International Financial Reporting Standards (IFRS) Overview

International Financial Reporting Standards (IFRS) Overview

Sambhasiva Rao Venkata Cheedella IFRS Certified, Senior Consultant, Oracle.

Purpose

This document is regarding International Financial Reporting Standards (IFRS), implication on regular business transactions as per IFRS recommendations. Few examples, case studies on IFRS. It is also one good resource wishing to make use of accounts under IFRS. Implementation pre-requisites on ERP (Oracle Applications) to map according to IFRS.

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Abbreviations CESR EC EEA EFRAG EITF EU FASB FEE GAAP IAS IASB

Committee Of European Securities Regulators European Commission European Commission Area (EU 27 + 3 countries) European Financial Reporting Advisory Group Emerging Issues Task Force (Of FASB) European Union (27 countries) Financial Accounting Standards Board (US) Federation Of European Accountants Generally Accepted Accounting Principles International Accounting Standards International Accounting Standards Board

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IASC IASCF IFRIC

IFRS IFRSF NCI

International Accounting Standards committee (Predecessor to the IASB) IASC Foundation (parent body of the IASB) (From 1 March 2010 named as IFRS Foundation) International Financial Reporting Interpretations Committee Of the IASB, and Interpretations issued by that committee (from 1 March 2010 named as IFRS Interpretations Committee) International Financial Reporting Standards IFRS Foundation Non-Controlling interest (previously ‘minority’ interests)

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SAC

Standards Advisory Council (advisory to the IASB) (from 1 March 2010 named as IFRS advisory council)

SEC

Securities and Exchange Commission (US)

SIC

Standing Interpretations Committee Of the IASC, and Interpretations issued by that committee

IOSCO

International Organization Of Securities Commissions

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IASB and IFRS

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Members Of IASB 2 Members in IASC from India out of 22. Mr. Mohandas, Mr.Prabhakar Kalavacherla. Kalavacherla was previously a partner at KPMG LLP. Sri David Tweedie, Chairman became the first Chairman on 1 January 2001, having served from 1999-2000 as the first full time Chairman of UK Accounting Standards Board. Term expires 30 June 2011.

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IASB and its Objectives International Accounting Standards Board (IASB) -Independent, privately funded accounting standard setter based in London. - Responsibility to develop International Financial Reporting Standards (IFRS) The Objectives are: -To develop a single set of accounting standards (High quality, understandable, global and enforceable)

-To promote their use and rigorous application - To work actively with national standard setters (To bring about convergence of national accounting standards and IFRSs)

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History 1973 IASC formed 1998 Core standards completed 2000 SEC review of core standards; concept release published Feb 2000 IASC approves new constitution IOSCO review finalized EU proposes that all EU listed companies (some 6,700) should apply IAS by 2005 2001 IASB assumes accounting standard setting responsibilities from IASC 2002 EU’s decision to adopt IFRS from 1 Jan 2005 2005 Nearly 7,000 listed business in 25 countries switch to IFRS 2007 SEC accepts fillings from Foreign Private Issues (FPI) without reconciliation to US GAAP 2010 US allows certain large filers to file IFRS accounts 2014? US converged for listed companies – decision to be taken in 2011

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International Financial Reporting Interpretations Committee (IFRIC)

Interpretation of contentious accounting issues -

Expand beyond interpretations of current standards to include areas where there is no guidance

Interpretations are authoritative guidance

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Timelines of achieving convergence Phase I – Transaction date April 1, 2011 - NIFTY 50 - SENSEX 30 - Companies whose shares or other securities listed on stock exchanges outside India - Companies (listed or unlisted) with net worth in excess of INR.1000 crores.

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Phase II – Transaction date April 1, 2013 - Companies (listed or unlisted) with net worth in excess of INR.500 crores but less than INR.1000 crores Phase III – Transaction date April 1, 2014 - Listed companies with net worth in less than INR.500 crores

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IFRS time lines for banks and insurance companies Banks

SCB* and UCB# with net worth > INR 300 crores

April 1, 2013

SCB* and UCB# with net worth > INR 200 crores but INR. 1000Cr

April 1, 2013

Net worth > INR. 500 Crores

April 1, 2014

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MCA clarifications on IFRS adoption Presentation of comparatives Opening balance sheet prepared at 1 April 2011 and the financial statements for the year ending 31 March 2012 shall be in accordance with the converged accounting standards; but comparative period figures (I.e. for the year ending 31 March 2011) shall continue to be reported as per the non-converged accounting standards.

Option to present comparatives voluntarily (2010-2011) A company may however, voluntarily choose to report comparative period figures (I.e. for the year ending 31 March 2011) as per the converged accounting standards as an additional column in the financial statements. The opening balance sheet (and therefore transaction adjustments) for companies in such a case shall be 1 April 2010.

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Voluntary adoption for Phase 2 and 3 companies - Phase 2 and 3 companies will have an option to early adopt the converged accounting standards, commencing on or after 1 April 2011 - All other companies can also early adopt IFRS

If, subsequent to the adoption, the company does not meet the IFRS adoption criteria, should it discontinue IFRS? - Once a company follows the converged accounting standards it shall continue preparing financial statements in accordance with the converged accounting standards. It shall not revert to the non-converged accounting standards.

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Applicability to group companies - The criteria for determination of various phases shall be based on the stand-alone financial statements of various entities. - Companies having subsidiaries, joint ventures and associates or covered in any of the phases shall prepare consolidated financial statements in accordance with the converged accounting standards. - Group companies (subsidiaries, joint ventures or associates) not covered in the phases similar to the parent company shall continue to prepare financial statements according to the according to respective phases as applicable. - However, such companies may voluntarily adopt the converged accounting standards.

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ICAI Standards – Converged progress (1) S. Topic No

Standard under IGAAP

Standard Differen under ces IFRS noted

Nature of difference

Abbreviations Presentation of Financial Statements

AS 1

IAS 1

No

-

2

Inventories

AS 2

IAS 2

No

-

3

Statement of Cash Flows

AS 3

IAS 7

Yes

GAAP

4

Events after the reporting period

AS 4

IAS 10 IFRIC 17

No

-

Accounting policies, changes in accounting estimates and errors

AS 5

IAS 8

No

-

Construction Contracts

AS 7

IAS 11 IFRIC 12 & SIC 29

Yes

Transactio nal provisions

1

5

6

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ICAI Standards – Converged progress (2) S. Topic No 7

8

9

Abbreviations Revenue recognition

Property, plant & Equipment

Standard under IGAAP

Standard Differen under ces IFRS noted

AS 9

IAS 18 SIC 31 Yes IFRIC 13, 15 & 18

AS 10*

Effect of Change in foreign exchange rates AS 11

IAS 16 IFRIC 1

Nature of difference

Terminolo gy & transaction al provisions

Yes - same as7- same as7-

IAS 21

Yes

* Includes AS 6 depreciation a/c ing IFRS Overview

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ICAI Standards – Converged progress (3) S. Topic No 10 11

Abbreviations Government grant Business Combinations

Standard under IGAAP

Standard under IFRS

Differ ences noted

Nature of difference

AS 12

IAS 20

No

-

AS 14

IFRS 3

Yes

Terminology, Transactional provisions

Yes

GAAP

Yes

GAAP

12

Employee benefits

AS 15

IAS 19 IFRIC 14

13

Borrowing Costs

AS 16

IAS 23

14

Operating Segments

AS 17

IFRS 8

Yes

Transactional provisions

15

Related party disclosures

AS 18

IAS 24

Yes

GAAP

AS 19

IAS 17 IFRIC 4

No

-

16

Leases

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ICAI Standards – Converged progress (4) S. Topic No 17

Abbreviations Earnings per share

18

Consolidated and separate financial statements

Standard under IGAAP

Standard under IFRS

Differ ences noted

Nature of difference

AS 20

IAS 33

Yes

GAAP

AS 21

IAS 27 SIC 12

Yes

Transactional provisions GAAP

19

Income Taxes

AS 22

IAS 12 SIC 21, 25 Yes

20

Investments in Associates

AS 23

IAS 28

Yes

GAAP

21

Non current assets held for sale & discontinued operations

AS 24

IFRS 5

Yes

GAAP

No

-

Yes

GAAP

22

Interim financial reporting

AS 25

IAS 34 IFRIC 10

23

Intangible assets

AS 26

IAS 38

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ICAI Standards – Converged progress (5) S. Topic No

Standard under IGAAP

Standard under IFRS

Differ ences noted

Abbreviations

Nature of difference

24

Joint ventures

AS 27

IAS 31 SIC 13

Yes

Terminology, Transactional provisions

25

Impairment

AS 28

IAS 36

Yes

- Same as 24-

26

Provisions, contingent liabilities & contingent assets

Yes

Transactional provisions

27

Financial instruments, recognition & measurement

28

Financial instruments presentation

AS 29

IAS 37

AS 30

IAS 39 IFRIC 9, 16 & 19

AS 31

IFRS Overview

IAS 32 IFRIC 2

Yes

Terminology, Transactional provisions

Yes

GAAP

25

ICAI Standards – Converged progress (6) S. Topic No

29

Abbreviations Financial instruments: Disclosures

Standard under IGAAP

Standard under IFRS

Differ ences noted

Nature of difference

AS 32

IFRS 7

Yes

GAAP

AS 33

IFRS 2 IFRIC 8 IFRIC 11

Yes

Transactional provisions

No

-

30

Share based payments

31

Financial reporting in hyperinflationary economies AS 34

32

Exploration of & evaluation of mineral resources

AS 35

IFRIC 6

Yes

Transactional provisions

33

Accounting and reporting by retirement benefit plans

AS 36

IAS 26

Yes

GAAP

IFRS Overview

IAS 29 IFRIC 7

26

ICAI Standards – Converged progress (7) S. Topic No

Standard under IGAAP

Standard under IFRS

Differ ences noted

Abbreviations 34

Investment property

AS 37

IAS 40

Yes

35

Agriculture

AS 38

IAS 41

Yes

36

Insurance Contracts

AS 39

IFRS 4

Yes

Nature of difference Transactional provisions Terminology, Transactional provisions Terminology difference

37

Financial Instruments

AS 40

IFRS 9

Yes

Terminology difference

38

First time Adoption

AS 41

IFRS 1

Yes

GAAP

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IFRS Framework

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Key points The IASB uses its conceptual framework as an aid to drafting new or revised IFRSs - Objective and elements of financial statements -Underlying assumptions and qualitative characteristics - Definitions

The framework is a key point of reference in the absence of specific guidance -Specific guidance in IAS 8 applies

IFRSs do not apply to items that are “immaterial” Transactions should be accounted for in accordance with their substance, rather than only their legal form.

