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C ONTEN T S

1. C ONTEN T S. T r ansiti o n Issues an d Chal len g es Cas e Studi e s. T r ansition Issues and Challen g es. Ind-AS-2 Inventories

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C ONTEN T S

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  1. 1

  2. CONTENTS • TransitionIssuesandChallenges • CaseStudies

  3. TransitionIssuesandChallenges • Ind-AS-2Inventories • Inrespectofinventoriesacquiredondeferredsettlementbasis,theinterestelementthereonshallbeexcluded.Thisneedtobeadjustedonthedateoftransition. • DuetoretrospectiveapplicationofIndAS16or38principlesanychangeindepreciation/amortisationofPPE/IntangibleAssetsmayneedtobeinventorised • DuetoapplicationofIndAS32anychangeinclassificationmay • resultinchangeinborrowingcostswhichneedtobecapitalised • SaleofinventoriesafterthereportingperiodwouldbeanadjustingeventunderInd-AS10discussedlaterwhichwouldneedtobeadjustedonthedateoftransition.

  4. TransitionIssuesandChallenges • Ind-AS10EventsAfterReportingPeriod • Anyprovisionforproposeddividendandrelateddividenddistributiontaxafterthereportingperiodshallbereversedandaddedbacktoretainedearnings. • SettlementofacourtcaseafterreportingperiodconfirmstheexistenceofapresentobligationandaccordinglythepreviouslycreatedprovisionneedstobeadjustedorfreshprovisionneedtobecreatedintermsofInd-AS-37 • Anentityshalladjustcostofassetspurchasedbasedoninformationavailableafterreportingperiodifitoptsforcarryingvalueasthedeemedcost. • Ondateoftransitionafirsttimeadoptershalladjustvaluationallowanceforreceivablesbasedoninformationavailableafterthereportingperiod • Onthedateoftransitionanylegaland/orconstructiveobligationsafterthereportingperiodshallbetakenintoaccountifnotconsideredunderpreviousGAAP.(seediscussiononInd-AS19onEmployeeBenefitsonnextslide)

  5. TransitionIssuesandChallenges • Ind-AS19onEmployeeBenefits • ActuarialgainsandlossesarisingondefinedbenefitplansandotherlongtermemployeebenefitsshouldberecognisedintheStatementofOtherComprehensiveIncomeandcannotberecycledtotheProfitandLossAccount. • Allpastservicecostsneedtobeimmediatelyexpensedoff. • InsteadofrecognisinginterestcostintheProfitandLossAccount,Ind-AS-19requiresrecognitionofnetinterestcostbasedonthenetdefinedbenefitassetorliabilityandthediscountrateatthebeginningoftheyear. • OthermiscellaneousadjustmentsintheactuarialassumptionsespeciallywithregardtosubsidiariesandJVslocatedabroadfordiscountrate.Alsoadjustmenttofairvaluesofplannedassets • Revisedactuarialvaluationwouldberequired. • Morespecificguidanceonaccountingforconstructiveobligationsi.e.asa • resultofinformalpractices.

  6. TransitionIssuesandChallenges • Ind-AS23onBorrowingCosts • Inventorieswhicharemanufacturedorotherwiseproducedinlargequantitiesonarepetitivebasisarenotconsideredasqualifyingassetseveniftheytakeasubstantialperiodoftimetogetreadyfortheirintendeduseorsale. • Borrowingcostsshallbemeasuredapplyingeffectiveinterestratemethodfromthetransitiondate.Accordingly,ancillaryborrowingcostwrittenoffearlierneedtobeamortised.Earlierperiodborrowingcostsshouldnotberestated. • IncaseofretrospectiveapplicationofthecostofitemsofPPE,IntangibleAssetsandInvestmentPropertytheimpactonborrowingcostneedstobeconsideredretrospectively • Dividendpayableinrespectofcompulsorilyredeemablepreferenceshareswouldalsoneedtobeconsideredasborrowingcostseligibleforcapitalisationdependingonthespecificcircumstances.

