chapter-09-first-time-adoption-ind-as-implementation-guide
chapter-09-first-time-adoption-ind-as-implementation-guide
9. First-time adoption
of Ind AS
Summary
This chapter covers:
• Ind AS 101, First-time Adoption of Indian Accounting Standards
The 2013 Act mandates preparation of financial statements of specified companies in accordance
with Ind AS. For this purpose, the Ministry of Corporate Affairs (MCA) had laid down a road
map which provided guidance for adoption of Ind AS by the specified companies in a phased
manner. Ind AS 101 provides principles for transition and disclosures to be made in the financial
statements by a first-time adopter.
Key principles
• Ind AS 101 provides a suitable starting point for Accounting policies
entities that are transitioning to Ind AS. Ind AS 101
• An entity is required to use the same accounting
is applied by an entity in its first Ind AS financial
policies in its opening Ind AS balance sheet and
statements and each interim financial report, if
throughout all periods presented in its first Ind AS
any, that it presents in accordance with Ind AS 34,
financial statements.
Interim Financial Reporting.
• Accounting policies are required to be chosen
• The date of transition is the beginning of the earliest
from Ind AS effective at the end of its first Ind
comparative period presented on the basis of
AS reporting period, unless there is an explicit
Ind AS. At least one year of comparatives is also
exemption or option provided in Ind AS 101.
presented together with the opening balance sheet,
which is prepared at the date of transition to Ind AS. • An entity is required to take the following steps in its
opening Ind AS balance sheet:
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– Recognise all assets and liabilities whose opening Ind AS balance sheet should comply with
recognition is required by Ind AS each Ind AS:
– Not recognise items as assets or liabilities if Ind – Prohibits retrospective application of some
AS do not permit such recognition specific aspects of an Ind AS
– Reclassify items that it recognised in accordance – Grants exemptions from some specific
with previous GAAP as one type of asset, liability requirements of an Ind AS.
or component of equity, but are a different type Explanation of transition to Ind AS
of asset, liability or component of equity in
accordance with Ind AS, and • An entity is required to explain how the transition
from previous GAAP to Ind AS affected its reported
– Apply Ind AS in measuring all recognised assets balance sheet, financial performance and cash
and liabilities. flows.
• The accounting policies in the opening Ind AS Disclosures
balance sheet may differ from those that an entity
used for the same date under previous GAAP. The • Detailed disclosures on the first-time adoption of
resulting adjustments arising from events and Ind AS including reconciliations of equity and profit
transactions before the date of transition to Ind AS or loss from previous GAAP to Ind AS are required
are generally recognised in retained earnings. in the annual financial statements as well as some
disclosures in its interim financial statement.
• Ind AS 101 establishes the following two categories
of exceptions to the principle that an entity’s
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Guidance from ITFG clarifications foreign currency items to the cost of the related
PPE. At the time of transition to Ind AS if such an
entity decides to avail the deemed cost exemption
I. Clarifications with respect to the application of under paragraph D7AA of Ind AS 101, but does not
the deemed cost exemption elect to continue to capitalise foreign exchange
differences (also refer section II below), it would
As stated above, Ind AS 101 permits an entity
still be required to carry forward the entire previous
to measure items of PPE, investment property,
GAAP carrying amount for all of its PPE and would
intangible assets and investments in subsidiaries/
not be permitted to reverse the impact of paragraph
associates/joint ventures on the date of transition
46/46A of AS 11 from the deemed cost of PPE.
at either their fair value or their carrying amount
(ITFG 7, Issue 3)
in accordance with previous GAAP and use this
amount as a measure of their deemed cost. Subsequent to issuing the above clarification in
bulletin 7, the ITFG clarified (refer paragraph I (c)
The application of this optional exemption gives
below) that the deemed cost of an asset, being its
rise to several accounting issues, especially when
previous GAAP carrying amount, may be adjusted
considering the interaction of this exemption in
only to the extent of consequential adjustments
Ind AS 101 with the requirements of other Ind AS.
arising from the application of other Ind AS (ITFG 12,
These issues are further discussed below.