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Presentation of Financial Statements

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Required Components of Financial Statements - Statement of Financial Position - Statement of Comprehensive Income - Statement of Chages in Equity - Statement of Cash flows - Notes - Statement of financial position as at the beginning of the earliest comparative period when an entity restates comparative information, if material, following a: - Changes in accounting policy - Correction of an error, OR - Reclassification of items in the financial statements - Equal prominence for all of the financial statements

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Identification of financial statements Must be clearly identified and distinguished from other information in annual report Required disclosures - Name of the entity - Separate, individual or consolidated financial statements - Date of the end of the reporting period or period covered by the financial statements - Presentation currency - Level of rounding

Reporting Period Financial statements to be presented at least annually If shorted or longer period, disclose - Reason - Fact that amounts reported may not be comparable No prohibition on 52-week period for practicality

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Accrual basis of accounting

Financial statements, except for cash flow information, should be prepared using the accrual basis Assets, liabilities, equity, income and expenses recognized when the definitions and recognition criteria in the framework are met

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Offsetting

Assets and liabilities should not be offset unless - Required or permitted by an IFRS Items of income and expenses should not be offset unless - Required or permitted by an IFRS - Gains, losses and related expenses arising from the same or similar items are not material

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Comparative Information

Numerical comparative information for the previous period required unless an IFRS requires or permits otherwise Narrative comparative information required if relevant to understanding of current period Reclassify comparative amounts unless impracticable to change presentation or classification - Disclosure required When an entity applies an accounting policy retrospectively, corrects a prior year error, or reclassifies items in its financial statements, it shall present, in addition a statement of financial position as of the beginning of the earliest period presented, if material

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Compliance with IFRSs

“Explicit and unreserved statement of compliance” Compliance with all IFRSs Disclose application of IFRSs before effective date Inappropriate accounting treatments can not be rectified by disclosure

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Statement of financial position- Current/ noncurrent Present assets and liabilities in the statement of financial position as - Current/ non-current OR - Broadly in order of liquidity (when reliable and more relevant) Disclose amounts due for recovery or settlement after more than 12 months for each asset and liability Deferred tax assets and liabilities are never presented as current Assets current if:

Liabilities current if:

All other assets and liabilities are non-current Events might qualify for disclosure as non-adjusting events in accordance with IAS 10

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Statement of financial position- Sub-classifications

Sub-classifications of items presented, either - In the statement of financial position; or - In notes Separate presentation of amounts payable to and receivable from the parent, subsidiaries, associates and other related parties Further guidelines in individual standards

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Statement of comprehensive income- Presentation Single statement or income statement and a separate statement of comprehensive income Analysis of expenses (in SCI or notes): by nature or function If classification based on function, additional information required: - Depreciation / amortization - Employee benefits expense Separate disclosure of nature and amounts of material items of income and expense (in SCI or notes) No extraordinary items Other comprehensive income for the period Other disclosures

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Statement of comprehensive income- Unusual and exceptional items No definition of “exceptional” or “unusual” events or items of income or expense given in IFRSs Items not exceptional just because of requirement to disclose separately Exceptional items occur infrequently Classification in same way as non-exceptional items of same function or nature Description of use of the term in notes, and applied consistently

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Statement of changes in equity Include - Total comprehensive income for the period - For each component of equity, the effect of retrospective application or restatement recognized in accordance with IAS 8 - For each component of equity, a reconciliation between the carrying amount at the beginning and the end of the period disclosing separately Profit or loss Each item of other comprehensive income Transactions with owners

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Statement of changes in equity- additional disclosure Also present, either in the statement of changes in equity or in the notes - the amount of dividends recognized as distribution to owners during the period, and the related amount per share

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Information about share capital For each class of share capital (in the statement of financial position, statement of changes in equity or notes): - Number of shares authorized - Number of shares issued: fully paid and not fully paid - Par value or no par value - Reconciliation of movements in number of shares - Rights, preferences and restrictions - Treasury shares - Share held for options and sale contracts (including terms/ amounts) Nature and purpose of each equity reserve

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Example Question Which components of financial statement is NOT prepared using the accrual basis of accounting? a) Statement of financial position b) Statement of comprehensive income c) Statement of changes in equity d) Statement of cash flows e) Notes to financial statements Ans: d

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Statement IFRS Framework of Cashflows

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Introduction

IAS 7 requires the provision of information about the historical changes in cash and cash equivalents of an entity by means of a statement of cash flows which cash cash flows during the period into: - operating activities - investing activities - financing activities

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Scope

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Key definitions

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Examples

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Revenue

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Types of income and related standards

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Revenue recognition criteria Common - Inflow of future economic benefits to entity is probable - Revenue is measurable reliably - Costs (incurred and expected) are identifiable and measurable reliably

Specific criteria for sale of goods - Significant risks and rewards of ownership transferred - Retain neither . managerial involvement; nor . effective control

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Layaway sales

Recognize when goods are delivered But: If experience indicates that most such sales are consummated, then recognize when - Significant deposit has been received - Goods are on hand, identified, ready for delivery

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IFRIC: 13 Customer Loyalty Programs IFRIC: 15 Agreements for the Construction of Real Estate IFRIC: 18 Transfer of Assets from Customers

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Scope Addresses accounting for customer loyalty award credits - Granted to customers as part of a sales transaction - Can be redeemed in future for free or discounted goods or services Include entities receiving consideration from a party other than the customer to whom it grants credits - Credit card companies are with in the scope Excludes programs that grant the customer a financial asset or do not include a sales transaction

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Issues Whether award credits are: - Separately identifiable component for which revenue should be deferred until awards are delivered (apply IAS 18.19) or

If separate component - How much revenue to be allocated? - When should revenue be recognized?

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Separate Components

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IFRIC 15 – Agreements for the Construction of Real Estate Divergence in practice - IAS 11 vs IAS 18 accounting

Issues addressed by IFRIC 15 - Applicable standards (IAS 11 or IAS 18) - Timing of revenue recognition

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Continuing managerial involvement or effective control?

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IAS 11 or IAS 18?

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Effective date and transition Effective date - Annual periods beginning on or after 1 January 2009 - Earlier application permitted, and shall be disclosed

Transition - Retrospective application - In accordance with IAS 8 Accounting Policies, changes in Accounting Estimates and Errors

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Revenue Vs principal

Revenue of the agent - Amount of commission - Plus any other amounts charged by the agent

Revenue of the principal - Gross amount charged to the ultimate customer

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Example:1 Company A operates an Internet site from which it will sells Company T's products. Customers place their orders for the product by making a product selection directly from the internet site and providing a credit card number for the payment. Company A receives the order and authorization from the credit card company, and passes the order on to Company T. Company T ships the product directly to the customer. Company A does not take title to the product and has no risk of loss or other responsibility for the product. Company T is responsible for all product returns, defects, and disputed credit card charges. The product is typically sold for USD 175 of which Company A receives USD 25. In the event a credit card transaction is rejected, Company A losses its margin on the sale (i.e. the USD 25) Should Company A revenue on a gross basis as USD 175 along with costs of sales of USD 150 or on a net basis as USD 25, similar to a commission? Ans: Here company is an Agent, is not taking any risk.

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IFRIC 18 – Transfer of Assets from Customers Divergence in practice - Recognize contributed PPE at fair value or cost of nil? - Recognize credit as revenue immediately or over period of service / asset life?

Issues addressed by IFRIC 18 - Should asset be recognized by the entity receiving the transfer? At what amount? - How to account for the credit? Cash contributions?

Scope - Accounting by the entity receiving the transfer (contribution)

Effective date - Transfer of assets on or after 1 July 2009 - Prospective application

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Revenue by Category - Sale of goods - Rendering of services - Construction contracts - Interest - Royalties - Dividends

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IAS 11 vs AS 7

There is major difference the Exposure draft of AS 7 (revised 20xx), Construction Contracts and International Accounting Standard (IAS) 11, Construction Contracts, IFRIC 12, Service Concession Arrangements and SIC 29, Service Concession Agreements: Disclosures, except that the transactional provisions given in IFRIC 12 have not been given in the Exposure Draft of AS 7 (Revised 20xx), keeping in view that Accounting Standard corresponding to IFRS 1, First-time Adoption of International Financial Reporting Standards, will deal with same.