  7. TransitionIssuesandChallenges • Ind-AS12IncomeTaxes • BalanceSheetmethodtobeadoptedforcomputationofdeferredtaxassetorliabilitybywhichthetaxbaseiscomparedwithaccountingbase.Primaryimpactwouldbeinrespectofbusinesscombinationsandconsolidationadjustmentsonaccountundistributedretainedearnings • Taxbaseofanassetistheamountdeductiblefortaxpurposesagainstanytaxableeconomicbenefitsthatwouldflowtotheentitywhenitrecoversthecarryingamountoftheasset.e.gdepreciableassets,uncollectedincometaxedonacashbasis,assetsmeasuredatfairvaluewherethefairvaluegainisnotaxedorfairvaluelossisdisallowed. • Taxbaseofaliabilityisitscarryingamount,lessanyamountdeductiblefortaxpurposes.E.g.incomereceivedinadvancetaxedatalaterdate,loanpayablehavinganamortisedcost. • Afirsttimeadopterwouldhavetoestablishthehistoryofitemsthatgive • risetotemporarydifferencesandadoptretrospectiveapplication.

  8. TransitionIssuesandChallenges • RecognitionofdeferredtaxonrevaluationreserveandotherfairvalueadjustmentsthroughOCIsomesuchitemsare: • RevaluationofPPE • FairvaluechangesonfinancialassetsthroughOCI • FairvaluechangesoninvestmentsingroupcompaniesifcarriedatfairvalueinseparatefinancialstatementsasperIndAS27 • Translationdifferencesarisingoutofforeignoperationsinconsolidatedfinancialstatements • Reassessmentofrecognitioncriteriafortax losses, special indexationbenefits,taxtreaties,treatmentof reservesetc.

  9. TransitionIssuesandChallenges • MATRelatedIssues: • Proposaltoamendsection115JBsoastoprovidetheframeworkforcomputationofbookprofitforIndAScompliantcompaniesintheyearofadoptionandthereafterintroducedintheFinanceBill,2017 • Themainfeaturesofthisproposedframeworkareasunder: • NofurtheradjustmentstothenetprofitsbeforeothercomprehensiveincomeofIndAScompliantcompanies,otherthanthosealreadyspecifiedundersection115JBoftheActshallbemade. • Theothercomprehensiveincomeincludescertainitemsthatwillpermanentlyberecordedinreservesandhenceneverbereclassifiedtothestatementofprofitandlossincludedinthecomputationofbookprofits.TheseitemsshallbeincludedinbookprofitsforMATpurposesatthepointoftimeasspecifiedinthenextslide

  10. TransitionIssuesandChallenges • ChangesinrevaluationsurplusofProperty,PPEandIntangibleassets(IndAS16andIndAS38)tobeincludedinbookprofitsatthetimeofrealisation/disposal/retirementorotherwisetransferred • Gainsandlossesfrominvestmentsinequityinstrumentsdesignatedatfairvaluethroughothercomprehensiveincome(IndAS109)tobeincludedinbookprofitsatthetimeofrealisation/disposal/retirementorotherwisetransferred • Remeasurementsofdefinedbenefitplans(IndAS19)tobeincludedinbookprofitseveryyearastheremeasurementgainsandlossesarise • Anyotheritemtobeincludedinbookprofitseveryyearasthegainsandlossesarise 10

  11. TransitionIssuesandChallenges • Firsttimeadoption: • Thoseadjustmentsrecordedinothercomprehensiveincomeandwhichwouldsubsequentlybereclassifiedtotheprofitandloss,shallbeincludedinbookprofitsintheyearinwhichthesearereclassifiedtotheprofitandloss • Thoseadjustmentsrecordedinothercomprehensiveincomeandwhichwouldneverbesubsequentlyreclassifiedtotheprofitandlossshallbeincludedinbookprofitsasspecifiedinthenextslide

  12. TransitionIssuesandChallenges • ChangesinrevaluationsurplusofPPEandIntangibleassets(IndAS16andIndAS38)tobeincludedinbookprofitsatthetimeofrealisation/disposal/retirementorotherwisetransferred • Gainsandlossesfrominvestmentsinequityinstrumentsdesignatedatfairvaluethroughothercomprehensiveincome(IndAS109)tobeincludedinbookprofitsatthetimeofrealisation/disposal/retirementorotherwisetransferred • Remeasurementsofdefinedbenefitplans(IndAS19)tobeincludedinbookprofitsequallyoveraperiodoffiveyearsstartingfromtheyearoffirsttimeadoptionofIndAS • AnyotheritemtobeincludedinbookprofitsequallyoveraperiodoffiveyearsstartingfromtheyearoffirsttimeadoptionofIndAS

