2. Session plan  Requirements of First time adoption  Exemption from retrospective application  Prohibition from retrospective application  Disclosures

3. What are the requirements on first time adoption  The Financial Statements must be prepared in compliance of IFRS (Framework/ IFRS/IAS/SICs/ IFRICs)  Financial statements to carry an explicit & unreserved statement that it is in complete compliance of IFRS  Financial statements to carry figures as if IFRS had been adopted right from the day they were in force (retrospective application)  However IFRS 1 provides certain exemptions from retrospective application in the case of many items, on first time adoption.

4. What are the statements to be prepared on first time adoption  Opening IFRS statement of financial position is prepared on the date of transition ( 1-4-2010 in the Indian situation) Therefore at Minimum, following are presented  3 Statements of financial position,  2 Income statements,  2 Statement of changes in equity  2 Cash flow statements and  Notes ( with comparatives)  IFRS to be applied shall be the ones in force as on the end of the first IFRS reporting period ( ie IFRS effective for periods ending on 31-3-2012 in the Indian situation)

5. Non IFRS comparative information  Auditors of X ltd are of the view that the entity shall present (a) the financials for FY 09-10, and 10-11, under old GAAP (b) the opening IFRS financial statement on 1-4-10 and © IFRS compliant financials statement for FY 10-11 and 11- 12 on its first time adoption from FY 2011-12  (a) is not in the scope of IFRS.However there is no prohibition in making such comparatives as additional information.  Any such additional comparisons need to be prominently labeled as not being prepared under IFRS and disclosure for the nature of adjustments (without quantification) that would make it IFRS compliant  ( This means the gap between the previous GAAP information and the information if it was presented under IFRS needs to be explained).

6. Explanation of transition to IFRS  Auditors of Y Ltd wants that the entity on its firstime adoption of IFRS shall explain how the transition from previous GAAP to IFRS has affected it. The company finds it impracticable  Such an explanation is mandatory.The explanation to cover impact on reported financial position, financial performance, and cash flows.  The explanation requires to be included with reconciliation of position between the previous GAAP and IFRS both on account of statement of financial position and comprehensive income  The reconciliation to include material adjustments, if any to statement of cash flow.

7. Reconciliation of equity  Auditors are of the view that the reconciliation presented by first time adoption is too simplistic  The requirement is to present a reconciliation of equity under previous GAAP to equity under IFRS as on date of transition and as on the end of latest period under previous GAAP, giving sufficient details. Auditors are right 1-4-1031-3-11 Equity under Indian GAAP 12001500 Effect of first time adoption 250200 Equity under IFRS 14501700

8. Exemption from retrospective application  Fair value as deemed cost (for PPE, investment property, intangible assets)  Business combinations  Employee benefits – Corridor approach  IAS 21 principles related to foreign operations  Separation of Compound financial instruments  Fair value designation of previously recognized financial instruments  Principles of FV measurement of financial assets and financial liabilities

9. Exemption from retrospective application  Share based payment transactions  Assets/Liabilities in subsidiary, associates & JCE  Insurance contracts  Leases  Decommissioning liabilities included in the cost of PPE – only balance liability to be provided for,  Financial assets or intangible assets accounted for as per IFRIC 12  Borrowing costs

10. Retrospective application prohibited  De-recognition of financial assets and liabilities  Hedge accounting  Change of estimates (inconsistent with previous GAAP)  Non controlling interests

11. Variation in profits of past periods  X Ltd found that it had not accounted for fair value changes in derivatives ( that were not effective hedging instruments) for the years FY ’08, ’09, ’10 and ’11 the effect of which were under reporting of profits 1000 and 1500 for ’08 and ’09 respectively. Effect of ’10 and ’11 were over reporting of profit by 400 and 250 respectively. Derivatives get settled not later than three months  By virtue of Para 25 A of IFRS 1, designating the eligible items at FV thro P/L prospectively is allowed ( ie from 1-4-2010 in Indian case) Therefore non accounting in ‘08 and ’09 is not non compliance.  Assign fair value on 1-4-10 and the effect goes to retained earnings. Effect of fair value change in 2010-11 will affect the profit of that year and is an item of reconciliation

12. Necessity of impairment provision on transition  On 1-4-2010, Y ltd identified impairment losses on certain financial assets which was to be recognized in year 09-10, but not done. Y ltd designated the items under AFS on transition to IFRS on 1-4-10. How would the impairment losses be reckoned on first time adoption in compliance of IFRS  If the impairment loss was to be carried to the opening IFRS statement, then the corresponding asset would be lower by so much erosion in value and the impact would have been in equity ( Retained earnings)  However here the asset will be valued at fair value as per IAS 39, which need not be done retrospectively on first time adoption that does away the impairment loss accounting. Further an AFS need not be subject to impairment

