New Syllabus – Paper 1
(First Impression – Part III)
By CA. Parag V. Kulkarni, Founder Ind AS Lab
(First Impression – Part III)
Read below the detailed analysis of the standards by CA Parag Kulkarni.
ICAI has issued Four more chapters – one on asset based standards, second on liability based standards, third on revenue standards and fourth on other standards. Chapter 9 (Asset based standards) includes 8 units. Chapter 10 (Liability based standards) include 2 units. Chapter 5 (Revenue based standards) includes 2 units. Chapter 7 (Other Standards) includes 2 units. Thus, in this blog, we will discussing 14 units of FR (New Syllabus).
Let’s quickly get into nuts and bolts of the units.
We do not foresee any challenge to CA Final students in approaching standard on inventory. You have already learned such accounting at intermediate level. If you note following distinguishing points, you can find yourself in a comfortable position to write answer of any question on inventory.
- Inventories are service provider are now dealt with under Ind AS 2. You can imagine inventory accounting of a chartered accountant who is offering audit service to auditee and raising bill of the same in subsequent financial year.
- Inventories of agricultural producers (for example inventory of mango farmer) are partially excluded from Inventory Measurement. This is because, we have new standard that offers guidance on such measurement. This new standard is Ind AS 41 Agriculture.
- You need to note difference between Fair Value and Net Realisable Value.
Property Plant & Equipment (PPE)
Traditionally, PPE has been a most favoured topic of IFRS students and faculties. This standard offers guidance on accounting of specific fixed assets such as machines, tools, land, building, motors etc. This is quite a logical standard and hence we do not see students facing challenges in learning this topic.
You need to note following under this chapter:
- Revaluation Model. Please note that revaluation is now taken to Other Comprehensive Income. Depreciation on such revaluation is taken to retained earnings (and not to profit or loss).
- Major inspection/ overhauls need to be capitalised and depreciated separately.
- You need to have integrated understanding of Ind AS 16 PPE and Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets to appreciate concept of accounting for cost of dismantling, removal and site restoration. For example, in a forging industry, we have been capitalizing all directly attributable costs to bring in furnace to its workable location as intended by management. But we have not been capitalizing the present value of future cost required to remove the furnace.
You can read our blog on decommissioning liability – click here
There are two types of leases – operating and finance lease. Typically, we can observe lease arrangements in airline and automobile industry. We would love to offer live case studies of concord and indigo airline in our live batches.
You need to followbelow mentioned approach while honing your skills in to leases:
- Accounting in the books of LESSOR – Operating and Finance Lease
- Accounting in the books of LESSEE – Operating and Finance Lease
Additionally, you need to note ‘Accounting by Manufacturer or Dealer Lessor’. You can observe such leases in case of ‘Mercedes’ that offers cars on lease. Let we make you wait to understand these practical case studies until you join us in our batch.
We are also known for our exciting way of explaining ‘Sale and Lease Back Transactions’. You also need to note accounting for ‘Initial Direct Costs’. We know that not many others have detailed guidance on this standard as we do. And we claim it because we carry pride in guiding Executives of Oil India while they account for their pipeline which they used to supply crude oil to Indian Oil. While we did that we encountered with lease standard. Let us continue this story when we meet in person.
Let we write here something intellect that is other than otherwise guidance that has been written in such standard such as commencement,suspension and cessation of capitalization of borrowing costs.
At a consolidated level,group need to apply general borrowing rate for capitalization. When we were dealing with some of the multinational leading organizations such as India Infoline Finance Ltd. (IIFL) along with their auditors, we observed that various borrowings across all subsidiaries located in more than 10 nations are now required to be weighted averaged at group level to identify group level capitalization rate. Thus, under Ind AS, consolidated capitalization is not mere line by line addition of previously capitalised stand-alone values.
Impairment of Assets
All in all, CA Final level offers very fundamental and theoretical base of impairment concept. However, we believe, you may have tremendous professional opportunities to work in this area once you complete CA. This is because, impairment exercise will be required periodically (or sometimes annually in case of assets with indefinite useful life) and you can be one of the service provider of impairment testing.
Assets Held for Sale & Discontinued Operation
Provisions, Contingent Liabilities and Contingent Assets
Two things that you must note are:
1.Approach is changed. Concept is NOT changed – Though approach has been shifted from income approach (previous GAAP) to balance sheet approach (Ind AS), concept of deferred taxes on future taxable profitability upon today’s transaction is not changed.
2. Deferred taxes are nowaccountedin profit or loss as well as in other comprehensive income.
Foreign Exchange Transactions
Ind AS requires entities to record transactions in functional currency.Functional currency is a currency of economic environment. For example, if you are having 100% exports and if your decisions are based on US Dollar then functional currency of your company located in India is US Dollar. In which case, you need to record transactions in US Dollar. However, Indian Regulators such as SEBI or ROC may need you to report your financial statements in Indian Rupees (INR). A currency in which financial statements are presented is called as a ‘Presentation currency’. Any currency other than functional currency is a foreign currency. For example, your company located in India has USD as a functional currency. Your company sells few units in Great Britain Pounds (GBP) which is your foreign currency, and you present your books to ROC in INR which is your presentation currency. Foreign Exchange gains and losses on conversion from foreign currency to functional currency are to be recorded in profit or loss (with few exceptions).
Foreign subsidiaries may produce financial statements in respective functional currency. For example, your Dubai subsidiary has a ‘Dirham’ as its functional currency. While you consolidated your Dubai subsidiary, you need to convert its Dirham Financial Statementin to your presentation currency (which is INR). Such translation results in some foreign exchange difference. Such foreign exchange translation differences are to be taken to OCI.
Please note – concept of IFO, NIFOhave been eliminated from Ind AS.
Under Previous GAAP, Grants related to depreciable asset had two presentation choices – 1. Present Gross value of Asset and Present Deferred Government Grant or 2. Present Net Value of Asset (i.e. Asset Cost minus Government Grant)
Under Ind AS, Net Presentation approach is prohibited. Hence, entities must present Assets at gross amount and also present deferred government grant as a liability.
Another point which you must note is, government grant accounting standard covers some literature on government assistance. Please note, government assistance, for which disclosure is required, is different fromgovernment grant.
Ind AS 18 governs revenue accounting. We all know that revenue can be recognised when significant risk and rewards are transferred. The fun of understanding this standard lies in knowing revenue recognition of few concepts such as customer loyalty programs, bill and hold sales, sale on approval basis, installation fees etc. It is equally important to know various types of contracts such as FOB basis and CIF basis. As a student of a professional body, you should know interaction between recognition of revenue and related GST impact (this is not a part of FR syllabus). Few more areas which may excite you are – barter exchange and deferred consideration.
Knowing this standard is more about logic and business and less about theoretical accounting. It is important that you understand various revenue models prevalent in industries such as software, manufacturing, service, job working etc. Let us try to take this discussion to next level when we meet in person.
You are CA Final Students. You do not need us to teach you how to compute % of completion and thereby recognise revenue. You will need us badly to teach you new concepts such as service concession arrangements. Have you ever thought through how Government and Private Organisations join hands for the aggressive betterment of society? Who builds huge roads and dams? You must have observed that Mumbai Pune expressway is built by IRB. Or you must have read that few dams are built by L&T. Construction of roads and dams are public priorities. Such priorities may not be independently achieved by the government unless they involve intelligent and efficient help from private organisations. Such joint activities are commonly referred as ‘PPP i.e. Public Private Partnership’.
We will delve into this exciting concept in our live batch.
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