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IAS 18 vs AS 9 IFRS

AS 9

Terminology used is 'Statement of financial position' and 'Statement of Comprehensive income'.

Different terminology is used, as used in existing laws e.g. term 'balance sheet' and 'Statement of profit & loss'

The transactional provisions given in SIC 31, IFRIC 13, IFRIC 15 regarding changes in accounting policy have not been given in the Exposure draft of AS 9 (Revised 20xx), since IFRS 1, First time Adoption of International Financial Reporting Standards, provides that transitional provisions in other IFRSs do not apply to a first time adopters transition to IFRSs, unless otherwise permitted in IFRS 1. It is noted that IFRS 1does not permit use of these transactional provisions. Accordingly, deleting or retaining the said paragraph would have the same effect. Transitional provisions given in IFRIC 18 have not been given in the Exposure draft of AS 9 (Revised 20xx), since the Accounting Standard corresponding to IFRS 1, First time Adoption of International Financial Reporting Standards, will deal with the same.

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Example 2 “Bill and hold” sales, in which delivery is delayed at the buyer's request but the buyer assumes title and accepts invoicing, should be recognized when a) The buyer makes an order b) The sales starts manufacturing the goods c) The title has been transferred but the goods are kept on the seller's premises d) It is probable that the delivery will be made, payment terms have been established, and the buyer has acknowledged the delivery instructions

Ans: d

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Example 3

X ltd, a large manufacturer of cosmetics, sells merchandise to Y ltd, a retailer, which in turn sells the goods to the public at large through its chain of retail outlets. Y ltd. Purchases merchandise from X ltd. Under a consignment contract. When should revenue from the sale of merchandise to Y ltd be recognized by X ltd ? a) When goods are delivered to Y ltd b)When goods are sold by Y ltd C) It will depend on the terms of delivery of the merchandise by X ltd d) It will depend on the terms of payment between Y ltd and X ltd (Cash or credit)

Ans: b

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Example 4 Considering the provisions of IAS 18 for Multiple Deliverable Contracts, which of the following statement is true? a) In case of multiple deliverable contracts, transaction should be segmented into individual transactions and recognition criteria must be applied to each of them b) In case of multiple deliverable contracts, recognition criteria needs to be applied on the combined transaction as a whole

Ans: a

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Property, Plant & Equipment

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Definition and Scope •Definition –Tangible items •Held for production or supply of goods or services, or •Rental to others, or •For administrative purposes

–Expected to be used during more than one period

•Scope: accounting for all PPE –Unless another standard requires or permits a different accounting treatment

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Recognition •PPE is recognized as an asset when –Future economic benefits are probable, and –Cost can be measured reliably

•Criteria apply to all costs when incurred, including –Initial acquisition or construction costs –Subsequent costs (covered later)

•PPE is measured initially at cost

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Cost of acquired or self-constructed assets •Purchase price (including import duties and non-refundable purchase taxes) –Less any discounts or rebates deducted –Less implicit interest in deferred payment –Plus borrowing costs in the case of “qualifying assets” (refer IAS 23) –Plus any other directly attributable costs

•Excludes abnormal amounts of wasted material, labour and other resources

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Expenses not recognized as cost of PPE •Feasibility assessment costs •Costs of opening new facility •Costs of introducing new product or service •Costs of conducting business in new location or with new class of customer •Costs of staff training •Administration and other general overhead costs •Costs incurred in using or redeploying an item •Amounts related to certain incidental operations •Costs incurred while construction is interrupted, unless certain criteria are met

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Asset exchange transactions •Cost of exchanged asset is measured at fair value unless –Exchange transaction lacks commercial substance, or –Fair value of neither asset received nor given up can be measured reliably

•Fair value of asset given up is used, unless fair value of asset received is more clearly evident •If not measured at fair value, then carrying amount of asset given up becomes new cost basis

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Subsequent costs •Subsequent costs are capitalized only if meet general recognition criteria –Future economic benefits are probable –Cost can be measured reliably

•Costs of day-to-day servicing are expenses as incurred •Recognize cost of replacing part of PPE item when incurred •Recognize major inspection cost as replacement

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Parts of an item –“Component accounting”

•on initial recognition, allocate cost to significant parts of asset, including non-physical parts • Separate depreciation of each “component” Ship costs 150, useful life 10 yrs. Estimated docking cost 15, planned after 3 yrs.

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Measurement after recognition

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Depreciation •Systematic allocation of cost to profit or loss over useful life •Depreciable amount determined after deducting residual value •Review at least at each balance sheet date –Residual value –Useful life –Depreciation method

•Changes are changes in estimate, so adjust current and future periods only

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Revaluation model (1) •Revalue regularly •Revalue all assets of the same class •To adjust accumulated depreciation at the date of the revaluation either: –Restate it proportionately with the change in the gross carrying amount of the asset, or –Eliminate it against the gross carrying amount of the asset and restate the net amount to the revalued amount of the asset

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Revaluation model (2) •Revaluation increases credited to –Profit or loss to the extent they reverse previous revaluation decrease of that asset recognized in profit or loss –Otherwise, equity (revaluation surplus)

•Revaluation decreases debited to –Equity to the extent of any revaluation surplus in equity related to that asset –Otherwise, profit or loss

•The revaluation surplus maybe transferred to retained earnings when the asset is derecognized or as it is used by the entiry

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Example (1) Revaluation Model •Company A owns a building with the initial cost of 1000, accumulated depreciation of 600. The fair value of the asset on the same date is assessed at 800 •Entries to recognize revaluation of the asset should be: OPTION 1: PROPORTIONATE RESTATEMENT Dr Revaluation reserve 600 Cr Accumulated depreciation 600 Dr Building, cost 1,000 Cr Revaluation reserve 1,000

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Example (2) Revaluation Model •Company A owns a building with the initial cost of 1000, accumulated depreciation of 600. The fair value of the asset on the same date is assessed at 800 •Entries to recognize revaluation of the asset should be: OPTION 2: ELIMINATION AGAINST ASSET COST Dr Accumulated depreciation 600 Cr Building, cost 600 Dr Building, cost 400 Cr Revaluation reserve 400

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IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities(1) •Changes due to a change in –Estimated timing and amount of payments –Estimated amount of payments –Discount rate

•Added to / deducted from cost of underlying asset and depreciated prospectively over remaining useful life •Foreign exchange gains and losses may be recognised in profit or loss or adjusted against cost of PPE •Applies regardless of accounting policy (cost or revaluation model) but implementation varies •New obligations: in our view, accounting analogous to change in estimates

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IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities(2) •Cost model –Changes in liability added/deducted from asset cost in current period –No negative carrying amount possible; any excess recognised immediately in profit or loss –Increase in carrying amount triggers consideration of impairment, including, if necessary, calculation of recoverable amount

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IFRIC 1 Changes in Existing Decommissioning,Restoration and Similar Liabilities(3) •Revaluation model - Change in liability does not affect valuation of asset (impact on valuation reserve)

- Changes in liability: indication that asset might have to be revalued.

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Impairment assessment

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Impairment loss recognition •Recognize impairment loss as expense immediately –Unless carried at revalued amount (treat as revaluation) –Use “new” carrying amount to calculate future depreciation

•Refer to IAS 36 for impairment loss calculation

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Derecognition •Derecognize: –On disposal, or –When no future benefits expected from use or disposal

•Difference between carrying amount and net disposal proceeds recognized as gain/loss in profit or loss •Gains (or proceeds) are not classified as revenue •Exception: when an entity routinely sells assets it has held for rental, it transfers them to inventory when they cease to be rented.

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Compensation for impairment, loss or surrender

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IAS 16 –Key learning points (1) •Analyze costs carefully to determine what can be capitalised •Use cost or revaluation model to account for assets in the same class •Adjust changes in existing decommissioning, restoration and similar liabilities to cost of underlying asset: –Cost model: to asset cost in current period –Revaluation model: to revaluation surplus

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IAS 16 –Key learning points (2) •Allocate cost to significant components and depreciate separately •Depreciation method, useful life, residual value reviewed at each balance sheet date •Specific disclosure requirements for revalued assets •Should capitalize borrowing costs on “qualifying assets” in accordance with IAS 23 (R). The revised standard applies for accounting periods beginning on or after 1 January 2009

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IAS 16 vs AS 10 There is no major difference between the exposure draft of AS 10 (revised 20xx), property, plant and equipment and International Accounting Standards (IAS) 16, Property, plant and equipment and IFRIC 1, changes in existing decommissioning, restoration and similar liabilities except that the transitional provisions given in IAS 10 (revised 20xx), keeping in view that Accounting Standards corresponding to IFRS 1, First-time Adoption of International Financial Reporting Standards, will deal with the same.

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Impairment of Assets

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Cash-generating unit –Definition •Determine recoverable amount for the individual asset if possible •Apply the CGU concept if the asset does not generate cash inflows independent from other assets •CGU is smallest identifiable group of assets that generates cash inflows that are largely independent from other (groups of) assets.