  13. TransitionIssuesandChallenges • AllotheradjustmentsrecordedinReservesandSurplus(excludingCapitalReserveandSecuritiesPremiumReserve)asreferredtoinDivisionIIofScheduleIIIofCompaniesAct,2013andwhichwouldotherwiseneversubsequentlybereclassifiedtotheprofitandlossaccount,shallbeincludedinthebookprofits,equallyoveraperiodoffiveyearsstartingfromtheyearoffirsttimeadoptionofIndASsubjecttothefollowing: • PPEandIntangibleAssetsatfairvalueasdeemedcost:-adjustmentstoretainedearningsshouldbeignoredanddepreciationcomputedaccordingly.Gainorlossondisposalshallbesimilarlycomputed • Investmentingroupcompanieswithfairvalueasdeemedcost:-retainedearningadjustmenttobeaddedforcomputationofbookprofitatthetimeofrealisation • CumulativeTranslationdifferences-consideredinbookprofitsatthetimeofdisposal • Allotheradjustmentstoretainedearningslikedecommissioningliability,borrowingcosts,decapitalisationetc.tobeincludedinbookprofitsequallyoveraperiodoffiveyearsfromthedateoftransition

  14. TransitionIssuesandChallenges • Ind-AS38IntangibleAssets • Unamortisedshareissueexpensesneedtobechargedoff.Amountsinthenatureoftransactioncostneedtobereducedfromequity. • Anyunamortisedborrowingcostsneedtobeanalysed.Initialtransactioncostneedtobereducedfromtheborrowingsandanyancillarycostneedstobeconsideredinthecalculatingtheeffectiveinterestrate. • Revenuebasedamortisationoftollroadswouldnotbepermitted • fortollroadsarisingafterthetransitiondate. • Amortisationofintangibleassetswithindefiniteusefullifenotpermitted.E.g.RightofWay,StockExchangebrokingcardetc.Thesewouldhoweverneedtobetestedforimpairment.

  15. TransitionIssuesandChallenges • Ind-AS21EffectsofChangesinForeignExchangeRates • Conceptoffunctionalcurrencyintroducedforthefirsttime.Nofirsttimeexemptionprovided.Itisthecurrencyoftheprimaryeconomicenvironmentinwhichtheentityoperates.Itisnormallythecurrencywhichinfluencestheincomeandexpensesthemost.e.g.shippingcompany. • Incaseof multiplesegmentshavingdifferentfunctionalcurrencies, • predominancetesttobeapplied • Ind-AS37Provisions,ContingentLiabilitiesandContingentAssets • Specificrequirementtorecogniseprovisionsinrespectofconstructiveobligations.AS-29doesnotspecificallyrefertothesame.Itonlyreferstocreationofprovisionsarisingoutofnormalbusinesscustomsandpractices,tomaintainbusinessrelationsetc. • RestructuringprovisionsneedtobemadebasedonconstructiveobligationsasagainstlegalobligationsintermsofAS-29. • Discountingof • material. provisionswhereeffectoftimevalueofmoneyis

  16. TransitionIssuesandChallenges • FinancialInstruments: • Greateruseoffairvalue– useofjudgementandvaluationtoolsinmanycases • ImpairmenttobecalculatedontheExpectedCreditLossModel. • – Assessmentofwhetherthereisasignificantincreaseinthecreditrisksinceinitialinceptionorthereisalowcreditriskinwhichcase12monthsexpectedcreditlossesarerecognised • – WheresignificantincreaseincreditrisksinceinitialinceptionandnoobjectiveevidenceofimpairmentinwhichcaselifetimeexpectedcreditlossestoberecognisedonaPDbasis • – Wherethereisobjectiveevidenceofimpairmentlifetimeexpectedcreditlossesarerecognisedandinterestincomeiscomputedonthenetbasis(i.e.netofcreditallowances) • –Specificconsiderationsforimpairmentofgroupcompanyinvestmentscarriedatcostinstandalonefinancialstatements(seenextslide) • Toevaluateanobjectivebasisforassessingimpairmentoftradereceivables

