Comparative Analysis : IGAAP and IND AS

It is all about the comparison between Indian GAAP and Indian Accounting Standard (Ind AS)

1. COMPARATIVE ANALYSIS IGAAP AND INDAS By: SUSMITA PATRA M.PHIL R.D. WOMEN’S UNIVERSITY

2. INTRODUCTION Unfettered, unrestrained, the corporate world is expanding and spreading its reach beyond nations conquering them at the rate of knots and boundaries have lost their relevance without a doubt. The use of different accounting frameworks in different countries leads to inconsistent treatment and presentation of the same underlying economic transactions creating confusion for users of financial statements. Therefore, increasing complexity of business transactions and globalization of capital markets demands for a single set of high quality accounting standards. In this regard, a need for an internationally accepted accounting standard becomes all the more unavoidable so as to ensure greater accountability and homogeneity in the financial sector and bridge the lacuna that exists in the accounting standards. So, the transition from GAAP i.e., Generally Accepted Accounting Principles to Indian Accounting Standards (IND AS) becomes indispensable.

3. International Accounting Standards Board (IASB), successor of IASC, is an independent standard setting body of the International Financial Reporting Standard (IFRS) foundation. IFRS s issued by the IASB are not country specific and are meant to be applied across the globe. However, each country has its own peculiarities and hence, convergence of IFRSs as they are, with certain modification, was practicable according to the regulatory and economic environment prevailing in the country. After going through various legal procedures and consultation, MCA which National Committee on Accounting Standards (NACAS) and the ICAI issued a Roadmap for Convergence with IFRS in India in January 2010 and notified 35 accounting standards called as IND AS in February 2011 for the convergence process. They intent to harmonize the diverse accounting policies followed in the preparation and presentation of financial statements.

4. INDIAN GAAP Accounting standards are the policy documents issued by accounting standard setting bodies relating to recognition, measurement, treatment, presentation and disclosure of accounting transactions and events. ICAI established ASB (Accounting Standards Board) in 1977. ASB identified the areas in which uniformity in accounting was required. After detailed research and discussion, it prepared and submitted a draft to the ICAI. After proper examination ICAI finalized them and notified for its use in financial statements. At present ICAI has issued 31 accounting standards.

5. ACCOUNTING STANDARDS (IGAAP) AS 1: Disclosure of Accounting Policies AS 2: Valuations of Inventories AS 3: Cash Flow Statements AS 4: Contingencies and Events Occurring after the Balance Sheet Date AS 5: Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies AS 6: Depreciation Accounting AS 7: Construction Contracts AS 8: Accounting for Research and Development- merged with AS 26 (intangible assets ) AS 9: Revenue Recognition AS 10: Accounting for Fixed Assets AS 11: The Effect of Changes in Foreign Exchange Rates- AS 12: Accounting for Government Grants- AS 13:Accounting for Investments AS 14: Accounting for Amalgamation AS 15: Employee Benefits- AS 16: Borrowing Cost- AS 17: Related Party Disclosures- Accounting for Leases- AS 18: Related Party Disclosures AS 19: Accounting for Leases AS 20: Earning Per Share- AS 21: Consolidated Financial Statement- AS 22: Accounting for Taxes on Income- AS 23: Accounting for Investment in Associates in Consolidated Financial Statement- AS 24: Discontinuing Operation- AS 25: Interim Financial Reporting- AS 26: Intangible Assets- AS 27: Financial Reporting on Interest in Joint Ventures AS 28: Impairment of Assets- AS 29: Provisions, Contingent Liabilities and Contingent Assets- AS 30: Financial Instrument-recognition and measurement AS 31: Financial Instrument- Presentation AS 32: Financial Instruments-Disclosures and Limited Revision to Accounting Standards.