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CGU –Factors to be considered •Key factor: ability to generate independent cash inflows –If an active market exists for the output of an asset group, then it is a CGU even if the output is only sold to another division with the entity –The focus is on cash inflows, not net cash flows

•Consider how management makes decisions about continuing or disposing of assets / operations •Consider how management monitors operations

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Goodwill •Future economic benefits arising from assets that are not capable of being individually identified and separately recognized

•Does not generate independent cash flows

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Indications of impairment •External sources –Significant decline in market value –Technological, market, economic, legal environment –Increases in interest rates or rates of return –Lower market capitalization than equity book value

•Internal sources –Evidence of obsolescence or physical damage –Discontinuance, disposal, restructuring plans –Asset performance declining or expected to decline –Receipt from a dividend of a subsidiary, jointly controlled entity or associate when the carrying amount of the investment exceeds the share of underlying net assets (including goodwill) in the consolidated accounts or when the dividend exceeds total comprehensive income of the investee

IFRS Overview

99

Frequency and timing of testing (1) •CGU to which goodwill has been allocated •Intangible assets with an indefinite useful life •Intangible assets not yet available for use

IFRS Overview

100

Frequency and timing of testing (2) •Recent calculation can be used if the following criteria are met: –CGU did not change substantially –Most recent recoverable amount was significantly greater than carrying amount –Analysis of events and circumstances –no elimination of the difference

Note: A recent calculation can only be used in the case of intangible assets with an indefinite useful life and cashgenerating units to which goodwill has been allocated

IFRS Overview

101

Recoverable amount •Recoverable amount is the greater of: –Value in use (VIU): present value of estimated future cash flows to be derived from an asset/CGU (continuing use and ultimate disposal) –Fair value less costs to sell (FVLCS): amount obtainable from the sale of asset/CGU in an arm’s length transaction less costs of disposal

•If FVLCS is determinable, then not required to measure VIU or test at CGU level when: –an asset’s FVLCS is higher than the carrying amount; or –an asset’s FVLCS can be estimated to be close to VIU (e.g. asset held for disposal)

IFRS Overview

102

Allocating impairment loss –Step by step

IFRS Overview

103

Reversal of impairment loss

IFRS Overview

104

Key disclosures •By category of asset –Amount of impairment losses recognized / reversed during the period in •Profit or loss or •Other comprehensive income –If recognized in profit or loss, disclosure of where items are included –Segment reporting information

•By category of asset –Disclosures when impairment losses are material for an individual asset –Information on basis used for determining recoverable amount –Discount rate used

IFRS Overview

105

Key learning points •IAS 36 covers impairment of PPE, goodwill, intangible assets and investments in subsidiaries, joint ventures and associates •Detailed impairment testing generally is required only when there is an indication of impairment •Annual impairment testing: –Intangible assets not yet available for use –Intangible assets with indefinite useful life –Goodwill •Recognize impairment loss

IFRS Overview

106

IAS 36 vs AS 28 IFRS Terminology used is 'Statement of financial position' and 'Statement of comprehensive income'

Converged Standard Different terminology is used, as used in existing laws e.g. term 'Balance sheet' is used instead of 'Statement of profit and losses' is used instead of 'Statement of comprehensive income'

The transitional provisions have not been include in the exposure draft of AS28 (revised 20xx), since these are not relevant in the present Indian context as they relate to amendments made in the standard from time to time.

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107

Example 1 •Which of the following assets are within the scope of IAS 36? A. Assets held for sale B. Inventories C. Property, plant and equipment D. Financial assets

Ans: c

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108

Example 2 •What is the most appropriate definition of the “value in use”? A. The higher of an asset’s fair value less cost to sell and its market value B. The market quote C. The asset’s carrying value in the statement of financial position D. The discounted present value of future cash flows arising from use of the asset and from its disposal

Ans: d

IFRS Overview

109

Example 3 •Under IAS 36, which is the most appropriate conclusion when fair value less costs to sell cannot be determined? A. The asset is not impaired B. The value-in-use is the only measure of the recoverable amount C. The net realizable value should be used as an approximation D. The carrying value of the asset does not change Ans: b

IFRS Overview

110

Example 4 •What is normally the maximum period for which estimates of future cash flows can be reasonably developed? A. Five years B. Eight years C. Ten years D. Three years Ans: a

IFRS Overview

111

Example 5 •Which of the following cash flows should NOT be included when calculating the estimates of future cash flows? A. Cash flows from the sale of assets produced by the asset B. Cash flows from disposal C. Income tax payments D. Cash outflows on the maintenance of the asset

Ans: c

IFRS Overview

112

Income Taxes

IFRS Overview

113

Income Taxes

Income tax

= Current tax

+

IFRS Overview

Deferred tax

114

Recognition of current tax In the statement of financial position current tax for current and prior periods should be recognized as an asset or liability ●

●

Tax Payable = liability

●

Tax paid but recoverable = asset

- Tax assets may arise in some jurisdictions through the ability to redeem current period tax losses against tax paid in earlier periods

IFRS Overview

115

Recognition of current tax (continued)

Profit or Loss

OCI/Equity

Unless relates to item outside profit or loss (either in other comprehensive income or in equity)

If relates to item either in other comprehensive Income or in equity

IFRS Overview

116

Measurement of current tax Applicable tax rate for that type of income

Enacted or substantively enacted by end of the reporting period

Generate rate • Specific rates (e.g. capital gains tax rate) • Assume no distribution •

IFRS Overview

117

Distribution of profit - Example - Taxable income as at 31 Dec 20x7 is 100,000 ● - Subsequently, on 15 Mar 20x8 proposed dividends of 10,000 are approved and recognized as a liability Tax rate for undistributed earnings 50%

What tax rate?

Tax rate for distributed earnings 35%

Measure tax on undistributed earnings at 50% as at 31 Dec 2007 - Recognize current income tax liability and expense of 50,000 - Expectation of future distribution irrelevant

Remeasure when distribution recognized as at 15 Mar 2008 - Credit 1,500 (15%) as at 15 Mar 20x8 to profit or loss

IFRS Overview

118

Deferred tax: overview IFRS book value Vs Tax base = Temporary differences

Deductible

Taxable Tax rate applicable

- OCI / Equity Profit or loss OR - Goodwill Deferred tax asset recognition?

IFRS Overview

119

Tax base The tax base of an item is the amount attributed to that item for tax purposes ●

●

Tax base of an asset: - Amount deductible for tax purposes when the asset is recovered - Example: Interest receivable of 100 (carrying amount) Related interest revenue are taxed on a cash basis Tax base is nil

IFRS Overview

120

Tax base (continued) ●

Tax base of liability:

- Carrying amount less any amount that will be deductible for tax purposes in respect of that liability - Example: Loan payable of 100 (carrying amount) Repayment of the loan has no tax consequences Tax base is 100

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121

Temporary differences Temporary differences

Taxable Amount on recovery/ settlement

Deductible amount on recovery/ settlement

= →

→

Accounting IFRS Book value

Taxable Temporary difference

Deductible Temporary differences

IFRS Overview

-

Tax Base

→

Deferred tax LIABILITY

→

Deferred tax ASSET

122

Typical Temporary Differences Account

Potential temporary differences

Marketable Securities

Recorded at fair value for financial statement purposes, generally recorded at historical cost for tax purposes

Allowance for doubtful accounts

Allowance for tax purposes, if permitted, generally different from the financial statement allowance

Inventory

Valuation reserves for financial statement purposes but not for tax purposes

Property, plant and equipment

Costs capitalized for financial statement purposes but not for tax purposes Different depreciation lives or methods for financial statement and tax purposes

Pension liability (for asset)

Generally not deductible for tax until paid

IFRS Overview

123

Taxable temporary difference- Solution 1 ●

PPE with original cost of 150

- Accounting treatment: depreciate straight line zero residual value over 5 years - Tax treatment: original cost tax deductible straight line over three years ●

At the end of year 1 - Accounting: carrying amount=120 - Tax: tax base=100

Taxable temporary difference: 120-100=20 ● Deferred tax liability ●

IFRS Overview

124

Taxable temporary difference- Solution 2 ●

Transaction costs of 20 on loan received

- Accounting treatment: deduct from loan proceeds and amortize over the loan term to accounting profit - Tax treatment: tax deductible when loan was first paid ●

Immediately after receiving the loan

- Accounting: carrying amount = 0 - Tax: tax base = 20

Taxable temporary difference:- (0-20)=20 ● Deferred tax liability ●

IFRS Overview

125

Deductible temporary difference – Situation 1 ●

Revaluation of PPE for tax purposes 100 - Accounting treatment: no revaluation recognized - Tax treatment: tax deductible in future years through tax depreciation

●

At period end - Accounting: carrying amount = 0 - Tax: tax base = 100

Deductible temporary difference: 0-100= -100 ● Deferred tax asset ●

IFRS Overview

126

Deductible temporary difference – Situation 2 ●

Warranty provision of 100 - Accounting treatment: expense as incurred - Tax treatment: tax deductible upon reversal (when claims are actually paid)

●

Immediately after incurred - Accounting: carrying amount = 100 - Tax: tax base = 0

Deductible temporary difference:- (100-0) = 100 ● Deferred tax asset ●

IFRS Overview

127

Temporary differences and consolidation

Temporary difference

Group level

Entity level

Local tax base

IFRS Overview

128

Recognition of deferred tax

Profit or Loss

All cases, unless;

OCI/ Equity

If releases to item either in other comprehensive income or in equity

Goodwill

If arises on a business combination

IFRS Overview

129

Recognition of deferred tax outside profit or loss Examples

OCI

●

Revaluation of - Property, plant and equipment (IAS 16) - intangible assets (IAS 38) - available for sale securities (IAS 39)

Foreign exchange differences on the translation of a foreign entity (IAS 21) ● Cash flow hedge (IAS 39) ●