Issue 10).
a. Applicability of deemed cost exemption
c. Consequential adjustments to deemed cost,
Paragraph D7AA of Ind AS 101, provides an option being the previous GAAP carrying amount of
to a first-time adopter at the date of transition assets and liabilities
to continue with the carrying value of all PPE
An entity is required to recognise, classify and
(intangible assets or investment property) measured
measure assets and liabilities in its opening Ind AS
as per previous GAAP, and use it as its deemed cost
balance sheet in accordance with Ind AS.
without making any further adjustments based on
application of other Ind AS. Based on the above guidance, and subject to any
specific exemption/exception in Ind AS 101, all
Alternatively, Ind AS 101 also permits a first-time
assets and liabilities are required to be recognised in
adopter to elect to measure an item of PPE at the
accordance with the principles of Ind AS 101.
date of transition to Ind AS at its fair value and use
that fair value as its deemed cost on transition. This However, there may be situations where no
option may be applied selectively to some items of exemption/exception has been provided for an item
PPE. of asset and/or liability, and the application of Ind
AS principles to such an item has a corresponding
impact on another item of asset and/or liability
An entity is not permitted to continue with the
which is measured at its previous GAAP carrying
previous GAAP carrying value as deemed cost
amount at the transition date as permitted by Ind AS
on a selective basis for some of the items of PPE
101.
and use fair value as deemed cost approach for
the remaining items. (ITFG 5, Issue 3) In such a situation, the adjustment to the assets/
liabilities measured at deemed cost is only
consequential in nature and arises due to the
b. Reversal of the effects of paragraph 46/46A of application of the transition requirements of Ind
AS 11 under previous GAAP carrying amount of AS 101 to another item. Therefore, the previous
PPE on transition to Ind AS GAAP carrying amount may be adjusted only to the
An entity that would avail of deemed cost extent of consequential adjustments. Except such
exemption of paragraph D7AA (as mentioned in consequential adjustments, no further adjustments
above issue) would be required to carry forward should be made to the deemed cost (being the
the entire previous GAAP carrying amount for all of previous GAAP carrying amount) due to the
its PPE on transition to Ind AS. Ind AS 101 does not application of other Ind AS. (ITFG 12, Issue 10).
permit any further adjustments to the deemed cost
of PPE. This clarification may result in additional
adjustments being made to the deemed cost of
Under previous GAAP, an entity may have availed
PPE for items such as certain borrowing costs,
of the option under paragraph 46/46A of AS 11, The
hedging gains/losses, etc.
Effects of Changes in Foreign Exchange Rates to
capitalise foreign exchange differences on long-term
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This clarification is more general in nature, although though the PPE is measured at its deemed cost
clarifications have been provided in the past on specific (being previous GAAP carrying amount). (ITFG 5,
consequential adjustments – please refer paragraph I Issue 5)
(d) and (e) below: ii. Fair value as deemed cost: The entity may elect
d. Processing fees on loans to measure its PPE at fair value and use that as
An entity may have incurred processing fees on its deemed cost on the date of transition to Ind
a loan obtained before transition to Ind AS and AS in accordance with principles of Ind AS 101.
capitalised these as part of the relevant item of PPE Considering the principles in Ind AS 113, fair
in accordance with the previous GAAP. On transition value of the asset is the exit price that would be
to Ind AS, an entity may elect to apply the deemed received to sell the asset in an orderly transaction.
cost exemption and continue with the previous As fair value is a market-based measurement
GAAP carrying value for such PPE. and not an entity specific measurement, it is
independent of the government grant received
However, the loan is required to be measured at on the asset. Consequently, no adjustment with
amortised cost (in accordance with Ind AS 109) and regard to government grant should be made to
its carrying amount is to be restated to its amortised the fair value of the PPE, being the deemed cost
cost in accordance with Ind AS 109 as at the date of on the date of transition to Ind AS. However, the
transition. entity is required to recognise the asset related
As a consequence, in order to restate the carrying government grant outstanding on the transition
amount of loan, the deemed cost of the PPE, being date as deferred income in accordance with
its previous GAAP carrying amount at the date of the requirements of Ind AS 20. The resultant
transition, should be reduced by the amount of adjustments should therefore be made in
processing cost (net of cumulative depreciation retained earnings or if appropriate, another
impact). category of equity at the date of transition to Ind
This would be in the nature of consequential AS. (ITFG 12, Issue 2)
adjustment to enable an adjustment to the carrying Please refer chapter 10, Other topics-Accounting for
amount of loan as required by Ind AS. (ITFG 5, Issue Government Grants and Disclosure of Government
4) Assistance for more details on amended Ind AS 20
e. Government grants for purchase of a fixed asset (ITFG 17, Issue 1)
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under previous GAAP for exchange differences c. Amortisation of FCMITDA on transition to Ind AS
arising from translation of long-term foreign Ind AS 109 provides guidance on the measurement
currency monetary items recognised in the financial of financial liabilities classified into the amortised
statements for the period ending immediately cost category and requires the application of the
before the beginning of the first Ind AS financial Effective Interest Rate (EIR) method to measure
reporting period. amortised cost. The application of this method may
The application of this exemption in Ind AS 101 gives result in a change in the carrying amount of a long-
rise to several practical implementation issues, term foreign currency liability on transition to Ind AS,
which are highlighted below. as compared to previous GAAP.
