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New Syllabus – Paper 1
(First Impression – Part II)

By CA. Parag V. Kulkarni, Founder Ind AS Lab

Introduction

What is more challenging? ‘Consolidation of Financial Statements’ or ‘Financial Instruments’?  None (according to Ind AS Lab)! These being the most important topics of CA Final syllabus often tend to make a student nervous, and it is only because these topics reflect the complexities of the dynamic business transactions. Expected credit loss method… Embedded derivatives… Hedging…. Isn’t every student anxious to gain in-depth knowledge of these often heard terms?
ICAI has released the further e modules comprising of 1) Consolidated Financial statements & Separate financial statements; and 2) Financial instruments
These topics have repeatedly been tested and are definitely critical and most challenging topics for the CA final examinations. As a student, it is vital to master these topics to excel in the subject. Also from a practical perspective, these topics hold great importance because these standards are the talk of the corporate-world where most of the qualified CA’s have been trying to learn them. The dynamic environment exposes us to a wide range of business transactions and their accounting treatments. We hear a conglomerate acquiring another company or a group company publishing its consolidated results.  Thus having a grip over these two topics is a must to accelerate professional growth.
Merely reading the standards on financial instruments or consolidation won’t serve the purpose. Understanding the standards with real life examples will only add value to a student. At IndAS Lab, we try to help students understand with case studies and our experience of serving clients specifically for these IndAS.
Before beginning to read the standard, a student should be familiar with what the standard is about! Read below CA Parag Kulkarni Sir’s analysis on each subtopic of the recently published ICAI material.

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Chapter 13 Consolidated & Separate Financial Statements

This part is segregated into 8 different modules along with 1 annexure. Separate financial statements are financial statements of parent where investment in a subsidiary, associate, and JV are accounted either at cost or as per Ind AS 109 (i.e., at fair value). Consolidated financial statements are group level financial statements where parent absorbs subsidiary’s books following a line by line approach and accounts for its investment in associate and joint venture using equity method.
This chapter is fragmented into 8 chronological units.

Unit 1 – Introduction to Consolidated Financial Statements

Under previous GAAP we have had 3 accounting standards to deal with consolidation (AS 21), Investments in Associates (AS 23) and Investments in Joint Ventures (AS 27). Under Ind AS we have 5 accounting standards to deal with similar concepts. Consolidated Financial Statements (Ind AS 110), Separate Financial Statements (Ind AS 27) [this concept was never present in the previous GAAP] and 3 more standards.
Ind AS first requires you to analyze the type of arrangement while assessing the joint control. Under Ind AS 111 such arrangement is called as Joint Arrangement. For example, if two parties are joining hands by creating one company and then borrowing in that company for all business purpose, such jointly controlled entity is Joint Venture. On the contrary, if two people join hands by independently taking responsibility of their activities (including related liabilities) then such joint ownership results in Joint Operation. Accounting for Joint Ventures and Joint Operation differs substantially.
Investments in associates & joint ventures are now accounted using equity method (Ind AS 28).
Interestingly, we also have one dedicated disclosure standard for interest in other entities (Ind AS 112). This theory may be less important from the exam perspective. However, it is recommended to read through it at least once.
Please Note – This unit also differentiates between previous GAAP and Ind AS. This fact simply showcases interest of ICAI in testing you not only on Ind AS but also on differences between previous GAAP and Ind AS.

Unit 2 – Important Definitions

22 Key terms are defined in this unit. Please take a note that ICAI has quoted examples of 2 key terms – 1. Substantive Rights and 2. Protective Rights. You must understand both concepts because it may be likely tested in the exam. ICAI may test these concepts when it will pose a question on assessing the control. Also, note that substantive rights result in power over investee but protective rights do not result in a power over the investee. Thus, in case of substantive rights, control may be established but in case of protective rights, control may not be established.
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Thus, in case of substantive rights, control may be established but in case of protective rights, control may not be established.

Unit 3 – Separate Financial Statement

This is 4 page summary of Ind AS 27 that makes 1 mistake while offering guidance on accounting for joint ventures. ICAI wrongly suggests that joint ventures can be accounted using ‘proportionate consolidation method’ in consolidated financial statements. This is wrong and students must ignore this line (reference page 13.19 3rd line from the top). Please note that Investments in Joint Ventures must always be accounted using equity method under Consolidated Financial Statements.