6. INDIAN FINANCIAL REPORTING STANDARDS (IFRS ) IFRS is considered as a principle based set of standards which are internally consistent and internationally converged. adoption of IFRS would be definitely beneficial as it will ensure common accounting practice and treatment in various countries that will lead to common accounting language which can be understood by all. There are 15 IFRS statements. Those are as follows

7. IFRS IFRS 1: First Time Adoption of International Financial Reporting Standards 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 IFRS 9: Financial Instruments IFRS 10: Consolidated financial statements IFRS 11: Joint arrangements IFRS 12: Disclosure of interest in other entities IFRS 13: Fair value measurement IFRS 14: Regulatory deferral accounts IFRS 15: Revenue from Contracts with Customers IFRS 16: Leases

8. INDIAN ACCOUNTING STANDARDS (IND AS ) Complete adoption of IFRS mayn’t be possible due to diverse accounting practices, different prevailing economic, political, legal, social environment and diversified constraints across different countries. So, countries prefer convergence of IFRS with their existing accounting standards. Convergence means changes in existing accounting standards to bring them in line with IFRS . As on date The Ministry of Corporate Affairs has notified the following 41 Indian Accounting Standards:

9. IND AS Ind AS 101: First time adoption of Indian accounting standards Ind AS 102: Shared based payments Ind AS 103: Business combinations Ind AS 104: Insurance contracts Ind AS 105: Noncurrent Assets Held for Sale and Discontinued Operation. Ind AS 106: Exploration for and Evaluation of Mineral resources Ind AS 107: Financial Instruments: Disclosures Ind AS 108: Operating Segments Ind AS 109: Financial Information Ind AS 110: Consolidated Financial Statements Ind AS 111: Joint Agreements Ind AS 112: Disclosure of Interest in Other Entities Ind AS 11:3: Fair Value Measurement Ind AS 114: Regulatory Deferral Accounts Ind AS 115: Revenue from Contracts with Customers Ind AS 1: Presentation of Financial statements Ind AS 2: Inventories Ind AS 7: Statement of Cash Flows Ind AS 8: Accounting Policies , Changes in Accounting Estimates and Errors Ind AS 10: Events After the Reporting Period Ind AS 11: Construction Contracts

10. Cont… Ind AS 12: Income Taxes Ind AS 16: Property, Plant and Equipment Ind AS 17: Leases Ind AS 19: Employee Benefits Ind AS 20: Accounting for Government Grants and Disclosure of Government Assistance Ind AS 21: The Effect Of Changes In Foreign Exchange Rates Ind AS 23: Borrowing Cost Ind AS 24: Related party Disclosure Ind AS 27: Consolidated and Separate Financial Statements Ind AS 28: Investments in Associates and Joint Ventures Ind AS 29: Financial Reporting in Hyperinflationary Economies Ind AS 32: Financial Instruments: Presentation Ind AS 33: Earnings Per Share Ind AS 34: Interim Financial Reporting Ind AS 36: Impairment of Assets Ind AS 37: Provisions, Contingent Liabilities and Contingent Assets Ind AS 38: Intangible Assets Ind AS 39: Financial Instruments : Recognition and Measurement Ind AS 40: Investment property Ind AS 41: Agriculture

11. ROADMAP As per the notification released by the Ministry of Corporate Affairs (MCA) on 16 February 2015, the roadmap for IND AS implementation is as follows: Whenever a company gets covered under the roadmap, IND AS becomes mandatory, its holding, subsidiary, associate and joint venture companies will also have to adopt IND AS (irrespective of their net worth). Financial year Mandatorily applicable to 2016-17 Companies (listed and unlisted) whose net worth is equal to or greater than 500 crore INR 2017-18 Unlisted companies whose net worth is equal to or greater than 250 crore INR and all listed companies 2018-19 When a company’s net worth becomes greater than 250 crore INR 2015-16 Entities, not under the mandatory roadmap, may later voluntarily adopt Ind AS.

12. COMPARATIVE ANALYSIS BETWEEN IGAAP AND IND AS   IGAAP IND AS INVETORIES   AS 2 – Valuation of Inventories IND AS 2 - Inventories Provision for carrying amount No such provision. Deals with the subsequent recognition of cost/carrying amount of inventories as an expense, Explanation with regard to inventories of service providers AS 2 does not contain such an explanation. Provides explanation with regard to inventories of service providers. Machinery Spares Does not contain specific explanation in respect of such Spares. Explains that inventories do not include machinery spares which can be used only in connection with an item of fixed asset and whose use is expected to be irregular. Definition of Fair Value Does not contain the definition of fair value. Ind AS 2 defines fair value and provides an explanation in respect of distinction between ‘net realizable value’ and ‘fair value’.

