To know First time complete details of Adoption of Ind AS 101
Ind AS 101 usually prescribes the accounting principles for the first-time the adoption of Ind AS. It have been layed down various ‘transition’ requirements when a company adopts Ind AS for the first time, i.e., moving to Ind AS from Accounting Standards (Indian GAAP).
Conceptually, the accounting done under Ind AS should be applied retrospectively at the time of transition to Ind AS. However, Ind AS 101 grants limited exemptions from these requirements in specified areas where the cost of complying with them would likely exceed the benefits to users of financial statements.
Ind AS 101 also prohibits retrospective application of Ind AS in some areas (called exceptions), particularly where the retrospective application would require judgments by management about past conditions after the outcome of a particular transaction is already known.
Ind AS 101 have also been prescribes presentation and disclosure requirements to explain the transition to the users of financial statements, including how the change from Indian GAAP to Ind AS is affecting the company’s financial position, cash flows and financial performance.
Ind AS 101 is not providing any exemption from the disclosure requirements in other Ind AS.
OBJECTIVE of First time Adoption of Ind AS 101
The objective of this Ind AS is ensuring that an entity’s first Ind-AS financial statements, and its interim financial reports for part.
Period covered by those financial statements, contain high-quality information that:
- Is transparent for users and comparable.
- Provides an appropriate starting point.
- At a cost that is not exceeding the benefits.
VARIOUS DEFINITIONS of First time Adoption of Ind AS 101
First Financial Statements of Ind AS:
- The initial annual financial statements in which an entity is able to adopt Ind AS by an unreserved and explicit statement of Ind AS which have been compliance in Accounting Standards.
- In this manner compliance with ALL Ind-AS; partial compliance is not enough to make entity Ind AS compliant.
An entity that presents it’s first Ind AS financial statements, that entity is known as a first-time adopter
Opening of Ind AS Balance sheet:
A balance sheet of an entity at the date of transition to Ind AS
Date of Transition to Ind AS:
At the earliest period for which an entity presents full comparative information under Ind ASs in first Ind AS Financial Statements.
First Ind AS reporting period:
The latest reporting period is covered by an entity’s first Ind AS financial statements.
Consideration of cost:
An amount can be used as a surrogate for cost or depreciated cost at a given date. Subsequent depreciation or amortization assumes that the entity had initially recognized the asset or liability at the given date and that its cost was equal to the deemed cost. This definition will be used in measurement, at the date of transition to Ind AS, of
(i) Investments in subsidiaries, joint ventures and associates.
(ii) Property, plant and equipment, an investment property, an intangible asset or a right of use asset.
(iii) Assets acquired and liabilities assumed in a business combination when the exemption under Ind AS 101 is availed.
Preceding GAAP in First time Adoption of Ind AS 101
The basis of accounting that is a first-time adopter can be used for its statutory reporting requirements in India immediately before adopting Ind AS. For instance, companies are required to prepare their financial statements following Section 133 of the Companies Act, 2013.
It Shall consider those financial statements as previous GAAP financial statements. Those previous GAAP financial statements were prepared as per the Companies (Accounting Standards) Rules, 2006 and hence such accounting standards are the “Previous GAAP” for those companies in India.
SCOPE First time Adoption of Ind AS 101
Ind AS 101 applies to:
- First Ind AS financial statements in Accounting Standards.
- Each interim financial report for part of the period covered by its first Ind AS financial statements. For example, if the period covered by the first Ind AS financial statements is the year ended 31 March 20X2 and the company prepares quarterly financial results (i.e. interim financial report) for each quarter of that year, Ind AS 101 shall be applied in the preparation of those financial results.
However, it doesn’t applied to:
- Various changes in accounting policies can be made by an entity that already applied Ind AS.
MEASUREMENT AND RECOGNITION
Opening of Ind AS Balance Sheet:
An entity is needed to prepare and present an opening Ind AS balance sheet at the transition to Ind AS. It is the starting point for its accounting following Ind AS.
The entity uses the same accounting policies in its opening Ind AS Balance Sheet and through all periods are presented in its first Ind AS financial statements. Those accounting policies should be comply with each Ind AS effective at the end of its first Ind AS reporting period, subject to:
- Mandatory exceptions.
- Optional exemptions.