a. Applicability of exemption under paragraph If an entity applies the exemption in paragraph
D13AA of Ind AS 101 D13AA of Ind AS 101 and continues to accumulate
The option (under Ind AS 101) to continue with foreign exchange gains or losses on translation of
the accounting policy under paragraph 46/46A of such an item in FCMITDA, the balance in FCMITDA
AS 11, is available for only those long-term foreign should be revised retrospectively on the basis of the
currency loans that were taken/drawn down before amortised cost of the liability (as determined under
the beginning of the first Ind AS reporting period i.e. Ind AS 109 on the date of transition). The revised
1 April 2017 for a company falling within phase 2 of balance of FCMITDA should be amortised over the
the Ind AS adoption road map. (ITFG 1, Issue 3) and balance period of that long-term liability through the
(ITFG 7, Issue 1) statement of profit and loss. (ITFG 2, Issues 1 and 6)
b. Exemption under paragraph D13AA of Ind AS d. Exemption under paragraph D13AA on change
101 vis-a-vis borrowing costs under Ind AS 23 in functional currency
In case of a first-time adopter of Ind AS which would When the functional currency of a company
present its first Ind AS financial statements for the changes from INR to any other currency (e.g. USD),
financial year 2018-19, ITFG considered and clarified then any loans taken in the new functional currency
on exchange differences that qualify as borrowing (USD) would not be considered as long-term foreign
costs as per paragraph 6(e) of Ind AS 23, Borrowing currency monetary items under previous GAAP
Costs. In the given scenario, the relevant entity ( i.e. paragraph 46A of AS 11)
was exercising the option provided in paragraph Therefore, an entity cannot continue to recognise
46/46A of AS 11 and intended to continue to follow the exchange differences arising from those loans,
the same accounting policy in accordance with in the cost of fixed assets under paragraph D13AA
paragraph D13AA of Ind AS 101. of Ind AS 101. (ITFG 1, Issue 4)
e. Accounting policy for exchange differences to
A first-time adopter of Ind AS can continue to long-term forward exchange contracts
apply an accounting policy based on para 46A of
Companies that availed of the option to apply
AS 11 upon transition to Ind AS. When a company
paragraph 46/46A of AS 11 under previous GAAP
applies paragraph 46A of AS 11 then it does not
may have also capitalised foreign exchange
apply AS 16, Borrowing Costs to those exchange
differences on forward exchange contracts (covered
differences relating to long-term foreign currency
by paragraph 36 of AS 11) acquired to hedge long-
monetary items that otherwise qualify as being in
term foreign currency loans. This was permitted in
the nature of adjustments to interest cost within
accordance with the clarification issued by ICAI in
the meaning of paragraph 4(e) of AS 16.
its Frequently Asked Questions (FAQs) on the AS 11
notification.
Therefore, ITFG clarified that a company which However, the exemption in paragraph D13AA of Ind
wishes to continue to avail of the exemption provided AS 101 relates only to foreign exchange differences
by paragraph D13AA of Ind AS 101 would not be on long-term foreign currency monetary items
permitted to apply paragraph 6 (e) of Ind AS 23 to recognised in the financial statements prior to the
that part of exchange differences on such long-term first Ind AS financial reporting period and would
foreign currency monetary items. (ITFG 18, Issue1). not apply to long-term forward exchange contracts.