13. Impairment provision omitted in past  AB had suffered capacity shortfall in 2005 and had not provided for impairment losses, since 2005.On first time adoption it was found that the recoverable value of a CGU was less than carrying value by “1000” if impairment was done in 2005.  Retrospective application was needed. The effect is that depreciation should have been provided after considering impairment losses since 2005. Cumulative effect needs to be ascertained while measuring PPE.  In compliance of IAS 36, disclosure of impairment losses recognized or reversed for the first time, in the opening IFRS statement, if any is necessary. This is not that case

14. Fair value measurement of Financial assets or financial liabilities  Shares held for trading used to be valued at lower of cost or realizable price as per AS 13. Fair value of these assets on date of transition is much more than the carrying values and the fair value change could be dated back to 5 years ever since the company had a trading portfolio, although the portfolio underwent changes.  Paragraph 25G of IFRS 1 exempts from retrospective application of IAS 39 that requires measurement of financial assets or financial liabilities at fair value on initial recognition ( or on subsequent measurement, wherever it is required as per IAS 39 )  Effectively that allows prospective presentation of financial assets and financial liabilities as per IAS 39, from the date of transition

15. Redeemable shares  X had issued 10% redeemable preference shares in 2005, redemption after 7 years at face value. Company had been showing, the outstanding share preference capital, as part of share capital and hence equity.  By substance it is a liability, rather than equity. Therefore on date of transition it shall appear as liability in the financial statement books. Measurement has to be at amortized cost as per IAS 39.  Dividend that was not charged to P/L would have overstated the profit in the past. But its effect was offset when dividend was charged to equity on payment. Unless there are different line items to reflect the two under the head equity, no adjustment on this count is necessary

16. Accumulated preference share dividend  If the terms of issue ( in the previous case) provided for payment of dividend Rs 50 for all the years together with principal on maturity, would it have made any difference  Effective rate of dividend would have been 8.45% instead of contractual rate 10%. Amortised cost of liability that would be reflected on 1-4-10 would have been different  Dividend payable classification – current -non current needs re-assessment

17. Exemption on Compound instruments  Separation of equity and liability from a compound instrument at inception is the requirement of IAS 32  Retrospective application, apart from bifurcating the two components, also requires identifying accumulated interest accreted on liability component, considered in retained earnings. This is practically difficult.  IFRS 1 exempts from such separation if the liability element is not outstanding, on the date of transition. ( IFRS 1.23)  Where liability and equity components are outstanding, retrospective application required

18. Instrument with put options  Debenture holders are given option to convert 60% of the debenture in to equity shares after three years at the average market price of the equity for preceding three months. 30% will be converted to two equity shares for every 5 debenture. Balance (inclusive of fraction value) is payable in cash after 5 years. Those who do not exercise option of conversion also get cash  60% conversion option gives variable number of shares as means of settlement which is a liability as per IAS 32.Cash payable also is a liability. Fixed number of shares for settling the liability is “equity”  Breaking up the equity and debt element at the inception is needed under IFRS.

19. Implication of that instrument on transition  There is no exemption from retrospective application ( ie breaking into debt and equity since inception) if debt element is outstanding as at transition date  Out of the debenture proceeds on issue, liability part should have been recognized at fair value as per IAS 39. Balance should have been the equity element as per IAS 32  Fair value of debt is the PV based up on comparable instrument without conversion option  Interest attributable to the debt component only should have been charged to P/L  Amortised cost to be determined on the basis of effective rate of interest

20. Share warrants  Outstanding share warrants amounted to 1000, entitling holders to opt for 100 equity shares were outstanding on the date of transition. Option premium was considered as revenue at the time of receipt.Company had treated the share warrants as liabilities in previous GAAP.  As the number of shares to be issued is fixed, the share warrants are not liabilities but equity. Option premium is the part of equity that should have been shown as a line item under equity.  Retrospective application changes the past profits and creates a new line item under equity on account of option premium. It can be added with “warrant” account also.

