Jamil Khatri’s IFRS Diary: Part 9
The 'near final' Ind-AS (IFRS converged standards to be followed in India) have recently been issued. While Ind-AS are based on IFRS (as issued by the International Accounting Standards Board); there are some important areas where Ind-AS are not in conformity with IFRS. Such divergences are commonly referred to as 'carve-out's'.
April 06, 2011 / 16:44 IST
How close are Ind-AS to IFRS?
By Jamil Khatri, Head-US GAAP & IFRS, KPMGThe 'near final' Ind-AS (IFRS converged standards to be followed in India) have recently been issued. While Ind-AS are based on IFRS (as issued by the International Accounting Standards Board); there are some important areas where Ind-AS are not in conformity with IFRS. Such divergences are commonly referred to as 'carve-out's'.The carve-out's may be classified into the following three categories: Mandatory deviations from IFRS: Indian companies do not have a choice but to follow policies divergent from IFRS Voluntary deviations from IFRS: Indian companies may elect a policy choice that is either compliant or divergent with IFRS Elimination of options: Indian companies need to follow certain specific policies even though IFRS offers alternative choice of policies. The specific policies are however, compliant with IFRS The first category of carve-outs are the most troublesome, as companies do not have a choice but to diverge from IFRS. This is problematic for those Indian companies that may seek to achieve full compliance with IFRS either because they are listed in overseas markets or for any other reasons. The first category of carve-out's include:Recognition of revenues from sales of real estate on a percentage of completion basis (IFRS requires that revenues be recognized when possession is given to the customer) Recognition of biological/plantation assets at cost (IFRS requires fair value measurements) Recognition of 'embedded' foreign currency conversion options in convertible bonds, as 'equity' (IFRS requires 'liability' treatment and consequent mark-to-market) Recognition of 'bargain purchase gains' as 'capital reserves' (IFRS requires recognition of such gains through the profit and loss account) Use of government securities yields for determining actuarial liabilities (IFRS requires use of corporate bond yields). Our experience indicates that the above carve-outs would not materially impact a very wide cross-section of companies. For example, the first two carve-outs are industry specific (real estate and biological assets), while the third carve-out would only impact companies that have issued Foreign Currency Convertible Bonds. Similarly, situations involving the fourth carve-out are seldom seen in practice; and the impact of the fifth carve-out is unlikely to be material for most companies.The second category of carve-out's require a careful evaluation by the management and Boards/Audit Committees of companies. Thus, if companies want to achieve full compliance with IFRS, they would need to elect certain accounting policies. On the other hand, if compliance with IFRS is not important for the company, it may elect other policies that are divergent with IFRS. While assessing these policy choices, companies need to evaluate not just their current environment, but future plans (for example, plans for a future overseas listing). The second category of carve-out's include:Choice to defer exchange differences on long-term foreign currency assets and liabilities, and recognize such differences over the period of the underlying asset/liability (IFRS requires all such differences to be immediately charged to the profit and loss account) Choice to follow non-uniform accounting policies/periods for associates, where alignment is determined to be impracticable (IFRS offers no such choice)
Choice to consider Indian GAAP carrying values as 'deemed cost' for fixed assets acquired prior to April 1, 2007 (IFRS offers no such choice on transition - retrospective IFRS values or 'fair values' are the 2 choices on transition; Ind-AS offer a third choice) The third category of carve-out's are restrictive as they restrict choices otherwise available under IFRS. While following policies prescribed under Ind-AS will result in conformity with IFRS, these carve-out's could pose a challenge for Indian companies if global peers follow other alternative policies; if such companies are a part of a global group that follows other alternative policies; or if the Indian company has previously followed other alternative policies for IFRS reporting to overseas stakeholders. The third category of carve-out's include:Single statement presentation of income statement (IFRS permits the statement of comprehensive income to be presented separately) Classification of expenses in the profit and loss account by their nature (IFRS permits classification by function) Classification of interest and dividend as financing/investing cash flows (IFRS permits operating classification) No choice to carry investment property at fair value (IFRS permits this) Recognition of actuarial gains and losses directly in reserves (IFRS permits alternatives including recognition in the profit and loss account) Requirement to present consolidated financial statements by intermediate holding companies that are themselves 100% subsidiaries of a parent that reports under Ind-AS (IFRS offers an exemption from preparation of consolidated financial statements in such cases) Recomputation of borrowing costs capitalizable (IFRS permits prospective application) Pooling of interest method for acquisitions that are determined to be 'common control' transactions (IFRS permits use of the purchase method) In summary, while Indian standard setters (based on representation by companies themselves) have created the various carve-out's as discussed above, it is up to management of each company to evaluate whether there is an opportunity to fully comply with IFRS. In most cases, through the use of optimal accounting policy choices management would be in a position to achieve full conformity with IFRS. This, in turn, would ensure that the company truly benefits from the convergence with IFRS (ability to raise capital overseas, and the ability to assure international investors on the quality of financial reporting followed by the company).I look forward to your feedback and comments. You may communicate with me at thefirm@in.com Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