13. Net Realizable Value Does not deal with such reversal. Provides detailed guidance in case of subsequent assessment of net realizable value. Also deals with the reversal of the write-down of inventories to net realizable value to the extent of the amount of original write-down, and the recognition and disclosure thereof in the financial statements Elimination from scope Excludes from its scope such types of inventories. Excludes from its scope only the measurement of inventories held by producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products though it provides guidance on measurement of such inventories. Determination of cost of an item Specifically provides that the formula used in determining the cost of an item of inventory should reflect the fairest possible approximation to the cost incurred in bringing the items of inventory to their present location and condition. Does not specifically state so and requires the use of consistent cost formulas for all inventories having a similar nature and use to the entity. Disclosures Comparatively requires less disclosure. Requires more disclosures

14. FAIR VALUE MEASUREMENT   No framework for measuring fair value Ind AS 113 - Fair Value Measurement Framework There is no framework for measuring fair value for financial reporting. Establishes a single framework for measuring fair value for financial reporting. Ind AS provides guidance on - valuation techniques, inputs to valuation techniques (i.e. fair value hierarchy), concepts such as highest and best use, most advantageous market and principal market and fair value disclosures Fair Value Fair value may be entity-specific and not market-based. For e.g. as per AS 14, determination of fair values may be influenced by the intentions of the transferee company. Unlike IGAAP, fair value is a market based measurement under Ind AS i.e. it is measured using the assumptions that market participants would use when pricing the asset or liability, including assumptions about risk. As a result, an entity’s intention to hold an asset or to settle or otherwise fulfill a liability is not relevant when measuring fair value.

15. BUSINESS COMBINATIONS   AS 14 – Accounting for Amalgamations Ind AS 103 – Business Combinations / Ind AS 38 - Intangible Assets Scope The transactions that meet the definition of amalgamations under the Companies Act are accounted for in compliance with AS 14. An acquisition can be accounted as amalgamation in the nature of purchase or amalgamations in the nature of merger. The accounting treatment of an acquisition depends upon the structure of the acquisition. Goodwill arises, only if an amalgamation is in the nature of purchase. Under Ind AS 103, if an acquirer obtains control of a ‘business’ then the acquisition will be accounted as a business combination. The term 'business' is defined under Ind AS. Hence, Ind AS 103 will be applicable and Goodwill will be recognized if a ‘Business’ is acquired irrespective of the legal structure of an acquisition. Goodwill measurement / Purchase Price Allocation In case of an amalgamation in the nature of purchase, difference between the consideration and the value of the net assets acquired is recognized as Goodwill (if the difference is positive) or Capital Reserve (if the difference is negative). Hence, only assets and liabilities reflected in the books of the acquiree and acquired by acquirer will be considered while arriving at the Goodwill.   Goodwill is the difference between the fair value of the consideration and fair values of the identifiable assets (tangible and intangible) and liabilities as of the acquisition date. Hence, assets or liabilities even if not appearing in the books of the acquiree and which can be identified will be considered at fair values for arriving at the goodwill. Some commonly identifiable intangibles in purchase price allocation include customer contracts, customer relationships, brand and technology. Subsequent measurement of goodwill Goodwill arising on amalgamation is to be amortised over a period not exceeding five years unless a somewhat longer period can be justified. Goodwill arising on business combination is to be tested for impairment annually. (Ind AS 36)    

16. PROPERTY, PLANT and EQUIPMENT (PPE)   AS 10 - Accounting for Fixed Assets AS 6- Depreciation Accounting Ind AS 16 - Property, Plant and Equipment   Revaluations Revaluation is permitted; however, there is no specific requirement on frequency of revaluation. It also provides an option for selection of assets within a class for revaluation on systematic basis.   Companies will have to opt for either of the two accounting models viz. Cost model or Revaluation model permitted by the Ind AS 16 on the date of transition. Subsequently under Revaluation Model, PPE are revalued at fair value periodically, so that the carrying amount of an asset does not differ materially from its fair value at the balance sheet date. Revaluations do not affect the income statement, but rather are recognised in equity, unless the revaluation decreases an asset value below its net book value Initial and Subsequent Costs Subsequent expenditures related to an item of fixed asset are capitalized only if they increase the future benefits from the existing asset beyond its previously assessed standard of performance. Initial costs as well as the subsequent costs are evaluated on the same recognition principles to determine whether the same should be recognised as an item of property, plant and equipment. Component Approach Component accounting is permitted but is rarely followed in practice.   Under Ind AS 16, component approach is to be followed for accounting for PPE. Under componentization, if a fixed asset has two or more major components with substantially different useful lives, then the components should be treated as separate assets and be depreciated over their respective useful lives which will ensure that the income and expenditure statement correctly reflects the consumption of economic benefits inherent in those assets. Change in Depreciation It is considered as a change in accounting policy and treated accordingly. Requires that change in depreciation method should be considered as a change in accounting estimate and treated accordingly.

