets.

64 EXEMPTIONS

65 Exemptions First-time adoption of Ind AS: Ind AS 101 An entity moving from Indian GAAP to Ind AS needs to apply the requirements of Ind AS 101 The basic requirement is for full retrospective application of all Ind AS, effective at the reporting date. There are a number of optional exemptions and mandatory exceptions to the requirement of retrospective application. The exemptions cover standards for which it is considered that retrospective application could prove too difficult or could result in a cost likely to exceed related benefits to users

66 Optional Exemptions Share-based payment transactions Insurance contracts Deemed cost Leases Cumulative translation differences Investment in subsidiaries, joint ventures and associates Assets and liabilities of subsidiaries, joint ventures and associates Compound financial instruments Designation of previously recognised financial instruments Fair value measurement of financial assets or financial liabilities at initial recognition Decommissioning liabilities included in the cost of property, plant and equipment

67 Optional Exemptions Financial assets or intangible assets accounted for in accordance with service concession arrangements Borrowing costs Extinguishing financial liabilities with equity instruments Severe hyperinflation Joint arrangements Stripping costs in the production phase of a surface mine Designation of contracts to buy or sell a non-financial item Revenue from contracts with customers Non-current assets held for sale and discontinued operations

68 Mandatory Exemptions Derecognition of financial assets and liabilities Hedge accounting Non-controlling interests Classification and measurement of financial assets Impairment of financial assets Embedded derivatives Government loans Estimates

69 BENEFITS IN INDIAN CONTEXT

70 Benefits Cross border investments leading to economic growth Comparability of financial statements of any two companies anywhere in the world Globalisation of economy and world trade For multinational companies: Consolidation of group financial statements made easier Mergers and acquisitions made easier Access to multinational funds The job of governments and standard setters in the developing countries made easier Administrative costs of accessing the capital markets around the world reduced.

71 OPPORTUNITIES & CHALLENGES

72 Opportunities for Chartered Accountants Training Reporting Systems Fair Valuation Taxation Management Compensation Plans Transition to IndAS Others

73 Opportunities for Chartered Accountants Training Professional accountants are looked upon to ensure successful implementation of IFRS / IndAS. The biggest hurdle for the professionals in implementing IFRS / IndAS is the lack of training facilities and academic courses on IFRS in India. There exists a tremendous opportunity for training the professionals

74 Opportunities for Chartered Accountants Reporting Systems: The disclosure and reporting requirements under IFRS are completely different from the Indian reporting requirements. Companies would have to ensure that the existing business reporting model is amended to suit the reporting requirements of IndAS, for which they need Chartered Accountants and trained professionals. Chartered Accountants can also assist in developing reporting systems which are inline with the requirements of IndAS. Assistance in development of proper internal control and minimising the risk of business disruption during the transition period.

75 Opportunities for Chartered Accountants Management Compensation Plan: The terms and conditions relating to management compensation plans would also have to be changed. This is because the financial results under IFRS are likely to be very different from those under the Indian GAAP. The contracts would have to be re-negotiated which is also a big challenge. Chartered Accountants and other professionals can play a key role in the same.

76 Opportunities for Chartered Accountants Fair Valuation: IndAS uses fair value as a measurement base for valuing most of the items of financial statements. The use of fair value accounting can bring a lot of volatility and subjectivity to the financial statements. It also involves a lot of hard work in arriving at the fair value and valuation experts have to be used. Chartered Accountants can play key role as fair valuation experts.

77 Opportunities for Chartered Accountants Taxation: IndAS convergence would affect most of the items in the financial statements and consequently the tax liabilities would also undergo a change. Thus consulting in taxation laws will also become critical to Thus consulting in taxation laws will also become critical to address the treatment of tax liabilities arising on convergence from Indian GAAP to IFRS.

78 Opportunities for Chartered Accountants Handle Transitional Issues: Given the new set of standards which are in offing, the transition is going to be a challenge, trained CA s can play a key role in the same. Adoption of new set of standards, would imply preparing a new set of financial statements in line with the new standards. CA s have a very promising role to play.

79 Opportunities for Chartered Accountants Actuarial Services: Presently, the requirement for obtaining actuary valuation is only prescribed class of companies. Going forward, the more companies would be covered in this ambit mainly due to new standards. There exists great opportunities for the CA s in this field also.

80 Challenges Awareness about international practices : Adoption of IFRS means that the entire set of financial statements will be required to undergo a drastic change. Training: Professional accountants are looked upon to ensure successful implementation of IFRS. Training of professionals will be a challenge. Amendments to the existing law : It is observed that implementation of IFRS may result in a number of inconsistencies with the existing laws which include the Companies Act 1956 (Companies Act, 2013), SEBI regulations, banking laws and regulations and the insurance laws and regulations. Currently, the reporting requirements are governed by various regulators in India and their provisions override other laws. Taxation: Thus the taxation laws should address the treatment of tax liabilities arising on convergence from Indian GAAP to IFRS.

81 Challenges Fair Value: IFRS uses fair value as a measurement base for valuing most of the items of financial statements. The use of fair value accounting can bring a lot of volatility and subjectivity to the financial statements. It also involves a lot of hard work in arriving at the fair value and valuation experts have to be used. Moreover, adjustments to fair value result in gains or losses which are reflected in the income statements. Management compensation plan: The terms and conditions relating to management compensation plans would also have to be changed. This is because the financial results under IFRS are likely to be very different from those under the Indian GAAP Reporting Systems: The disclosure and reporting requirements under IFRS are completely different from the Indian reporting requirements. Companies would have to ensure that the existing business reporting model is amended to suit the reporting requirements of IFRS.

82 WAY FORWARD

83 Way Forward For Professionals High level of preparedness Acclimatization with the standards Dealing with convergence issues For Companies Gearing up for convergence Training of staff Transition in reporting Balancing the requirements and reporting

84 THANK YOU