  17. TransitionIssuesandChallenges • DerivativeInstruments– currentlytherearediversepractices– AS- • 30orICAIannouncement-consistencywouldcreepinandrecognitionofbothgainsandlosseseitherthroughProfitandLossorOCI(hedgeaccountingadopted)– GreaterimpactforentitieswhowerehithertofollowingtheICAIannouncementandrecognisingonlylosses • TransactionCosts • – Inrespectoflongtermborrowingswillberecognisedoverthetenoroftheborrowingusingtheeffectiveinterestratemethodasagainstthecurrentpracticeofchargingoff • – Inrespectoffinancialassetsthesewouldneedtobechargedoffasagainstthecurrentpracticeofcapitalisingthesame,unlesstheseareinrespectoffinancialassetsrecordedonamortisedcostbasis,inwhichcasetheywouldneedtobeadjustedagainstthecarryingvalue. ZFB&ASSOCIATES,CharteredAccountants

  18. TransitionIssuesandChallenges • Asubstantialmodificationofthetermsofanexistingliability(whetherornotattributabletofinancialdifficultiesofthedebtor)shallbeaccountedforasanextinguishmentoftheoriginalliabilityandtherecognitionofthenewliabilityandthedifferencebetweenthecarryingamountofthefinancialliabilityextinguishedandtheconsiderationpaid,ifanyshallberecognisedintheprofitandlossaccount. • Amodificationofthecontractualcashflowsofanamortisedcostfinancialliabilitye.g.duetofloatinginterestrateresetswhichdoesnotresultintheextinguishmentofthefinancialliabilitywouldresultinarecalculationofthecarryingamountandtheresultantgainorlosswouldneedtoberecognisedintheProfitandLossAccount ZFB&ASSOCIATES,CharteredAccountants

  19. TransitionIssuesandChallenges • BusinessCombinations: • AcquisitionValue • – Assetsandliabilitiestoberecognisedatfairvalue • ContingentLiabilitiesandIntangibleAssetsnotrecognisedintheacƋuiƌee’s financialstatementsalsoneedtoberecognisedatfairvalue • Remeasurementforacquisitioninstages • Noncontrollingintereststobemeasuredatfairvalue • – Significantchangesinthevalueofgoodwillreflectingamoreaccuratedepictionofthepremiumpaidonacquisitioneventhoughthelegalformoftheacquisitionhasnotchanged.(Generallyexpectedtobelower)

  20. TransitionIssuesandChallenges • Determiningtheacquisitiondate • -theacquirershallidentifytheacquisitiondate,whichisthedateonwhichitobtainscontroloftheacquiree– • -thedateonwhichtheacquirerobtainscontroloftheacquireeisgenerallythedateonwhichhelegallytransferstheconsideration,acquirestheassetsandassumestheliabilitiesoftheacquiree-closingdate. • wheretheacquisitiondatedependsontheshareholdersandregulatoryapprovalsandtheagreementfortransferprovidesthatthecontrolissubjecttosubstantivepre-conditions,theacquisitiondateisusuallythedateonwhichthelastofthosepre-conditionsissatisfied. • Incaseswheretheagreementisconditionaluponreceivingtheapprovalfromsomeregulatoryauthority,thedateofacquisitionwoulddependuponthenatureofthatapproval.Iftheapprovalisasubstantivehurdle,suchastheapprovaloftheCompetitionCommissionorHighcourtorTribunal,itishighlyunlikelythatthecontrolisobtainedpriortotheapproval.However,wheretheapprovalismerelyarubberstampingexerciseorformalityitwouldnotprecludecontrolhavingbeingexercisedatanearlierdate. 20

  21. TransitionIssuesandChallenges • AccountingforTransactionCosts • Theseneedtobechargedoffasagainstthecurrentpracticeofgenerallycapitalisingthem • Accountingvis-à-visHighCourtOrdersespeciallyontransitiondate- • UndertheCompaniesAct,2013certificatefromtheauditorsrequiredwhetherschemeisinaccordancewiththeAccountingStandardstherebydoingawaywiththeleewayprovidedundertheCompaniesAct,1956 • – TransferofallpendingschemestotheNCLT • “The amalgamatingcompanyortheamalgamatedcompany(bytheBoardofDirectors)mayalterormodifytheaccountingtreatmentspecifiedinthescheme,inconsultationwiththeauditors,astheymaydeemfitandconsidernecessary,tosettleanyquestion/difficultyarisingoutofthescheme,tocomplywiththerelevantlaws(includingbutnotlimitedtotheIncomeTaxAct,1961)andapplicableaccountingstandards.” (Extractfromanamalgamationscheme)