21. Redeemable preference shares  Preference shares redeemable are debts  Preference shares with put option with holder are debts  Preference shares with call option with issuer are not debts

22. Foreign currency translation difference adjustment  X had opted for the AS 11 modification pronounced by MCA, in March 2009, under which FCTDA account showed a debit balance as reduction from reserves 350 on 31-3-09, and 325 on 31-3-10. P/L account of the company was credited with 500 in 07-08 on exchange difference and amortized with 175, 325 and 425 during 08-09, 09-10 and 10-11 respectively.  On date of transition, the FCTDA account shall not appear in the opening IFRS statement and the effect goes to equity account.  As IFRS comparatives for 10-11 will not recognise the carried over effect of FCTDA 325 unlike in IGAAP, the profits between the two would differ by as much amount and reconciliation to capture the gap

23. Bank limits  X has a bank limit of 200 with variable interest rate. On date of transition to IFRS, fair value of the liability was sought to be assessed for presentation. Is it correct  Bank limit, is a liability that can not come under trade liability. Therefore no fair valuation is required as per IAS 39.  The liability will be measured at amortized cost in this case.  Since effective rate of interest and contractual rate are same, carrying value and amortized cost are same. Therefore transition invites no accounting adjustment to equity.

24. Written options  X used to amortize written option premiums over the period of contract as income.  On the date of first time adoption, this has to be measured at fair value through P/L account, being a derivative liability.  IFRS 1 exempts from retrospective classification of financial instruments “at FV thro P/L” ( IFRS 1.25A)  Therefore on the date of transition, the fair value shall be captured as liability. Incorrect recognition of option premium as income will not be adjusted as application is prospective, thereby the effect goes to Retained earnings.

25. Staff advances  Staff advances at concession rate of interest, has been outstanding on the date of transition 1000. Company had the practice of recognizing interest on accrual at contractual rates. The advances were as old as 10 years and of the subsequent periods.  The item comes under financial asset – Loans and receivables – requiring amortized cost presentation. There is no exemption from retrospective application. Therefore effects of (a) presentation at amortized cost (b) effect of charging of excess over fair value in P/L on initial recognition © effect of interest recognition under effective rate etc.. Would go to respective equity headsequity heads

26. PPE - Fair value or revaluation as deemed cost  On the date of transition ( 1-4-2010) fair value or revaluation price( approximating fair value) can be used as deemed cost for PPE (fixed assets), Intangible assets and investment property. (IFRS1.16-19)  Based on such deemed costs, entity can follow cost basis accounting.  If they choose an accounting policy of revaluation as permitted by IAS 16, the value to represent the fair value consistently

27. Change In accounting policy  Does first time adoption of IFRS require disclosure as per IAS 8 on change in Accounting Policy.  IAS 8 requires disclosure regarding change in Accounting Policy, as a matter of general rule.However on first time adoption, change in policies in compliance of IFRS are not required to be disclosed as per IAS 8

28. Early application of an IFRS  An IFRS is introduced, but not yet mandatory as on 31-3- 2012 (for the first IFRS statements of a company). What are the prescriptions for its applicability  The company is not required to follow non mandatory IFRS on first time adoption.If chooses to adopt early, there is no restriction  Transitory provision in the said new IFRS can be used even in a case of early application.  IAS 8 requires disclosure on all IFRS that are not effective and not adopted by the entity along with the likely implication upon adoption

29. Employee Benefits  IFRS 1 exempts entities from applying “corridor approach” retrospectively for complying with IAS 19. All other aspects in IAS 19 require retrospective application  This means Corridor approach can be used prospectively and past accumulated actuarial losses can be recognized on the date of transition, by charging to appropriate equity account.  Availing this exemption means availing for all the plans  Disclosure as per IAS 19 on unrecognized actuarial losses, would carry the facts on prospective application, by virtue of availing this exemption

30. Leases  How would ‘lease’ of past periods be considered on first time adoption..  IFRIC 4 gives guidance as how to test whether an arrangement constitutes a lease or not. The principle is to understand the substance of the contract.  On first time adoption, the guidance in IFRIC 4 can be used to determine whether an arrangement is a lease or not. If it is a lease prospectively since date of transition, IAS 17 needs application  In the Indian situation there is no significant difference between AS 19 and IAS 17 and therefore, there is less scope for gaps on first time adoption.

31. Business combinations took place prior to transition  IFRS 3 requires assets and liabilities to be accounted at fair value on the day of acquisition and goodwill arises consequently for the difference in purchase consideration for the unidentified assets. Minority interest also requires recognition ( in consolidated accounts). Employee liability, Contingent liabilities, Income taxes etc require recognition as specified in IFRS3  However for Business combinations happened before transition date to IFRS, retrospective effective is not mandatory.  However the entity can opt for retrospective application of IFRS 3 if it chooses provided IAS 27 also is complied with.  Suppose there are a few business combinations prior to date of transition, if it chooses to account for the first under IFRS 3, then the others also must comply.