Compound financial instruments (IAS 39) ● Adjustment to the opening balance of retained earnings (IAS 8/ IFRS 1) ● Share based payments (IFRS 2)

Equity

●

IFRS Overview

130

Recognition of deferred tax asset/ liability

Liability

Asset

Recognize in full

Recognize if recoverable

IFRS Overview

131

Deferred tax asset - Examples Deductible temporary differences ● Unused tax losses ● Unused tax credits ●

IFRS Overview

132

Asset recognition: When? ●

Sufficient taxable profit: - Taxable temporary differences - Taxable profits - Tax planning opportunities - Carry back income

IFRS Overview

133

Presentation Minimum line items to be presented separately in the statement of financial position ●

- Current tax assets and liabilities - Deferred tax assets and liabilities

Deferred tax assets/ liabilities to be classified as non current items in a classified statement of financial position ● Tax expense to be presented separately in the statement of comprehensive income ●

IFRS Overview

134

Presentation - Offsetting ●

Current tax assets/ liabilities offset only if - Legally enforceable right; and - Intention to settle on a net basis or simultaneously

●

Deferred tax assets/ liabilities offset only if - Legally enforceable right to offset current tax assets and liabilities; and - Income taxes relating to same taxation authority and from: The same taxable entity Different taxable entities intending to settle/ realize net or simultaneously

IFRS Overview

135

Convergence – Income taxes ●

Convergence project FASB/ IASB - Tentative Board decisions - Exposure Draft of amendments expected in 2009 - A final standard expected in 2010 - www.iasb.org for latest details

IFRS Overview

136

IAS 12 Vs. Converged AS 22 IFRS

Converged Standard

Terminology used is 'Statement of financial position','Statement of Comprehensive income' and 'authorization of financial statements for issue'

Different terminology is used as used existing laws e.g. term 'balance sheet' is used instead of 'Statement of financial position', 'Statement of Profit or loss' is used instead of 'Statement of comprehensive income' . Words 'approval of the financial statements for issue' have been used instead of 'authorization of financial statements for issue' in the contest of financial statements considered for the purpose of events after the reporting period.

IAS 12 requires presentation of tax expense (income) in the separate income statement, where separate income statement is presented.

Such requirements have been deleted. This change is consequential to the removal of option regarding two statement approach in AS 1 (Revised 20XX). AS 1 (Revised 20XX) requires that the components of profit or loss and components of other comprehensive income shall be presented as a part of the statement of profit and loss.

The transitional provisions given in SIC 21 and SIC 25 regarding changes in accounting policy have not been given in the Exposure Draft of AS 22 (Revised 20xx), since IFRS 1, First-time Adoption of International Financial Reporting Standards, provides that transitional provisions in other IFRSs do not apply to a first-time adopter's transition to IFRSs, unless otherwise permitted in IFRS 1. It is noted that IFRS 1 does not permit use of these transitional provisions. Accordingly, deleting or relating the said paragraph would have the same effect.

IFRS Overview

137

Example 1 Company A reported pre-tax accounting income of 90,000, but due to temporary differences arising in the year, taxable income is only 50,000. Assuming a tax rate of 40%, statement of comprehensive income should report net income of: a) 70,000 b) 40,000 c) 30,000 d) 54,000

Ans: d

IFRS Overview

138

Example 2 Assume that Company C has accrued several speeding fines for its salespeople. Fines are never deductible for tax purposes. This will result in which of the following? a) Deductible temporary difference and future income tax liability b) No temporary difference c) Taxable temporary difference and future income tax liability d) Taxable temporary difference and future income tax asset

Ans: b

IFRS Overview

139

Example 3 With respect to deferred taxes: 1. Deferred tax liability and assets must be offset if the entity has a legally enforceable right to offset current tax liabilities and assets, they relate to taxes levied by the same tax authority and the entity intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously; 2. Deferred tax assets and liabilities have to be discounted. a) 1 is true, 2 is false b) 1 is false, 2 is true c) 1 is true, 2 is true d) 1 is false, 2 is false

Ans: a

IFRS Overview

140

First-time Adoption of IFRS

IFRS Overview

141

When to apply IFRS 1 • Apply IFRS 1 - In the first set of financial statements that contain an explicit and unreserved statement of compliance with IFRSs - In any interim financial statements for a period covered by those financial statements that are prepared under IFRS

IFRS Overview

142

Why does IFRS 1 apply to? • Entity A stated compliance with all IFRSs except IAS 39 (Financial instruments) • Entity B claimed compliance, but it was IFRSs “lite” (i.e. only selected standards were applied) • Entity C followed IFRSs for group reporting only

IFRS Overview

143

Transition date • The beginning of the earliest period for which an entity presents full comparative information under IFRSs

Date of transition = IFRS opening statement of financial position

Comparative period 1 Jan 2008

Reporting date

First IFRS financial statements 31 Dec 2008

IFRS Overview

31 Dec 2009

144

General Requirements • Step 1 – Select IFRS accounting policies - Latest version of IFRSs only

• Step 2 – Recognize/ derecognize an necessary, for example - Liabilities (e.g. future losses, decommissioning obligations, leases) - Special purpose entities

• Step 3 – Remeasure, for example - Basis same, but measured differently (e.g IFRS cost not equal to previous GAAP cost) - Basis changed (e.g. from cost to fair value) - Discounting is required / prohibited (e.g. deferred tax, provisions, impairments)

• Step 4 – Reclassify, for example - Between captions (e.g. debt/ equity) - Current/ non-current

IFRS Overview

145

Opening IFRS statement of financial position Adjustments as a result of applying IFRSs for the first-time

Exemptions

Retained earnings

Another equity category

Goodwill

IFRS Overview

146

Mandatory exceptions • Derecognition of non-derivative financial instruments • Hedge accounting • Estimates

IFRS Overview

147

Derecognition of non-derivative financial instruments Derecognized after 1 Jan 2004?

No

Information needed to apply IAS 39 retrospectively obtained at the time of initially accounting for transactions?

No

Do not apply IAS 39

Yes Yes

Apply IAS 39

Yes

Does the entity elect to apply IAS 39 retrospectively?

IFRS Overview

No

148

Hedge accounting Measure all derivatives at fair value and remove all deferred gains and losses arising on derivatives recognised under previous GAAP

Yes

Designated as a hedge under previous GAAP and is the hedge effective? On transition apply the following adjustments

Fair value hedge: adjust carrying amount of the hedged item in opening IFRS statement of financial position → recognize effect in retained earnings

No

Do not reflect hedging relationship in opening IFRS statement of financial position → recognise effect in retained earnings

Cash flow hedge and hedge of a net investment: recognize deffered gains and losses on the hedging instrument in equity as seperate item

IFRS Overview

149

Estimates in the opening IFRS statement of financial position

No estimates under previous GAAP

Use information available at the date of transition to IFRSs (i.e no hindsight)

Conditions arising after the date of transition

“Wrong”

“Right”

Apply also to the end of the comparative period

IFRS Overview

150

Estimates in the opening IFRS statement of financial position (continued)

Error

Previous GAAP estimate

Adjust, but do not use hindsight

No error

Apply IFRS methodology to estimate made

Apply also to the end of the comparative period

IFRS Overview

151

Overview of optional exemptions • Deemed Cost

• Share-based payments

• Compound financial instruments

• Day 1 gain or loss

• Cumulative translation differences

• Arrangements containing a lease

• Business Combinations

• Defined benefit obligation pension disclosures

• Employee benefits

• Insurance Contracts

• Designation of previously

• Service concession

recognized financial instruments • Decommissioning liabilities

arrangements • Borrowing Costs

• Transfers of assets from customers

IFRS Overview

152

IFRS 1 vs Converged AS 41 (1) IFRS

Converged Standard

IFRS 1 First-time Adoption of International Financial Reporting Standards was first issued by the International Accounting Standards Board in June 2003 and thereafter has been amended many times to accommodate the changes to other relevant IASs and IFRSs and the first time Accommodation required arising from those changes. For the purposes of Ind-AS 41, the IFRS 1 as restructured and issued in 2008 has been used as the basis and updated to reflect subsequent amendments up to November 2009 excluding the amendments so far as they relate to changes arising from instruction of IFRS 9 – Financial Instruments

To that extent Ind-AS 41 reflects only the current set of provisions and exemptions and does not present all the evolution

IFRS Overview

153

IFRS 1 vs Converged AS 41 (2) IFRS Generally, there is only one transition date for a country transitioning to IFRS. IFRS 1 defines transitional date as beginning of earliest period for which an entity presents full comparative information under IFRS. It is this date which is the starting point for IFRS and it is on this date the cumulative impact of transition is recorded based on assessment of conditions at that date

Converged Standard In India, as the converged IFRS standards become applicable in a phased manner it is expected that Ind-AS 41 would be available to each company considering its relevant transition date. Ind-AS41, however provide an entity with a choice to either consider the beginning of the current period or the comparative period as the transition date. Thus, the transition date has been defined as the beginning date of financial year on or after 1April 2011 for which an entity presents financial information under Ind-AS in its first Ind-AS financial statements but where an entity voluntarily decides to provide a prior period comparatives in accordance with Ind-AS then the date of transition would be the beginning of the earliest period for which an entity presents for full comparative information under Ind-AS in its first Ind-AS financial statements i.e. beginning of financial year on or after 1 April 2010. Arising from this fundamental change, there are other consequential changes to Ind-AS 41. For example, disclosures required under paragraph 21 and reconciliations under paragraphs 24 to 26 Ind-AS 41 have been modified to accommodate this option available under Ind-AS 41. The relevant Implementation Guidance and illustrative examples have been appropriately modified to reflect the option provided to transitioning entities.