  22. TransitionIssuesandChallenges • Commoncontrolbusinesscombinations • –transferwithinthegroup • Poolingofinterestmethodtobeadopted • SimilartocurrentAS-14

  23. TransitionIssuesandChallenges • ShareBasedPayments: • ESOPStobemandatorilyrecordedonafairvaluebasiswhichwouldresultinincreasedchargesandhencehaveasignificantimpactonkeyperformanceindicatorslikeEPS • Sharebasedpaymentstonon-employeeslikevendorsagainstsupplyofgoodsandserviceswouldneedtoberecordedonafairvaluebasisinallcases,whichiscurrentlymissing.OnlyfixedassetssoacquiredareaccountedforatfairvalueintermsofAS-10.

  24. TransitionIssuesandChallenges • Property,PlantandEquipment • MandatoryComponentAccounting • Anycostwhichissignificantinrelationtothetotalcostandhasaseparatelydefinedusefullifeneedtobeseparatelyidentifiedanddepreciatedaccordingly • Residualvaluecalculationsandestimatesneedtobeevaluatedafresh • EvencompaniesnotadoptingInd-ASneedtoadoptthe • sameintermsoftheCompaniesAct,2013 • ExpectedtoahaveamaterialandsignificantimpactonhighlycapitalisedmanufacturingentitiesandITtechnologycompanies • Couldhaveasignificantimpactoninsurance,assetbacked • financing,amongstothermatters

  25. TransitionIssuesandChallenges • RevaluationofAssets • – Noselectiverevaluationpermitted • Updationofrevaluationonaregularbasis • DepreciationchargetobechargedofftoIncomeStatement.EvencompaniesnotadoptingInd-ASneedtofollowthesameintermsoftheCompaniesAct,2013 • Sinceitisanoptionitcanaffectcomparabilityofresultsofthesameclassofcompaniesandhenceuniformityintermsofloancovenantsincludingsecuritycoveretc.wouldbeanissue • Forcompaniesadoptingtherevaluationroutswhilsttheassetbasewouldbehigher,therewouldalsobeahighercorrespondingdepreciationcharge • RepairsandOverhaulexpenditure • – Needstobecapitalisedifitsatisfiestherecognitioncriteria • Correspondingdecapitalisationofthereplacedparts • Closerscrutinyoftherenewalandassetmaintenancepoliciesofcompanies,especiallythosewhichareassetheavy. • CapitalspareswhichmeetthedefinitionofPPEtobeseparatelyrecognisedevenifthedeemedcostexemptionisavailed

  26. TransitionIssuesandChallenges • UnrealisedExchangeDifferences • – Thesearerequiredtobechargedoffinallcasesprospectively • -Companieswhohaveoptedforthetransitionalreliefforcontinuingtreatmentofcapitalisationintermsofpara46AofAS-11tillthetenoroftheloansortillFY2020.Thiswouldimpactcomparabilityofresults • -Incaseofchangeinthefunctionalcurrencyclassificationmaychangeandhencethesecouldnolongerbeconsideredasforeigncurrencyitems • -AmortisationofFCMTDAwouldcontinuetobethroughtheProfitandLossAccountandnotOCI • – Greatervolatilityintheresultsofcompanieswhohavelarge • overseasborrowings

  27. TransitionIssuesandChallenges ImpactontheOrganisation • Identifyingtherelevantcomponentswouldrequire • reconfigurationofthefixedassetsregister.TheMaintenanceofthefixedassetsregisterwouldbecomeacumbersomeexercisesincegreatergranularitywouldberequiredinthecompilationthereof. • Substantialsystemchangeswouldhavetobeundertaken,thecostofwhichmaynotalwaysbecommensuratewiththebenefits. • Evaluationoftheusefullivesandresidualvalueswouldrequiregreatermanagementjudgementsandestimatesandhelpofexpertsinseveralcases.

