New Syllabus – Paper 1
(First Impression – Part II)
By CA. Parag V. Kulkarni, Founder Ind AS Lab
(First Impression – Part II)
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.
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
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
Unit 4 – Consolidated Financial Statements
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
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
Unit 7 Investments in Associates and Joint Ventures
Unit 8 Disclosures
Unit 9 Annexure
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
Unit 1 – Accounting and Reporting
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
Unit 3 – Classification and Measurement
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.
Unit 4 – Recognition & Derecognition
Unit 5 – Derivatives and Embedded Derivatives
Unit 6 – Disclosures
Unit 7 – Hedging
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