IFRS Overview

154

Key Learning Points IFRS 1 sets out all transitional requirements and exemptions available on the first-time adoption of IFRSs ● An opening statement of financial position is prepared at the date of transition of IFRSs ● Accounting policies are chosen from IFRSs in effect at the end of the first IFRS reporting period ● A number of exemptions are available ● At least one year of comparative information must be presented ● First-time adoption of IFRSs may be reported in annual or interim financial statements ●

IFRS Overview

155

Example 1 Under which one of the following circumstances can we conclude that the entity prepared IFRS financial statements in the previous year? a) Financial statements were prepared under IFRSs in the previous year; however, these were meant for internal purposes only b) Previous year's financial statements were prepared under the entity's national GAAP c) Previous year's financial statements were prepared in conformity with all requirements of IFRSs; however, these statements that they compiled with IFRSs d) Previous year's financial statements were prepared in conformity with all requirements of IFRSs, and these statements contained an explicit and unreserved statement that they compiled with IFRSs. Ans: d

IFRS Overview

156

Example 2 Which one of the following is a required adjustment in preparing an opening IFRS statement of financial position? a) Present at least two years of comparative information in the financial statements b) Derecognize items as assets or liabilities if IFRSs do not permit such a recognition c) Disclose as comparative information all figures for the current year presented under IFRSs d) Measure all recognized assets and liabilities at fair value Ans: b

IFRS Overview

157

Example 3 Which one of the following does NOT qualify for an exemption allowed by IFRS 1? a) cumulative translation differences b) Inventories c) Business combinations that occurred before the date of transition to IFRSs d) Compound financial instruments Ans: b

IFRS Overview

158

Implementation pre-requisites on ERP

IFRS Overview

159

Implementation pre-requisites on ERP Implementation pre-requisites on ERP (Oracle Applications) to map according to IFRS. a) Detailed Segment Structure b) Currencies c) One more Secondary Ledger for IFRS (Adjustment)

IFRS Overview

160

Detailed Segment Structure Need to prepare detailed segments according to the business and reporting requirements. Need to prepare detailed segment values according to IFRS standards. While preparing segments consider the points like business units, operating units, business operations & processes etc..

IFRS Overview

161

Currencies Need to review and assign required currencies for reporting. Assign reporting currencies to particular ledger.

IFRS Overview

162

One more Secondary Ledger for IFRS (Adjustment) We need to maintain two ledgers. One ledger (Primary ledger) for GAAP and another ledger (secondary ledger) for IFRS. Define a new ledger for IFRS as a secondary ledger with type as adjustment. With this we are mainly doing adjustment entries for IFRS reporting (detailed reporting).

IFRS Overview

163

Example (from Insurance domain) Please find below the details of the IFRS ledger: 1. The IFRS ledger will contain the Chart of accounts structure and values as per IFRS requirement. 2. Transactions shall be accomplished in the specific sub ledgers like AP, AR from which they shall be transferred to the primary ledger (as per GAAP). 3. The account balances then shall be transferred to IFRS ledger from the primary ledger, where users will pass manual entries to make adjustments in accounts balances from one account to another as per IFRS requirement.

IFRS Overview

164

Continue (1) The above points can be understood through an Insurance Industry example: Case Study - In case of Insurance, IGAAP just asks for a consolidated premium booking amount to be booked in the premium revenue account, while in IFRS it needs to be bifurcated into three heads premium main(50%), premium mortality charges(25%) and premium bid charges(25%) Thus when we book a receivable Invoice of Rs 100 in AR the accounting entry to IGAAP ledger would be: Receivable Dr 100 To Premium Revenue Cr 100

IFRS Overview

165

Continue (2) These balances would then be transferred to IFRS ledger, where the user shall pass the following manual adjustment: Premium Revenue Dr 50 To Premium mortality charges Cr 25 To Premium bid charges Cr 25 Effect in IFRS Ledger : Receivable Dr 100 To Premium Revenue Cr 50 To Premium mortality charges Cr 25 To Premium bid charges Cr 25

IFRS Overview

166

IFRS with Oracle E-Business Suite ERP

IFRS Overview

167

Introduction Oracle EBS standard model is mostly similar to US GAAP, in this chapter we are discussing about US GAAP and IFRS. In the fall of 2008, the SEC (Securities and Exchange Commission (US)) published a discussion road map for the adoption of IFRS by US public companies in which early IFRS adopters could file as soon as 2011, and regular filing under IFRS would begin in 2014. In March 2010, the SEC announced that in 2011 they would consider accepting IFRS into the US Financial Reporting system if certain readiness conditions were met and IFRS and US GAAP had reached convergence by mid 2011. This would mean that 2015 might be the earliest possible date for IFRS reporting.

IFRS Overview

168

Much is the Same …But There are Differences US GAAP is always more specific, plus: Similarities Approach (Some Examples) Revenue Recognition Fair Market (e.g. AR or Inventory Valuation) Detailed Disclosure

Segment Reporting

Chart of Accounts Not Mandated Distinction Between Tax and External Reporting

IFRS

Differences US GAAP

Approach

ü ü

ü ü

Fair Market Revaluation

ü ü ü ü

ü ü ü ü

IFRS

US GAAP

Fixed Assets & Investments

Only Certain Fixed Assets

None

Rare

Consolidation

Control

2 Models

Joint Ventures

Proportional OK

Only Equity

“Development”

Capitalized

Expensed

Components

Unitary

Financing

Cap vs. Op

No LIFO

LIFO OK

1 Step, Reversible

2 Step, No Reversal

(Some Examples)

Extraordinary Items

Fixed Assets Leasing Inventory Impairment

IFRS Overview

From a system view point the following lists are important: • Financial Statements • Revenue Recognition • Lease Accounting • Financial Instruments

IFRS Overview

170

“Comprehensive Income,” a proposed modification to IAS 1. In the area of financial reporting, the Boards published a series of proposals that require more disclosure, in particular distinguishing operating and investment assets and requiring the use of direct cash flow reporting. Regarding Revenue Recognition, there are proposals to replace US GAAP revenue recognition and IFRS revenue recognition (IAS 18) with a Performance Obligation model. The proposal is not yet definitive, and the Boards have not yet agreed on a final proposal for public review. According to this Oracle EBS follows mostly US GAAP. Once finalize the changes more changes will effect on application.

IFRS Overview

171

In the area of Lease Accounting, the proposals clarify the difference between long-term financing of assets and short-term rental of assets. While neither Board is keen on the current standards, the existing standards in US GAAP and IFRS are quite similar. It is anticipated that a proposal will be published in the summer of 2010. Regarding financial instruments, the Boards are deep in consultation with the financial industry, regulators, and authorities around the world to determine the best way to value and report on complex financial instruments and transactions. Both Boards have published standards and proposals covering elements of this topic, but the overall position is not definitive, and the community is not in agreement on what is generally acceptable.

IFRS Overview

172

Background Over 12,000 companies in a hundred countries have successfully adopted IFRS. They include countries in the European Union (EU), China, Australia, Russia, South Africa, Brazil and Chile. India, Canada, and Japan will adopt IFRS starting in 2011. The US joins Mexico in adopting IFRS within the next few years, thereby completing the worldwide adoption.

IFRS Overview

173

CHALLENGES OF TRANSITIONING TO IFRS Although there will be significant challenges along the way, the transition to IFRS will bring considerable benefits to worldwide businesses. A single set of global accounting and financial reporting standards applied consistently will not only increase comparability for investment purposes and reduce accounting complexity, but it will also increase the competitiveness of companies and capital markets. As with any significant change, companies will need to plan for it to address challenges and obstacles.

IFRS Overview

174

Impact of the Differences between US GAAP and IFRS From an operational point of view, the post-Convergence differences between IFRS and US GAAP remain substantial. IFRS are statements of principles and do not include the detailed guidance that is a hallmark of US GAAP. A company reporting under IFRS is likely to recognize a different amount of revenue, expense and income than it did under US GAAP. Certain assets and liabilities have different recognition and measurement criteria. Disclosure rules are different and there are more disclosure data points. In some cases, a business model implicitly based on US GAAP will produce different results under IFRS and will need to be changed.

IFRS Overview

175

Implications of the Time-line It appears that American companies will have a two-step transition to IFRS. Around 2013 or 2014, US GAAP will implement the Convergence standards (“Convergence”), and around 2015 and 2016, adoption of IFRS (“Adoption”) will occur. In June 2010, the FASB and IASB wrote to the SEC, G20 and others suggesting the establishment and discussion of the timing implications of Convergence. Nothing has been decided at this time.

IFRS Overview

176

Geographic Variances in Accounting Compliance IFRS are standards that define shareholder reporting for a complete enterprise, both domestic and overseas. While the standards have been adopted worldwide for public company shareholder reporting, not all countries have adopted them for private company reporting. In fact, some 30 countries actually disallow the use of IFRS for subsidiary statutory reporting. During the migration period, many companies may have to simultaneously comply with three regulations: local statutory, US GAAP and IFRS. There will likely be three channels of transaction data: • In the US, where no statutory reporting is required, certain IFRS data will be captured in the subsystems. • In countries where IFRS is permitted for statutory filing, local general ledgers will be IFRS compliant. However, consolidation adjustments and currency conversion will still be necessary. • In countries where IFRS is not permitted for statutory filing, local compliance might be the daily operational routine and the accounts from such subsidiaries may need substantial conforming adjustments – as companies do today with their non-GAAP subsidiaries.

