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

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

Introduction

What if someone tells you that you can change the net-worth of a company just by passing an accounting entry? What if we further add that it can make a significant impact on the profits? Yes! It is possible because such is the impact of Ind AS on the transiting companies. Ind AS propagates the use of fair valuation, something that wasn’t prevalent in the Indian scenario. Hence it is very important for a student to understand these standards in depth and their implementation in practical scenarios.
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.

Inventories

stock

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.

  1. 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.
  2. 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.
  3. You need to note difference between Fair Value and Net Realisable Value.

Property Plant & Equipment (PPE)

property

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:

  1. 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).
  2. Major inspection/ overhauls need to be capitalised and depreciated separately.
  3. 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

Leases

lease

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 follow
below mentioned approach while honing your skills in to leases:

  1. Accounting in the books of LESSOR – Operating and Finance Lease
  2. 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.

Borrowing Costs

borrowings
We are so happy to see ICAI including opening page with ‘Exchange Differences to be included in Borrowing Costs’. You will have that ‘Aha’ feeling the moment you understand the logic in above concept.
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

sports-car
Previously we have had bottom-up and top-down approach for impairment testing of CGU. Ind AS 36 offers detailed guidance on indicators of impairment, discount rate to be used for calculation of value in use and impairment of goodwill. We have been involved by few phase I companies for impairment testing of investments in subsidiaries located in countries such as Algeria and England. See the fun part is – investment is valued in India for Indian reporting purpose but companies gained those values in different countries/ different economic environment. For example, Investor sitting in India has expectation of 15% of year on year growth but GDP growth rate in another country (where investee is located) is 3%. While we carried such impairment testing we were required to factor in two variables – 1. economic environment of investee company is altogether different and 2. Foreign exchange rate of Foreign Currency to Indian Rupees will also vary over a period.
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.

Intangible Assets

patent-certificate
After Kingfisher mishap, everyone is questioning the mortgage of brand. Chapter on Intangibles enumerates initial recognition and subsequent measurement principles. Like PPE, even Intangible Assets can follow either cost model of revaluation model for subsequent measurement. What excite us is to explain you how intangibles are treated in business combinations. Let we share with you one live story of the Ind AS Implementation. Presently we are working on implementation of one of the listed company. This company has purchased trademarks few years back as a part of business combination. Company wants to fair value of such brands as at transition date. Company can do so and increase their networth if that intangible has an active market. Please note, if intangibles acquired 30 years back (which now has become prominent brand in India) if fair valued as at transition date will add up to networth by few hundred crores.
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Investment Property

investment-property
This is altogether new standard. Many times entities buy land for capital appreciation. Often we have seen organisations investing in commercial complexes to lease out to banks/ other institutes. Such investments made for capital appreciation or to lease out to others are treated as investment properties. One point which you must note is fair value of investment property needs to be disclosed at the end of each reporting period. This is segregating few investments in fixed assets from PPE. We loved this standard as it offers such a brilliant reporting to various stakeholders. For example, banker can now easily differentiate between assets that are used to generate turnover and assets that are put to earn lease rentals/ capital appreciation. Such reporting also facilitates few non-financial qualities such as asset utilization.

Assets Held for Sale & Discontinued Operation

held-for-sale-property
The very first thing that you should note is Ind AS prohibits depreciation on assets held for sale. Instead, you need to measure it at lower of carrying value or Fair Value less cost to sell. Previously assets held for sale were not differentiated from other fixed assets. Kindly also note that previous guidance was on DiscontinuING operations and Ind AS guidance is on DiscountinuED operations. These provisions are evoked when entities plan to sale segments/ discontinue segment. For example, FIAT may discontinue its one of the business segment in India if its newly launched car – ‘JEEP’ fails to capture expected market share.

Employee Benefits

employees
This is a chapter with 53 pages. Traditionally students have been ignoring this chapter (even under old scheme of CA Final). Students must respect only that faculty who can explain them concepts such as asset ceiling and past service cost along with examples. Many other concepts are easy to understand in one reading. Another point that you must note is actuarial gains and losses are now presented in ‘Other Comprehensive Income’.

Provisions, Contingent Liabilities and Contingent Assets

Kindly note two points – 1. Long Term Provisions are now discounted and 2. Contingent assets are to be disclosed

Income Taxes

taxes
Ind AS introduces concept of ‘Temporary Differences’ (previously we had ‘Timing Differences’) that is sub-classified into 1. Deductible Temporary Differences (which result in Deferred Tax Assets and 2. Taxable Temporary Differences (which result in Deferred Tax Liabilities. We want to appreciate efforts put in by ICAI in creating this unit. According to us, this is probably the best drafted chapter among any other chapters written by ICAI.
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 now
accountedin profit or loss as well as in other comprehensive income.

Foreign Exchange Transactions

rupee-convert
Directly or Indirectly, almost each one of us (Chartered Accountancy fraternity) have been interacting with one or the other multi-national companies. There are two important parts that you must understand.
Part I
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).
Part II
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 Statement
in 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, NIFO
have been eliminated from Ind AS.
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Government Grants

government
Previously grants were segregated in to 3 types – revenue, capital, and in the nature of promoter’s contribution. Under Ind AS we have two types – revenue and capital.
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 from
government grant.

Regulatory Deferral

electric-tower
This is unique standard. It offers guidance to those entities which sell goods/ services that are rate regulated. For example, Tata Power sells electricity. Electricity rate per unit is regulated by Indian Government. Thus, in such scenario, Ind AS 114 Regulatory Deferral Accounts is to be applied. We know that this is new concept and may take a while to finally apprecate it. Hence, let us park our dicussion on this topic for live batch.

Revenue

rupee

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.

Construction Contracts

constructions

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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