(ITFG 7, Issue 4)
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Accordingly, ICAI clarified that the difference Although Ind AS 20 requires that the benefit of a
between the carrying amount of the financial liability government loan at a below-market rate of interest
(as per previous GAAP) on the date of transition and is treated as a government grant, such benefit
its amortised cost as on that date, computed as per (based on a retrospective restatement of the
the EIR method specified in Ind AS 109, should be loan amount at its fair value on initial recognition
adjusted by crediting the capital reserve account under Ind AS 109) would not be recognised for a
and the corresponding debit would be to the government loan existing at the date of transition,
relevant account which was credited earlier. (FAQ since Ind AS 101 does not permit such retrospective
dated 7 April 2017 issued by the ASB of ICAI). restatement.
A first-time adopter is required to use its previous
Companies that have previously adjusted GAAP carrying amount of government loan as the
the entire redemption premium against the Ind AS carrying amount on the date of transition.
securities premium account and recognised the It should apply the requirements of Ind AS 20
full repayable amount of the liability would be and Ind AS 109, prospectively to government
required to reverse the unamortised premium loans existing at the date of transition to Ind AS,
expense on transition to Ind AS. This would unless the necessary information needed to apply
subsequently be recognised as an interest the requirements of Ind AS 109 and Ind AS 20
expense through the statement of profit and retrospectively, has been obtained at the time of
loss over the remaining period until redemption. initially accounting for that loan. On prospective
This could have a significant impact on the application of Ind AS 109, the EIR of the loan
determination of future profits under Ind AS. should be computed by comparing the carrying
amount of the loan at the date of transition with the
amount and timing of expected repayment to the
e. Depreciation on first-time adoption government.
An entity, being a first-time adopter of Ind AS is Another important related issue is whether this
required by Ind AS 101 to measure its PPE on the exemption would apply to the deferment of a liability
date of transition either by retrospectively applying payable to government based on an agreement, i.e.
Ind AS 16 or at deemed cost (being either fair value liability similar to sales tax deferment for 10 years.
or previous GAAP carrying amount at the date of Often in such deferral schemes (e.g. where the
transition). amount of sales tax collected by an entity from its
If the entity elects to measure its PPE by customers is retained by the entity and is required
retrospective application of Ind AS 16, it is not to be repaid after a specified number of years) are
permitted to re-estimate its depreciation, unless its similar in nature to an interest-free loan. Hence, Ind
estimate of depreciation in the previous GAAP was AS 109 and Ind AS 20 should also be prospectively
in error. applied to such balances (e.g. deferred sales tax
liabilities) outstanding at the date of transition. (ITFG
However, when an entity has not estimated the
12, Issue 7).
useful life of its assets, but has depreciated its
assets as per the minimum requirements of law
(at the rates prescribed under Schedule XIV to the Entities are, therefore, not required to remeasure
Companies Act, 1956), then it would be required their deferred sales tax liabilities outstanding at
to re-compute the depreciation by assessing the the date of transition.
useful life of the asset in accordance with Ind AS 16.
(ITFG 3, Issue 14) g.. Business combination accounting in case of
acquisitions by first-time adopter
f. Accounting treatment of government loans at a
below-market rate of interest In the year 2009, an entity A Ltd. formed a
subsidiary B Ltd. by subscribing to 60 per cent of
Ind AS 101 requires a first-time adopter to apply
its share capital. Additionally, A Ltd. acquired 25 per
the requirements in Ind AS 109 and Ind AS 20
cent of share capital of B Ltd. during the month of
prospectively to government loans existing at the
October 2015. Subsequently, in the Financial Year
date of transition to Ind AS. Therefore, the carrying
(FY) 2017-18, A Ltd. transitioned to Ind AS with its
amount of government loan, under previous GAAP,
date of transition as 1 April 2017.
would continue to be recognised at the date of
transition to Ind AS.
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Ind AS Implementation Guide I 102
Subscribed Additional
A Ltd. 60 per cent B Ltd. A Ltd. B Ltd.
25 per cent
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Therefore, ITFG clarified that a first-time adopter Ind AS for the first time when it prepares its financial
does not have the choice of applying the simplified statements for the accounting period beginning on 1
transition method. (ITFG 19, Issue 3) April 2019.
i. Accounting of operating leases of a subsidiary In the year 2014, A Ltd. acquired an Indian company
not capitalised by a first-time adopter parent as its subsidiary. The acquisition qualifies as a
An entity A Ltd. is a first-time adopter of Ind AS. Its business combination as per Ind AS 103.
date of transition is 1 April 2018 and it would apply
Acquired in 2014
A Ltd. Subsidiary
(parent) Business combination (which was lessee)
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