IFRS Overview

177

Customers using IFRS in ERP •

E-Business Suite – – – – – –

•

PeopleSoft – – – – –

•

Emirates Airlines (since 2001) Hilton Hotels PLC Michelin Reuters (since 2002) Societe National De Chemin De Fer Francais Westpac AXA International Carrefour European Bank of Investment John Lewis PLC Societe Generale

JD Edwards – – – –

Chevron Juken New Zealand Ltd LaFarge Pernod Ricard

Supporting IFRS since Release 10.7

Supporting IFRS since Release 8.4

Supporting IFRS since Release Xe for E1 and Release A7.3 for World

IFRS Migration Plan Achieve “early mover” advantage Stage 1 Study Impact & Determine Strategy

Stage 2 Enable Top End Reports

I

Stage 3 Record Transactions in both GAAPS

Stage 4 Transform Your Business& Win with IFRS

Collect GAAP financial results

Determine impact on accounting in subsystems

Determine changes to business model

Assess Impact

Adjust and consolidate under GAAP & IFRS

Configure accounting rules and set up ledgers

Transform operations using IFRS results

Determine Strategy

Report, reconcile and audit results

Process and report using dual accounting

Report IFRS results, increase shareholder value

y Polic y and Cont rol Mana geme nt

Perform Preliminary Study

Milestone 1 Completed Preliminary Study

Milestone 2 IFRS Reports Produced

Milestone 3 Transactions Recorded in Multiple GAAPs

Milestone 4 Business Model Optimized

Oracle Enables Key Stages in IFRS Action Plan Stage 1 Study Impact & Determine Strategy

Stage 2 Enable Top End Reports

Stage 3 Record Transactions in both GAAPS

Stage 4 Transform Your Business & Win with IFRS

Oracle Enterprise Performance Management Oracle ERP Financials

Other ERP Financials Custom, Legacy, Competitor

Oracle Industry Specific Applications

y Polic y and Cont rol Mana geme nt

Oracle Governance, Risk, & Compliance Suite

Oracle Enterprise Performance Management Oracle Hyperion Financial Management (HFM) helps organizations align the processes for collecting financial results, operating results, and sustainability information in response to investor demands for increased disclosures of both financial and non-financial metrics. HFM streamlines the collection, consolidation, and reporting of financial and non-financial information. The result is more control and consistency over financial and non-financial reporting, improved data integrity and audit trails, as well as savings in time, effort, and costs. HFM supports standardized consolidation and reporting processes in compliance with US GAAP, IFRS, and local statutory requirements. It provides inter company eliminations,multi-currency translations, and minority interest calculations, delivering them quickly and cost-effectively out of the box. HFM is comprised of entity structures which define the group structure, i.e., the management or statutory hierarchies of reporting units and a chart of accounts hierarchy, which maintains the relationship or roll-up of account lines used in management and statutory reporting. IFRS Overview

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Oracle Enterprise Performance Management Enable Top End IFRS Reporting CORE CONSOLIDATION FEATURES Multiple reporting standards in a single solution GAAP

IFRS

CUSTOM DIMENSIONS Enables tracking of GAAP vs. IFRS adjustments

Flexible Rules Engine Journal Entries and Audit

DOCUMENT ATTACHMENTS Creates “Electronic Binder” of all adjustments

FLEXIBLE REPORTING Easy to reconcile and trend GAAP vs. IFRS results

Lead slide for our EPM and IFRS presentation: happy to arrange a showing

Customization An IFRS-compliant consolidation model must be able to analyze results from different sets of GAAP, and report those results side by side with their quantified differences.

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Multi-GAAP reporting compares results and quantifies the differences

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Satisfy IAS 14: Segmented reporting with Oracle Hyperion Financial Management’s sub forms

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Key capabilities of HFM • Core consolidation features, such as a flexible rules engine and journal adjustments to support multi-GAAP reporting • Custom dimensions to roll up data under different reporting standards to easily track IFRS vs. GAAP adjustments • Document attachments feature that allows users to document the details behind adjustments. These then become part of an electronic briefing book which includes the original data, adjustments, and supporting details with full audit trails. • Flexible reporting tools which allow easy viewing, reporting and reconciling of your financial results under IFRS vs. GAAP Oracle Hyperion Financial Management integrates directly with Oracle and nonOracle transactional systems and can be deployed quickly to address your Stage 2 transition requirements.

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Oracle Governance, Risk, and Compliance Oracle Governance, Risk, and Compliance (GRC) Applications provide a central documentation repository that aligns any changes to the business processes and the corresponding control policies to IFRS. Organizations can manage IFRS compliance documentation with the same platform they would use to manage compliance with SOX or environmental compliance regulations. Specific IFRS features will be examined, such as Componentized Assets. In addition, this chapter will discuss the dual accounting and reporting capabilities of EBS.

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Oracle Governance, Risk, and Compliance Suite Manage changes to policies and controls GRC DOCUMENTATION REPOSITORY

COMPLIANCE WORKFLOW

Record changes to business process due to IFRS

Automate steps to audit IFRS compliance

APPLICATION CONTROLS MONITORING Single subledger transaction creates multiple accounting representations

Control changes to ERP applications

COMPLIANCE DASHBOARDS Monitor status of testing and exceptions

Lead slide for our GRC and IFRS presentation: happy to arrange a showing

History of E-Business Suite Support for IFRS Oracle has participated in the IFRS adoption process along with other software companies as members of an International Accounting Standards Board (IASB) System Company Discussion Group since its founding. Oracle’s accounting domain experts monitor developments in the regulatory environment to ensure our software reflects best practice and compliance. Oracle E-Business Suite had customers reporting under the IFRS standards in the United Arab Emirates and in Switzerland in the early years of the twenty-first century with many customers doing so in the European Union, Australia, and other IFRS stock markets around the world.

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ERP Products Designed for IFRS E-Business Suite, PeopleSoft, JD Edwards

SPECIFIC IFRS FEATURES Specific functionality developed for IFRS

IAS/IFRS SUPPORT SINCE 2000 Thousands of customers overseas reporting under IFRS IAS 2 IAS 16 IAS 18 IAS 21 More …

Inventory Property, Plant Revenue Rec. Currency Segments, etc. …

Inventory, Costing FA, ALM OM, AR, BI, CA Multibook, MRC,GL Flex / ChartFields …

DUAL GAAP ACCOUNTING Ledger Set/Code: GAAP

US Principles Expanded COA Calendar USD

Differences Expanded COA Calendar USD

•

•

Asset Componentization ü

Parent & Child Assets

ü

Child Depreciation rates differ

Impairment Processing ü

Impairment identification

ü

Unplanned depreciation

IFRS MIGRATION PATH Multiple Ledgers or Multi-GAAP

Familiar Features Support IFRS Requirements Many external reporting features are not specific to IFRS but can be used to support IFRS. For example, Oracle E-Business Suite Release 12 includes Sub-ledger Accounting (SLA), a rules based accounting engine that can be used to ensure consistency with accounting and data gathering across the world, while at the same time recording transactions in compliance with local regulations. SLA allows companies to record the same business transaction under multiple accounting conventions. For example, a supplier invoice to record the purchase of goods can simultaneously be recorded using three conventions: US GAAP, IFRS, and local statutory. There are many other features Oracle E-Business Suite customers will be familiar with that are currently used to support US GAAP environments. Some reconfiguration may be necessary to comply with IFRS principles. For example, Oracle Inventory supports a variety of inventory valuation methods. However, to comply with IAS 2, inventory cannot be valued using the LIFO method. IFRS Overview

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For “development” expenses, expenses that might have been expensed immediately under US GAAP would need to be posted to the balance sheet and later released onto the P&L according to the IFRS principles. Customers can comply with this IFRS principle by deploying Oracle Projects, creating cost centers on the balance sheet and using allocations to release the expense; they could also track the development costs into bills of material using Oracle Inventory. The appropriate choice will depend on the circumstances of the customer, the products involved, the underlying business process, etc.

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Unique IFRS Features IFRS does have some principles that translate into requirements that are not required by other GAAP or regulatory standards. Oracle E-Business Suite includes specific features designed to meet these requirements as well. An important example of a feature not widely used outside of IFRS compliance is “componentized assets” where an asset is tracked by its components when those components have different useful lives, (e.g., roof, elevator and frame of a building may have different lives). Under IFRS, each component would be depreciated under its own useful life. Oracle Assets within Oracle E-Business Suite facilitates the grouping of child assets (depreciated separately) into parent assets (managed as one) and further into asset groups.

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The process of deriving and populating the componentized asset values is quite an issue for many customers. In Europe, many had to use real estate appraisers and other asset valuation experts. Oracle provides spreadsheet integration that facilitates importing and updating the revised valuations of the individual components. "As per my observation we can do componentized asset depreciation by using many segments/ separate segment value for each component (make component is another segment)" . Another example is the IFRS approach to asset impairment. The IFRS valuation method is different from US GAAP, and the impairment can be reversed. Asset impairment in Oracle E-Business Suite accommodates both of these options.