The general principle of Ind AS 101-
It may be noted that the way Ind AS 101 is structured first lays down the general principle that all Ind AS, as effective for first Ind AS reporting period, should be applied retrospectively, i.e. at the starting point, which is the opening Ind AS balance sheet, should carry the balances as if Ind AS has always been applied by the company in the past.
Once the general principle has been specified, Ind AS 101 then talks about certain exemptions and exceptions, the former being voluntary and the latter being mandatory, as mentioned above.
So let’s talk of the general principle first – an entity shall, in its opening Ind AS Balance sheet:
- Recognizing all liabilities and assets whose recognition is needed by Ind AS. For example, recognition of derivative assets and liabilities for which different guidance was followed under Indian GAAP or intangible assets arising in a business combination, which were not carried in the books of the acquiring entity under Indian GAAP;
- Not recognize items as assets or liabilities if Ind AS do not permit such recognition. For example, Ind AS 115, Revenue from Contracts with Customers, has different thresholds for revenue recognition as compared to AS 9 under Indian GAAP and hence an item that is recognized as a trade receivable in Indian GAAP may not be so recognized under Ind AS;
- Reclassify items that it recognized following previous GAAP as one type of asset, liability or component of equity, but are a different type of asset, liability or component of equity following Ind AS. For example, Ind AS requires classification of assets in Accounting Standards.
Given on operating lease as investment property whereas the same is presented as property, plant and equipment under Indian GAAP; and
- Apply Ind AS in measuring all recognized assets and liabilities. For example, Ind AS has well-defined measurement principles for financial assets and liabilities, like certain investments are measured at fair value under Ind AS. In contrast, the same are measured at lower cost and fair value under Indian GAAP.
There are two categories of provisions in Ind AS 101 under which the general principle mentioned above is applied in a modified manner:
- Mandatory exceptions to the retrospective application of other Ind AS.
- Optional exemptions from retrospective application of other Ind AS.
Compulsory exceptions to the retrospective application of other Ind AS:
Estimates in First time Adoption of Ind AS 101
An entity’s estimates following Ind AS at the date of transition to Ind AS shall be consistent with estimates made for the same date following previous GAAP (after adjustments to reflect any difference in accounting policies), unless there is objective evidence that those estimates were in error.
De-recognition of financial assets and liabilities-
A first-time adopter should prospectively apply the de-recognition requirements in Ind AS 109 for transactions occurring on or after the date of transition to Ind AS.
An entity can apply for the de-recognition requirements in
Ind AS 109 retrospectively from the date of the entity’s choosing, provided that the information needed to apply Ind AS 109 to financial assets and financial liabilities de-recognized as a result of past transactions was obtained at the time of initially accounting for those transactions.
Meanwhile, transition to Ind AS, an entity shall:
(a) Measure all derivatives at fair value.
(b) Eliminating all deferred losses and gains arising on derivatives that were reported following previous GAAP as if they liabilities or assets.
An entity should not reflect in its opening Ind AS Balance Sheet a hedging relationship of a type that does not qualify for hedge accounting following Ind AS 109 (for e.g., many hedging relationships where the hedging instrument can be a stand-alone written option or a total written option; or where the hedged item have been net position in a cash flow hedge for another risk than foreign currency risk). In other words, if the hedge relationship:
(A) A type qualifies for hedge accounting (i.e. hedge relationship consists of eligible hedging instruments and eligible hedged items as per Ind AS 109).
(B) It is designated under Indian GAAP then-
(1) the hedge relationship is required to be reflected in the opening Ind AS Balance Sheet, irrespective of whether other conditions for applying hedge accounting (i.e. documentation and effectiveness) are met.
(2) If several conditions are not met, then requirements of Ind AS 109 concerning discontinuance of hedge accounting are applied subsequently.
As a result of this principle, if (A) or (B) above are not encountered, barring a specific exception, the hedge relationship is needed to be removed from the opening of Ind AS Balance Sheet.
If an entity is designated at a net position as a hedged item following previous GAAP, which is not a qualifying hedged item otherwise under Ind AS 109, it might designate as a hedged item following Ind AS as an individual item within that net position, or a net position if those are meeting the requirements in Ind AS 109, provided that it does so no later than the date of transition to Ind AS.
Hedge accounting is followed only when the qualifying criteria have been encountered which are irrespective of the conditions which are stated above at (A) and (B). Transactions can be entered into before the time of transition to Ind AS should not be retrospectively designated as hedges.