  28. TransitionIssuesandChallenges • Leases: • Straightliningofleaserentalnotpermittediftheincreaseisattributabletoinflation.Onlypermissibleifitisforcashflowpurposes.Likelytopresentpracticalchallengesespeciallyifthestraightliningismorerepresentativeofthetimepatternoftheusersbenefit • Initialdirectcostinrespectoffinanceleaseincurredbythelessortobeincludedaspartofleasereceivableasagainstthecurrentpracticeofeitherchargingofforamortisation • Initialdirectcostinrespectofoperatingleasetobeaddedtotheassetcarryingvalueandrecogniseovertheleasetermasagainstthechoicecurrentlyavailabletochargeitoff • Evaluatingthesubstanceofspecificassetstest(e.g.forcontrolledbythepurchaser. arrangementsto transportation)– identifyleases- righttouseis

  29. TransitionIssuesandChallenges • OperatingSegment: • Anoperatingsegmentisacomponentofanentity: • Thatengagesinbusinessactivitiesfromwhichitmayearnrevenuesandincurexpenses,includingfrominter-divisiontransactionsandtransfersbasedonatransferpricingformula; • WhoseoperatingresultsareregularlyreviewedbytheCODMtomakedecisionsaboutresourcestobeallocatedtoassessitsperformance;and • -Forwhichdiscretefinancialinformationisavailable. • OperatingResultsareRegularlyReviewed:-Thistermisnotspecificallydefinedandhencealotofjudgementisrequiredtoidentifysuchinformation. • AvailabilityofDiscreteFinancialInformation:-ThistermisalsonotspecificallydefinedthoughbasedonaliteralmeaningitimpliesavailabilityofinformationwhichisspecificallyanddistinctlyavailabletofacilitatereviewbytheCODM.TheAvailabilityoffullfledgedfinancialinformationisnotapre-requisite.Somecommonexamplesofdiscretefinancialinformationwhichbyitselfwouldbesufficienttoidentifyoperatingsegmentsare: • GrossMarginanalysis • Revenuedata • CashFlowanalysis

  30. TransitionIssuesandChallenges • Reportseparatelyinformationabouteachreportablesegmentthat: • Hasbeenidentifiedinaccordancewiththecriteriadiscussedabove;or • resultsfromaggregatingtoormoresegmentsaspertheaggregationcriteria • discussedbelow;and • -Exceedsthequantitativethresholds(10%ofrevenue,profit/lossortotal • assets). • OperatingSegmentsoftenexhibitsimilarlongtermfinancialperformance,iftheyhavesimilareconomiccharacteristics.Insuchsituations,theymaybeaggregatediftheyexhibitsimilarcharacteristicsinthefollowingrespects: • Natureofproductsandservices; • Natureoftheproductionprocess; • Classortypeofcustomers; • Methodsusedtodistributetheproductsorservices;and • Natureoftheregulatoryenvironment,ifapplicable. • Significantlydetaileddisclosureshavebeenspecified • TheexistingMISdataneedstobecloselyreviewed. 30

  31. TransitionIssuesandChallenges • Definitionof͚revenue͛ givenintheIndAS18isbroadcomparedtothedefinitionof͚revenue͛ giveninexistingAS9becauseitcoversalleconomicbenefitsthatariseintheordinarycourseofactivitiesofanentitywhichresultinincreasesinequity,otherthanincreasesrelatingtocontributionsfromequityparticipants.Ontheotherhand,aspertheexistingAS9,revenueisgrossinflowofcash,receivablesorotherconsiderationarisinginthecourseoftheordinaryactivitiesofanenterprisefromthesaleofgoods,fromtherenderingofservices,andfromtheusebyothersofenterpriseresourcesyieldinginterest,royaltiesanddividends. • AsperexistingAS9,revenueisrecognisedatthenominalamountofconsiderationreceivable.IndAS18requirestherevenuetobemeasuredatfairvalueoftheconsiderationreceivedorreceivable.

  32. TransitionIssuesandChallenges • IndAS18specificallydealswiththeexchangeofgoodsandserviceswithgoodsandservicesofsimilaranddissimilarnature.Inthisregardspecificguidanceisgivenregardingbartertransactionsinvolvingadvertisingservices.ThisaspectisnotdealtwithintheexistingAS9. • IndAS18providesguidanceonapplicationofrecognitioncriteriatotheseparatelyidentifiablecomponentsofasingletransactioninordertoreflectthesubstanceofthetransaction.ExistingAS9doesnotspecificallydealwiththesame. • Forrecognitionofrevenueincaseofrenderingofservices,existingAS9permitstheuseofcompletedservicecontractmethod.IndAS18requiresrecognitionofrevenueusingpercentageofcompletionmethodonly. • ExistingAS9requirestherecognitionofrevenuefrominterestontimeproportionbasis.IndAS18requiresinteresttoberecognisedusingeffectiveinterestratemethod.

