Indian AS 101 - First time adoption of Indian Accounting standards

Accounting standards are issued by ICAI from time to time to ensure the accuracy and reliability of financial statements. Today country borders are no barriers for businesses or investments. Hence India is moving towards convergence of Accounting standards with IFRS ( International Financial Reporting Standards) known as Indian AS. This convergence is taking place in a phased manner.

When an entity adopts the Indian Accounting standards for the first time, the presentation of the financial statements will depict all the changes as per the converged standards. Therefore the board has issued this standard to ensure smooth application.

What is the purpose of this standard?

The purpose of this standard is to ensure that the company’s first Ind AS financial statements and interim statements contain information that is transparent and comparable, the cost does not exceed the benefits and the statements provide a suitable starting point for accounting in accordance with Indian Accounting Standard.

Which statement does this standard apply to?

This standard applies to the first Ind AS financial statements and each interim financial report if any. But this standard does not apply to changes in accounting policies for an organisation that already applies Ind AS, such changes are subject of requirements of Ind AS 8 or specific transitional requirements of other Ind AS.

• Implementation of Ind AS
• Selection of Accounting Policies
• Preparation of Opening Ind AS Balance sheet
• Presentation and disclosure in an entity’s in Ind AS Financial Statements and Interim Financial Reports

Let’s take a look at some of these steps in detail:

Selection of Accounting Policies

An entity must use the same accounting policies in its opening Ind AS balance sheet and throughout all periods that are presented in the first Ind AS. Those accounting policies must comply with all the Ind AS effective during the reporting period of first Ind AS except as stated in Ind AS 101.

The accounting policies that are used in the preparation of the opening Ind AS Balance sheet may differ from the ones used by the entity while using previous GAAP on the same date. The resulting adjustments arise from events and transactions prior to the date of the Opening Ind AS Balance sheet and hence must be adjusted in retained earnings.

Preparation of Opening Ind AS Balance Sheet

On the date of transition to Ind AS, an entity shall prepare and present an opening Ind AS Balance Sheet. This is the starting point for it’s accounting according to Ind AS subject to requirements of Ind AS. Except for restrictions spelt out in the AS, an entity must in its Opening Ind AS Balance sheet:

• recognise all assets and liabilities for which recognition is required by Ind AS
• derecognise items as assets and liabilities if Ind AS does not permit such recognition.
• if the Ind AS requires a particular asset, liability or component of equity to be recognised differently from its previous recognition under GAAP, then reclassify it.
• apply Ind AS in measuring all recognised assets and liabilities.

Presentation and Disclosure

This Ind AS does not provide exceptions from the presentation and disclosure requirements in other Ind AS. The Ind AS established two types of exemptions from the requirement that an entity must apply each Ind AS in preparation of Opening Ind AS Balance sheet.

Prohibit retrospective application of some aspects of Ind ASs Grant exemptions from some requirements of Ind ASs

The exemptions to the retrospective application of other Ind AS are: –

Derecognise financial assets and liabilities

An entity can derecognise assets and liabilities as per AS 109, prospectively from the date of transition to the Ind AS. However it can derecognise it retrospectively provided the information required for derecognising it as per Ind AS 109 was obtained at the time of initially accounting for these transactions.

Hedge Accounting

As required by Ind AS 109 on the date of transition to Ind AS an entity shall measure all derivatives at fair value and shall eliminate all deferred losses and gains arising on derivatives on account of previous GAAP and recognise them as assets and liabilities.

As per Ind AS 109, if a hedge accounting does not qualify for accounting then it should not be recognised in the opening Ind AS. –

Non–controlling interests

The following requirements of Ind AS 110 shall be applied by prospectively from the date of transition to Ind AS by a first-time adopter:

(a) that total comprehensive income is attributed to the owners of the parent and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance;

(b) for accounting for changes in the parent’s ownership interest in a subsidiary that do not result in a loss of control; and

(c) for accounting for a loss of control over a subsidiary, and Non-current assets held for sale and discontinued operations.

However, if a first-time adopter elects to apply Ind AS 103 retrospectively to past business combinations, it shall also apply Ind 110.

Classification and measurement of financial asset

An entity shall assess whether a financial asset meets the conditions specified in Ind AS 109, on the date of transition from previous GAAP to Ind AS. If it is impracticable to assess the time value of money element in accordance with Ind AS 109 and/or whether the fair value of prepayment feature is insignificant as per Ind AS 109 on the basis of the facts and circumstances that exist on the date of the transition to Ind AS then the entity shall assess the contractual cash flow characteristics of that financial asset on the basis of the facts and circumstances that existed on the date of transition and accordingly disclose it without taking into consideration the requirements of Ind AS 109.

If it is impracticable* for an entity to apply retrospectively the effective interest method in Ind AS 109, the fair value of the financial asset or the financial liability at the time of transition shall be the new gross carrying amount of that financial asset or the new amortised cost of that financial liability.

*impracticable as defined in Ind AS 8

Impairment of financial assets

At the time of transition, the entity shall determine the credit risk, at the date when such instruments were initially recognised. For determining if there has been a significant increase in credit risk, if an entity has to incur undue cost or effort then an entity shall recognize a loss allowance at an equal amount to lifetime expected credit losses at each reporting date until that financial instrument is low credit risk at a reporting date. 

For determining the loss allowance on financial instruments prior to the date of initial application, an entity shall consider information that is relevant in determining or approximating the credit risk at initial recognition.

Embedded Derivatives

Assess if an embedded derivative needs to be separated from the host contract and accounted for as a derivative on the basis of the conditions at later of the date that existed first became a party to the contract and the date a reassessment as required by Ind AS 109.

Government Loans

A first-time adopter shall classify all government loans received as a financial liability or equity instrument as per Ind AS 32. The exception being a loan taken at a rate lower than the market rate. Also, apply the requirements the of Ind AS 109 and Ind AS 20 prospectively to the government loans existing at the date of transition. 

However, an entity is not precluded from applying the requirements retrospectively provided the information required to do so is available at the time of accounting. The standard also defines other exemptions available and in detail disclosure requirements.