Unit 4 – Consolidated Financial Statements

Previously, we have been analyzing subsidiaries by reference to quantitative ownership i.e. 50% or more. Under Ind AS regime, such quantitative assessment is not mandated. But rather, ‘control’ is must (refer point 4.3 on page no. 13.24). This unit of the chapter explains you some key features of parent-subsidiary relationship by offering an explanation of ‘control, relevant activities, and power’. It offers 7 steps to assess control. Ind AS Lab appreciates efforts by ICAI in creating these 7 step approach. At least this will bring in some life to this dry theory.
This chapter also explains some concepts such as ‘Investment Entities’ that are unique to Ind AS. Investment Entities are exempted from the consolidation if they fulfill certain conditions.

Unit 5 – Accounting of Subsidiaries under CFS

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This is the most important unit of this chapter. You will be tested heavily in the exam on concepts such as calculation of goodwill and gain on bargain purchase, valuation of non-controlling interest. You also need to gauge your skills in accounting for intra-group transactions such as unrealized profits on group transactions etc. While you do so, you should carefully understand downstream (sale by a subsidiary to a parent) and upstream (sale by a parent to a subsidiary) transactions.
ICAI fails to refer Ind AS term ‘parent’ while repetitively referring such entity to be ‘holding’ (word ‘holding’ is a previous GAAP terminology. Students are expected to use word ‘parent’ each time they refer to such entity under Ind AS context)
Students must also note that ICAI for the first time has introduced a concept of consolidated cash flows. It is important that you practice this concept at least once.
ICAI has gone one step ahead in embracing complexities for CA final students. It has introduced guidance even for ‘Chain Holdings. Under such concept, an entity may be a subsidiary of an investor indirectly. For example, A Limited holds 60% voting power in B Limited and 20% voting power in C Limited. B Limited holds 40% in C Limited. The group’s total voting power in C Limited is 60% (20% + 40%), hence it should consolidate C Limited. ICAI is expecting you to know consolidation in case of chain holdings.
ICAI has also added guidance on:
1. Sale of a stake in the subsidiary without loss of control and
2. Issuance of shares to the third party that results in loss of control
In short, ICAI has showcased its expectations from students to be thorough with the concepts. Thankfully, ICAI has not offered concept of cross-holding. However, Ind AS Lab will still cover the concept of cross holding in its live batch in order to prepare students for worst case scenario.

Unit 6 Joint Arrangements

Apparently, students need to understand the concept of ‘Joint Control’ in order to approach potential 4 or 6 marks theory questions. ICAI may ask students to analyze the existence of joint control in each situation.
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Unit 7 Investments in Associates and Joint Ventures

Students must note that quantitative criteria of 20% to establish significant influence is not been eliminated from Ind AS (however, quantitative criteria of 50% to establish control has been eliminated from Ind AS). Students can expect numerical questions on ‘Equity Method’ apart from few theoretical questions on assessment of significant influence. In a one-off event, ICAI may also test a candidate on his understanding of impairment of investment in an associate or joint venture that has been accounted using equity method in consolidated financial statements.

Unit 8 Disclosures

You may tend to ignore this unit. But do not do so. You may ignore the theory part of this unit, however, you cannot ignore 8 questions that are added at the end of disclosure theory. These questions test most of the theory you learned in all previous units of this chapter.

Unit 9 Annexure

The word annex means ‘addition’. This unit offers additional guidance on:
1. Statement containing salient features of the financial statement of subsidiaries or associate companies or joint ventures and
2. General Instructions for the Preparation of CFS

Chapter 16 Financial Instruments

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Financial instruments are discussed in 3 standards along with 1 standard on fair value measurement. Whether the financial instrument is a liability, asset or equity is discussed in Ind AS 32. Disclosures related to financial instruments are discussed in Ind AS 107. Every other aspect of the financial instrument such as recognition, derecognition, classification, reclassification, impairment, and hedging is discussed in Ind AS 109.