  33. TransitionIssuesandChallenges • DisclosurerequirementsgivenintheIndAS18aremoredetailedas • comparedtoexistingAS9. • IndAS18specificallyprovidesguidanceregardingrevenuerecognitionincasetheentityisunderanyobligationtoprovidefreeordiscountedgoodsorservicesorawardcreditstoitscustomersduetoanycustomerloyaltyprogramme.ExistingAS9doesnotdealwiththisaspect. • IndAS18dealswithaccountingoftransferofproperty,plantandequipmentbythecustomerstotheentity,whichareusedbytheentitytoconnectthecustomertoanetworkortoprovidethecustomerwithongoingaccesstoasupplyofgoodsorservices.ExistingAS9doesnotdealwiththisaspect. • ExistingAS9specificallydealswithdisclosureofexcisedutyasadeductionfromrevenuefromsalestransactions.IndAS18doesnotspecificallydealwiththesame.NotestoScheduleIIIprovidesthatrevenueshouldbeinclusiveofexcisedutyandhenceexcisedutyshouldbereflectedasanexpense.Thiswouldsignificantlyimpactthetoplinedisclosures

  34. CaseStudies • CaseStudy1: • LiftManufacturingCo.Ltd.isacompanyengagedinthemanufactureoflifts.AspartofthetermsofthecontractaswellasinaccordancewiththelocalMunicipalRegulations,itisrequiredtoprovideathreeyearwarrantyonallsales. • TheCompanyintendstotransitiontoInd-ASon1stApril,2015andhasmadeaprovisionforwarrantyclaimsasperAS-29ofRs.120lakhs.Theestimatedyearlyoutflowonaccountofclaimsoverthenextthreeyearsisasperthenextslide:

  35. CaseStudies

  36. CaseStudies • Further,intermsoftheMunicipalRegulations,allliftManufacturersarerequiredtomakeanannualcontributiontoaBuildingRehabilitationFundwhichinveststhesameinprescribedsecurities.Thedetailsofthesameareasunder: • AnnualcontributionRs.10lakhswhichisexpensedoffeachyear. • TheCompanyisprovidedwithastatementeveryyearforitsinformationbytheMunicipalauthoritiesdetailingitsshareoftheobligationbasedonaglobalactuarialvaluationtogetherwiththevalueoftheassetsattributableagainstthesame,whichamountsason31stMarch,2015areRs.35lakhsandRs.25lakhs,respectively.

  37. CaseStudies • Further,theCompanyhasbeenaskedbytheConsumercourtvideitsorderdated2ndJune,2015topaydamagesofRs.5lakhsforinjurysufferedbyapersonwhometwithanaccidentusingthecoŵpaŶy’s lift.TheCompanyhasdisputedtheorderandhasbeenlegallyadvisedthatitisnottenableandhasdecidedtofileanappealagainstthesame. • TheCompanyhasalsoproposedadividendofRs50lakhswhichentailsadividenddistributiontaxofRs.7lakhsitsBoardMeetingheldon15thJune,2015.,whichisalsothedatewhenthefinancialstatementswereapprovedbytheBoard. • TheriskfreerateforGovernmentBondswithdifferentmaturitiesisasperthenextslide:

  38. CaseStudies

  39. CaseStudies WhataretheadjustmentswhichtheCompanyisrequiredtomakefortheabovetransactionandeventsforthepurposeoftransitiontoInd-ASason1stApril,2015. Makewhateverassumptionsaredeemed necessary. NB:Incaseanycalculationsarerequiredtheamountsneednotnecessarilybecalculatedbutonlythebasisonwhichcalculationsarerequiredtobemademaybeindicated.

  40. CaseStudies SolutiontoCaseStudy1: TheCompanywouldberequiredtomakethefollowingadjustments: a)Discountingofwarrantyprovisions– Sincethewarrantyprovisionsarepayableoveraperiodofthreeyears,thetimevalueofmoneyneedstobeconsideredandtheprovisionneedstobeworkedoutondiscountedbasisusingtheriskfreerateongovernmentbondsforthemiddletenorontheassumptionthattheclaimswillariseevenlythroughouttheyear.Thecalculationsaretabulatedinthenextslideonlyforreferencepurposes: Accordingly,theexcessprovisionofRs.13.63lakhs(120-106.37)wouldneedtobeadjustedagainsttheretainedearningswhilstpreparingtheopeningInd-ASbalancesheet. 40