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1: IFRS Sub-ledger Data Capture in EBS IFRS Standards that require transaction level data tracking either in generic ERP or in Industry Specific products

Relevant IAS & IFRS Principles • • • • • • • • •

IAS 02 Inventories IAS 11 Construction Projects IAS 16 PP&E IAS 17 Leases IAS 18 Revenue IAS 19 Employee Benefits IAS 23 Borrowing Costs IAS 41 Agriculture IAS 32 & 39, IFRS 07 & 09

Financial Instruments •

IFRS 04 Insurance Contracts

•

Product Support §

–

Standard Features in EBS GL & Sub-ledgers Specific features in sub ledgers and IBU offerings • • • •

–

Inventory Receivables Assets Projects, HCM

General support through the data model and with features like sub ledger accounting

Reconfigure Existing Features •

Using LIFO? Need to reconfigure for IFRS –

–

•

Costing & Inventory support  Standard Cost  Actual Cost Watch that inventory cost the same way worldwide

Expensing Development? Need to capitalize for IFRS – – – –

In GL, assign cost centers to balance sheet accounts Use allocations or BoM to eventually bring to P&L Or In Projects, set up projects as Capitalized…

Special IFRS Sub ledger Features Asset Componentization & Impairment • •

IFRS unlike other GAAPs in the way it handles Assets Componentization –  – þ þ

•

Assets componentized by “useful life” Needs Parent-Child asset feature Generates many more assets Need an API to import data from assessor, realtors, etc. Need to be grouped for ease of management

Impairment • • þ

Impairment is costed differently Can be reversed Need an impairment tool

2: Corporate Accounting for IFRS in EBS Specifies the handling of major transactions & situations:

Relevant IAS & IFRS Principles • • • • • • • • • • • •

IAS 10 IAS 20 IAS 21 IAS 29 IAS 36 IAS 37 IAS 38 IAS 40 IFRS 01 IFRS 05 IFRS 06 IFRS 08

Post balance sheet Government Grants Foreign Currency Hyperinflation Impairment Provisions, Contingent Intangibles Investment Property First Time Adoption Discontinued For Sale Mineral resources Operating segments

•

Product Support §

In EPM

–

Model corporate adjustments

§

–

–

– –

Standard Features in EBS GL & Sub-ledgers Flexfields, segments and other chart of accounts features Reporting Currencies & Revaluation for translation or re-measurement Multiple Ledgers The Accounting Engine, SLA

Approaching IFRS Compliance in ERP Example: IAS 21, Foreign Currency •

IAS 21 Summary (Converged with FAS 52) –

–

•

Two routes from local accounting to shareholder currency: “re-measurement” @ historic rates, “translation” @ current rates Depending on the company’s circumstances and IAS 21 tests

Product Support –

–

–

R12 “Reporting Currencies” and “Revaluation” together designed to do both IAS 21 and FAS 52 Re-measurement and Translation The company chooses, at each overseas location: • Transaction Level, if they need to manage the detail in home currency • GL Activity Level, if they populate a “fat GL” or analytic cube • GL Balance level, for a traditional statement oriented approach HFM also includes IAS 21 and FAS 52 capability

That is: 8 IFRS Compliant options at each location There are many ways to comply with IFRS in all product areas

3: IFRS Financial Statement Preparation in EBS Defines what’s included on Financial Statements, and how they should be presented; work done by CPAs in EPM or GL

Relevant IAS & IFRS Principles

•

Product Support § –

• • • • • • • • •

•

IAS 01 Financial statements IAS 27 Consolidate / Separate IAS 28 Associates IAS 31 Joint Ventures IAS 33 Interims IAS 34 EPS IAS 07 Cash Flow Statements IFRS 01 First Time Adoption IFRS 03 Business Combinations SEC IFRS Regulations under discussion

–

§

–

In EPM Hyperion Financial Management E-Business Suite OFA

Standard Features EBS GL & Sub-ledgers E-Business Suite General Ledgers •

Consolidation features like GCS

•

Reporting features like FSG with BI Publisher

•

Multiple Ledgers & Ledger Sets

Dual GAAP Reporting One of the most commonly asked questions about IFRS in regards to ERP systems is “how is dual or multiple GAAP reporting supported?” Oracle E-Business Suite Release 12 and 12.1 have powerful multiple ledger reporting supported by alternative accounting in sub-ledgers with which an IFRS company can automate dual GAAP reporting. Release 11 also supported dual GAAP capabilities but to a lesser degree. In addition, Oracle Hyperion Financial Management provides consolidation and reporting capabilities oriented to support dual GAAP reporting.

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Approaching Dual GAAP Reporting •

•

•

Depends on the customer’s circumstances vis-à-vis IFRS & US GAAP – Top Down approach in EPM Products – Bottom Up approach in ERP Products EPM Solutions – Ask if the legacy supports the IFRS functionality in Hyperion – Specific IFRS Dimensionality, IFRS rules engine, etc. – See our EPM show! ERP Solutions – EBS: SLA, Ledgers, Multiple Ledgers, Ledger Sets – PeopleSoft: Book Code, Multiple Ledgers, Multi-Book – JDE: Multiple Ledger Types

R11 Dual Reporting example Release 11 : Balancing Segment

Balancing Segment Value example: 99 •

•

•

Manual Adjustment Adjustment from subledger data Recurring Adjustment

Other R11 Multiple Compliance Tools •

•

•

All other segments

Ledger Total

AX, the Accounting Engine MRC Ledgers at FX rate = 1 GCS Ledgers

R12 Dual Reporting : What’s different to 11

Release 12: Sub-ledger Accounting, Multiple Ledgers, Ledger Sets Ledger Set: Primary

GAAP

US Principles Expanded COA Calendar USD

Primary Ledger Account Development Expense Employee Payables

Balance Debit 500,000 1,500 (100,000)

Adjusting Ledger Capitalized Development Development Expense

500,000 (500,000)

1,500

Ledger Set Development Expense Employee Payables Capitalized Deveopment

(100,000) 500,000

1,500 1,500

Credit 1,500

US GAAP 501,500 (101,500)

1,500

Adjustment 501,500 (501,500)

1,500 1,500 -

IFRS (101,500) 501,500

Adjusting

Differences Expanded COA Calendar USD

Accounting Dr

Cr

Subledger Accountin g

Can choose to use: • A (full) Secondary Ledger •

or •

An Adjusting Ledger, (or Segment) • •

Operating Unit

Complete alternative accounting

•

Automatic business reconciliation Fewer adjusting entries Easier feed to Hyperion

R12 Dual Reporting Example

Release 12 : Adjusting Ledger in a Ledger Set Ledger Set

Ledger 1 = Base Ledger 2 = Adjusting

Adjusting Ledger •

• •

Base Ledger Total

Ledger Set Total

Automatic Adjustment from subledger data Recurring Adjustment SLA Driven Adjustments

Endgame: Adopting IFRS, walking away from GAAP A function of your Dual Reporting Choices 1.

Hyperion

Many subsidiaries will retain GL and subsystems in compliance with either • •

2.

ERP GL Multi-GAAP Features ERP Subledgers

3.

Statutory requirements (foreign subsidiaries) Regulatory legislation (utilities, financial services, etc.)

Some will find that their existing GL is quite appropriate, but that they have a few subsystem areas that will require adjustment Others will require that they need to do something more substantial, for example restructuring their business, up to the point of reimplementing

Macro-Level in EPM solution, Transaction-Level in E-Business Suite During the comparative reporting period of the IFRS transition, companies will need to report under dual or multiple GAAPs. Depending on the complexity of the change from GAAP to IFRS compliance, the differences can be managed in a variety of ways. Customers will find themselves on a spectrum from a macro level approach to a detailed transaction approach when it comes to dual GAAP reporting. If a top-down approach is best, they can look to an Enterprise Performance Management (EPM) solution, such as HFM; whereas if a transaction level approach is more appropriate, they can address dual GAAP reporting within their ERP solution. Customers should work with their accounting compliance advisors to identify their circumstances and the appropriate approach.

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To support multiple ledgers in Oracle E-Business Suite, Subledger Accounting will be used to automatically populate the necessary dual accounting entries. Ledgers with similar characteristics can belong to a “Ledger Set” which facilitates treating distinct ledgers as if they were one for reporting and accounting purposes. Together, these features provide powerful dual reporting capabilities.

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Dual Reporting System Strategies Typical Considerations IFRS facilitates WW system stratification

= Companies migrating

Structured for GAAP, not IFRS

Limited IFRS:US GAAP differences GL for National or Regulatory compliance

System Choices: From “Top-down” through Multi-GAAP ledgers and subledger reconfiguration, to the possibility of a do-over

ity x le p m Co

HFM Only

Non sub-ledger

1 GL Only

minor differences

System Choices

Valuation different in IFRS Your IFRS Situation Many IFRS:US GAAP differences

GL& Adjusting

easy reconciliation

2 Distinct GLs over 50% different

New GL

Major difference

Re-implement New ballgame

Transform Your Business & Win with IFRS Going beyond compliance IFRS Change IFRS OK for SEC and for 60+ countries’ statutories

Potential for Business Transformation • Improve dramatically your reporting process, consistency, and management vision • Consider instance, ledger, data consolidation • Consider shared service accounting & reporting centers

IFRS book leases as liabilities

• Consider buying that fleet of planes you use • Evolve your leasing revenue business to an equipment sales business

Capitalize R&D • Move those 2009 Development expenses to the Balance Sheet – recognize in P&L, matched to Revenue, in 20102011

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Q&A

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Thank you

To Learn more: Sambhasiva Rao.V.CH [email protected] http://orclappsfunctional.blogspot.com/

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