Unit 1 – Accounting and Reporting

This unit covers definitions of Financial Asset, Financial Liability, and Equity; commentary about certain types of equity instruments; and preference shares with multiple types of features.
Let we tell you one thing – your faculty must earn your respect only if he/ she can explain you all the following:
1. Derivative and non-derivative part of definitions of the financial asset and financial liability
2. Those financial liability instruments that may be equity in nature (para 16A, 16B, 16C and 16D of Ind AS 32) and
3. Preference shares with features such as redeemable, convertible, dividends at discretion with a permutation and combinations of such features.

Unit 2 – Presentation

This unit also explains financial liability, equity, and compound financial instruments. We want to appreciate work by ICAI while preparing this unit. Ind AS Lab has been offering similar guidance to corporates and at ICAI platform for members of the Institute exactly similar guidance. It will be interesting for students to learn separation of embedded derivatives. Buy back of shares is now called as a Treasury Shares. Under US GAAP treasury shares are accounted differently than from accounting under Ind AS or IFRS.

Unit 3 – Classification and Measurement

This is a very important chapter. Students must understand the classification of financial assets into – Amortised Cost, FVTOCI, and FVTPL after application of 1. Business Model test and 2. Contractual Cash Flow Test. We are happy to see that ICAI has created its own chart of classification and kept itself away from plagiarism that otherwise has had happened if it had copied chart copyrighted by IASB. At Ind AS Lab, we too have our own copyrighted original charts and content that we believe is simpler than charts of other publishers.
You can expect 4 marks question on theoretical assessment of classification of financial asset.
Effective Interest Rate is the new favorite discussion among corporate accountants. Students must note fees that are an integral part of EIR and fees that are not an integral part of EIR. Ind AS Lab has already written a concept paper on EIR for its implementation client. We look forward to sharing the same with students fraternity who will be joining us in our face to face batches.
This unit also introduces few more complex concepts such as modification of cash flows (typically observed in the restructuring of the loan), interest post impairment, and loans between group companies. We can find a specific discussion on a restructuring of loan liability that might be very relevant amid two things – 1. Present stressed assets (NPA) under Indian Banking Context and 2. Ind AS Adoption of Ind AS by banks. Further, this unit also explains reclassification of financial assets and financial liabilities.
Here comes the challenging discussion on ‘Impairment’. We strongly believe that you need us to explain you ‘Expected Credit Loss’ approach that we applied to few Phase I companies and taught to hundreds of Indian Chartered Accountants. We will write less here and talk more about it in our face to face batch.
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Unit 4 – Recognition & Derecognition

Logically, this unit should have preceded unit 3 on classification and reclassification. Entity first recognizes the asset and then classifies it. Hence, we recommend all students to first read unit 4 and then you can go to unit 3. It will be interesting to discuss provisions related to derecognition specifically in case of securitization/ factoring or in case of transfers with call options. ICAI has also created one example on ‘pass through’ arrangements.

Unit 5 – Derivatives and Embedded Derivatives

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This 16-page document gives chance to students to understand concepts of derivatives. While we have been serving enterprises across India, we did observe many embedded derivatives in the contracts. This simply means that you will be facing real-life scenarios to handle derivatives once you complete your course. You may not get second chance to learn this concept and hence we strongly recommend to achieve conceptual clarity while you complete this unit. Knowing accounting for derivative and embedded derivatives will also differentiate you and take you in a different league.

Unit 6 – Disclosures

You may tend to ignore this chapter. However, we will be happy to showcase you how disclosure requirements are fulfilled when we dive into practical case studies. Ind AS Lab also works very closely with bankers. We might also give you banking flavor of disclosures that are used for their analysis.

Unit 7 – Hedging

Let we up front tell you that ICAI has pulled few of these examples from resources known to Ind AS Lab. We hope that ICAI is not breaching any copyright. Nonetheless, there is a high probability that ICAI must have copied entire example along with one mistake (that we have not yet detailed verified). Examples discussed in the module are typical examples discussed by CA. Parag, founder of Ind AS lab in his addresses across India in IFRS Certification batch by ICAI. What we can tell you is – this is definitely not a simple topic. You cannot risk your professional time with somebody else to learn Hedge Accounting specifically when you have CA. Parag who has taught Hedge Accounting to 80 executives of HUL, 20 executives of Tata Group and hundreds of Indian CAs across India.
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