A first-time adopter should be applying for the following prospective requirements of Ind AS 110 from the date of transition to Ind AS:
- Total comprehensive income can be attributed to the owners of the parent and to the non-controlling interest’s even if this is resulted in the non-controlling interests which are having a deficit balance;
- Accounting for various changes in the parent’s ownership interest in a subsidiary that are not resulting in a loss of control.
- Accounting for a mislaying of control over a subsidiary, and then it is related to the requirements of Ind AS 105, Non-current Assets can be held for Sale and Discontinued operations, i.e. classification of all the assets and liabilities of that subsidiary as it is held for sale.
However, if a first-time adopter is elected for applying Ind AS 103 retrospectively to past business combinations, it shall also apply Ind AS 110 from that date.
Classification and various measurements of financial assets and financial liabilities-
Ind AS 109 contains principles for classifying a financial asset as at amortized cost or fair value through other comprehensive income or fair value through profit or loss. Such classification depends on an assessment of features of the financial asset on the date of its initial recognition.
Ind AS 101 provides an exception to this general principle by requiring that such assessment be done on the transition to Ind AS.
Ind AS 101 further provides that if it is impracticable to assess the below-mentioned features of a financial asset as at the date of transition to Ind AS, the “contractual cash flow characteristics test” shall be done without taking into account those features:
- Modified time value of money element.
- Significance of the fair value of a prepayment feature.
An entity shall disclose the carrying amount of such financial assets until those financial assets are derecognized.
Ind AS 109 requires measuring the amortized cost of a financial asset or a financial liability using the effective interest method. As an exception to this general measurement principle, Ind AS 101 provides.
If it is impracticable (as defined in Ind AS 8) for an entity to apply the effective interest method retrospectively in Ind AS 109, the market value of the financial asset or the financial liability at the commitment of transition to Ind AS shall be the new gross carrying amount of that financial asset or the new amortized cost of that financial liability at the date of transition to Ind AS.
Impairment of financial assets-
An entity should be applying for the impairment requirements of Ind AS 109 retrospectively subject to the below:
- At the commitment of transition to Ind AS, an entity should be using reasonable and supportable detail that can be available without undue effort or cost for determining the credit risk at the date that the financial instruments were recognized initially.
- An entity is not needed for undertaking an exhaustive search for information when determining whether there have been significant increases in credit risk since initial recognition at the date of transition to Ind AS.
- If, at the commitment of transition to Ind ASs, determining whether there have been an increase in credit risk significantly since the initial recognition of a financial instrument would be requiring which can be undue cost or effort, an entity should be recognizing a loss which are allowed at an amount which is equal to lifetime expected credit losses at every reporting date until that financial instrument is derecognized unless that financial instrument is low credit risk at a reporting date.
A first-time adopter should assess whether an embedded derivative is necessary to be separated from the host contract and accounted for as a derivative based on the conditions that existed at the later of=
(a) The date it first became a party to the contract.
(b) The date a reassessment is required by Ind AS 109, i.e. when there is a change in terms of the contract that significantly modifies the cash flows that otherwise would be required under the contract.
A first-time adopter should be classifying all government loans received as a financial liability or an equity instrument following Ind AS 32, Financial Instruments Presentation.
A first-time adopter should be applying for the requirements in Ind AS 109, Financial Instruments, and Ind AS 20, Accounting for Government Grants and Disclosure of Government Assistance, prospectively to government loans existing at the date of transition to Ind AS and shall not be recognizing the corresponding benefits of the government loan at a below-market rate of interest as a government grant.
Optional exemptions from retrospective application of other Ind AS:
Ind AS 103 need not be applied to business combinations before the date of transition. But, if one business combination is restated to comply with Ind AS 103, all subsequent business combinations are restated.
Ind AS 104 will apply for annual periods beginning on or after the transition to Ind AS.
If an insurer changes its accounting policies for insurance liabilities, it is permitted to reclassify some or all of its financial assets as FVTPL (fair value through profit or loss).
Share-based payment transactions-
A first-time adopter can be encouraged, but it is not required, to apply Ind AS 102, Share-based Payment, to equity instruments that vested before the date of transition to Ind AS.
However, a first-time adopter may apply Ind AS 102 to equity instruments if it has disclosed publicly the fair value of those equity instruments, determined at the measurement date.
It is encouraged to apply Ind AS 102 to liabilities arising from share-based payment transactions settled before the date of transition to First time Adoption of Ind AS 101.
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