  41. CaseStudies

  42. CaseStudies ContributiontoBuildingRehabilitationFund– ApartfromtheannualcontributionofRs.10lakhs,thecompanyhasanetpresentobligationofRs.10lakhs(Rs.35-25)forwhichitneedstomakeaprovisionintermsofInd-AS37whichcanbeadjustedagainsttheretainedearningswhilstpreparingtheopeningInd-ASbalancesheet. DamagesawardedbyConsumerCourt– TheadjudicationofdamagesbytheConsumerCourton2ndJune,2015whichisbeforethedateofapprovalofthefinancialstatementson15thJune,2015confirmsapresentobligationintermsofInd-AS37necessitatingtheadjustmentofaprovisionorcreationofafreshprovisionandbecomesanadjustingeventintermsofInd-AS10[Para10.9(a)],sinceitprovidesadditionalevidenceofaconditionexistingasattheBalancesheetdate.Hence,sincenoprovisionwasmadeearlier,theCompanyisrequiredtocreateaprovisionforRs.5lakhsintermsofInd-AS37whichcanbeadjustedagainsttheretainedearningswhilstpreparingtheopeningInd-ASbalancesheet. Proposeddividend– Intermsofpara12ofInd-AS10,anydividendsonequityinstrumentsproposedordeclaredafterthereportingperiod,shouldnotberecognisedasaliabilitysincethereisnoobligationonthereportingdate.Accordingly,thedividendofRs.50lakhsandthecorrespondingdividenddistributiontaxofRs.7lakhsshouldbereversedandadjustedagainsttheretainedearningswhilstpreparingtheopeningInd-ASbalancesheet.

  43. CaseStudies • CaseStudy2: • XYZLtd.hadpurchasedafactorybuildingon1stApril,2013,thedetailsofwhicharegivenhereunder: • OriginalCost:Rs.500lakhs • UsefulLife:20years • ScrapValue:5% • TheCompanyfollowsthestraightlinemethodofdepreciation.TheCompanyintendstotransitiontoInd-ASon1stApril,2015.Asaresultthereofithasestimatedthedetailsofthematerialcomponentsasperthenextslide:

  44. CaseStudies

  45. CaseStudies • Theelectricalfittingsweredamagedon15th June,2014and replacedatacostofRs.80lakhswhichwasexpensedoff.Theestimatedusefullifeandscrapofthereplacedelectricalfittingsisthesameasabove.ThecompanyhadalsoaccountedforthescraprealisationofRs.16lakhsasincome. DeterminethecarryingamountofthebuildingonthedateoftransitiontoInd-ASontheassumptionthatthecompanydecidestofollowthecostmodelonaretrospectivebasisandtheadjustmentswhichneedtobedone. IftheCompanydecidestooptforthecarryingamountonthedateoftransitiontoInd-ASasthecarryingcostandonlyhastheestimatedmarketpricesofthevariouscomponentsonthesaidasagainstthevaluationabove,determinethebasisofcomponentisationandthedepreciationchargeonthedateoftransition.

  46. CaseStudies Solution Part(a) • Thefirststepwouldbetodeterminethecarryingcostason1stApril,2015,beingthedateoftransitionasperthepreviousGAAPwhichworksouttoRs.452.50lakhsarrivedasunder: • OriginalCostRs.500lakhsless5%scrapvalueofRs25lakhsi.e.Rs475lakhsdepreciatedover20yearswithanannualdepreciationofRs.23.75lakhsfor2yearsi.e.Rs.47.50(500-47.50) • Thesecondstepwouldbetodeterminetherevisedcarryingcostincludingseparatelyforthecomponentsandtakingintoaccountthereplacement.Thesameisworkedoutasperthenextslide: ThereductioninthecarryingamountofRs.32.85lakhs(452.50-419.65)wouldhavetobeadjustedagainsttheretainedearningswhilstpreparingtheopeningInd-ASbalancesheet.

  47. CaseStudies

  48. CaseStudies Part(b): Sincethe Company doesnothave detailed informationaboutthecomponents,itmayallocatethecarryingamountintheratioofthecurrentmarketpricestothemaincomponents.

  49. CaseStudies • PQR Ltd.hascertainfinancialassetsand liabilities(seenextslide)ason1stApril,2015,whichisalsothedatewhenitintendstotransitiontoInd-AS:

  50. CaseStudies 50

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