17. INVESTMENT PROPERTY   AS 13 - Accounting for Investments Ind AS 40 – Investment Property Initial and subsequent measurement Investment property initially recognised at cost. Subsequently, it is measured at cost less accumulated depreciation less other than- temporary impairment loss, if any. Similar to IGAAP except an entity is required to disclose the fair value of its investment property. EARNINGS PER SHARE   AS 20 - Earnings per Share Ind AS- 33 - Earnings per Share Scope Does not specifically deal with options held by the entity on its shares, e.g., purchased options, written put option etc. Deals with the same. Basic and Diluted EPS Does not require any such disclosure Requires presentation of basic and diluted EPS from continuing and discontinued operations separately. Extraordinary Items Requires the disclosure of EPS with and without extraordinary items. As per Ind AS 1, Presentation of Financial Statements, no item can be presented as extraordinary item, Ind AS 33 does not require the aforesaid disclosure.

18. IMPAIRMENT OF ASSETS   AS 28 – Impairment of Assets Ind AS 36 – Impairment of Assets / Ind AS 38 - Intangible Assets Applicability Applicability Applies to all assets except inventories, assets arising from construction contracts, deferred tax assets, assets arising from employee benefits, financial assets and investments. Applies to all assets except inventories, assets arising from construction contracts, deferred tax assets, assets arising from employee benefits and financial assets that are within the scope of Ind AS 39. Applies to financial assets classified as subsidiaries, associates and joint ventures. Frequency of impairment testing   An entity should test the assets or a cash generating unit for impairment at the end of each reporting period if the impairment indicators exist. However, an entity should test the following assets for impairment annually irrespective of whether the impairment indicators exists or not - an intangible asset not yet available for use; and – an intangible asset with an estimated useful life of more than ten years. Similar to IGAAP. However, an entity should test the following assets for impairment annually irrespective of whether the impairment indicators exists or not: - an intangible asset not yet available for use; - an intangible asset with an indefinite useful life; and - goodwill acquired in a business combination

19. FINANCIAL INSTRUMENTS   AS 13 – Accounting for Investments AS 30 – Financial Instruments: Recognition and Measurement is currently not mandatory   Ind AS 36 – Impairment of Assets / Ind AS 38 - Intangible Assets Ind AS 109 on Financial Instruments will replace Ind AS 39 Financial Instruments: Recognition and Measurement Initial Measurement AS 13 contains limited guidance dealing with long term and short term investments under IGAAP.   All financial instruments are initially measured at fair value plus or minus transaction costs except Fair Value Through Profit or Loss (FVTPL) that are directly attributable to the acquisition or issue of the financial asset or financial liability. Financial Instruments– classification and subsequent measurement of financial assets As per AS 13, investments are classified as long-term or current depending on intended holding period on the date the investment. Long-term investments are carried at cost less provision for permanent diminution I value. Current investments are carried at lower of cost and fair value. All financial assets are classified as measured at amortised cost or measured at fair value. Subsequent measurement depends on how the financial instrument is classified  

20. CONCLUSION Indian business firms are presenting financial statements as per IFRSs, Indian GAAPs, USGAAPs, Japan GAAP, etc. With a view to avoid this kind of inconvenience, there was a requirement of transition from Indian GAAP to IFRS for India in all the sectors. So , the accounting bodies across the world stood out to work towards a standard set of accounting policies, valuation norms and disclosure requirements and decided to converge with IFRS by developing a standard called Ind AS. preparation of IFRS-converged standards is a challenge before the preparers in India. There are different ways of understanding about IND AS and the analysis shows that there is a high requirement of knowledge as well as training towards IFRS to get a better idea and clarity Clearly, Ind AS is vastly different from Indian GAAP. These differences make the switch a daunting task. Though difficult, it is not impossible for the Indian corporate to implement IFRS. Hence, Ind -AS will bring a more contemporary presentation of financial statements .