32. Application of IAS 21 in a past business combination  In a past business combination, if IAS 21 was applied it would have resulted in certain fair value adjustments to assets and liabilities and to the value of goodwill. But it was not done. What is the effect on first time adoption  IFRS I exempts application of IAS 21 retrospectively in a past business combination.  If an entity chooses it can apply it retrospectively too.  In the Indian context if AS11 was complied for past business combination, this exemption made no material difference as AS11, is not inconsistent with IAS 21  Prospective application means on date of transition, translation is done as per IAS 21 and exchange difference accounted for

33. Consequences of a past business combination on first time adoption If IFRS 3 was not retrospectively followed  First time adopter to recognize all assets and liabilities taken over.  But, shall not recognize those that are not IFRS compliant  There could be items that were not recognized under previous GAAP, if they can be recognized under IFRS, recognize them  There could also be items that were recognized under previous GAAP, but can not be recognized under IFRS, derecognize them  Resulting changes of the above would be adjusted in equity account  However effect of derecognizing of any intangible assets has to be to the goodwill account ( unless goodwill was offset against equity under previous GAAP – which is not followed in India)

34. ‘Measurement’ on first time adoption in the wake of past business combination  Assets /liabilities from past business combination, if are to be valued at fair value on subsequent measurements under the Accounting policies under IFRS, first time adopter to measure them accordingly and the resultant effect goes to equity (rather than goodwill).  If assets are to be measured at cost for depreciation or amortization under IFRS, then the carrying value of those items under previous GAAP becomes deemed cost.  Para 16 – fair value being deemed cost for PPE, Intangible assets etc.. Not applicable therefore.

35. Changes to Goodwill from acquisition on first time adoption  A past business combination, accounted under previous GAAP, reflected goodwill. If IFRS 3 is not applied retrospectively, how would the goodwill be carried on first time adoption.  Goodwill will be carried with the same amount (as in previous GAAP ) to the IFRS books, subject to following adjustments  If any intangible asset was recognized under previous GAAP, which is not to be recognized under IFRS 3 (read with IAS 38), derecognizing that intangible asset would be adjusted to goodwill account  If any asset that was subsumed in goodwill account and was not recognized under previous GAAP, has been recognized on date of transition, the goodwill gets affected by the adjustment. ( adjustment to deferred taxes and non controlling interest is consequential, depending on cases)  IAS 36 requires testing goodwill for impairment regardless of indication of impairment. Therefore consequential adjustments necessary.

36. A sample IFRS disclosure on business combination  “ Since the date of transition to IFRS meant for EU is 1.4.2006 and the practice of preparation of consolidated financial statement (CFS) under pooling method has been in vogue since much longer period under the old GAAP, the stipulation of IFRS-3 laying down purchase method of incorporating consolidated accounts had to be done away with for business combination lasting since before transition date.  However purchase method has been applied for consolidation / merger of any new entity or change in business combination of existing entities forming the group”.  Comment- exemption under IFRS 1.15 is availed, for past business combinations. Language could have been refined.

37. Restatement of Goodwill for adjustments in past  Goodwill created at the time of a past business combination was amortized partly. Can the Goodwill be restated with the pre-amortized amount on first time adoption  No. carrying amount under previous GAAP becomes the carrying amount on first time adoption

38. Goodwill not accounted from past business combination  A the parent on acquiring B as a subsidiary had not prepared consolidated financial statements under previous GAAP. On first time adoption, how is the compliance ensured.  IFRS requires mandatory consolidation of subsidiary  Difference between parents investments in its books and Parent’s interest in Subsidiary’s net assets (after presenting all the assets and liabilities according to IFRS requirement as on the date of transition, including deferred tax accounting ) will be the goodwill in the consolidated records.  Non controlling interest also would be reflected in the consolidation

39. Intangible assets  Can intangible assets also be valued at fair value on date of transition just as fixed assets  Yes, if the assets can be recognized under IAS 38, their value can be the deemed cost on the date of transition, just as in the case of PPE  Similar option is available to Investment property also

40. Exchange rate translation reserve  Exchange rate differences on foreign operations are accumulated in a special equity account until investments are disposed as per IAS 21.  A retrospective application of this principle would mean identifying accumulated exchange difference on this account as on date of transition and showing separately  IFRS 1 gives option to do away with this on retrospective basis, which means as on date of transition the exchange rate difference accumulated can be Zero.  Consequently gain or loss on disposal of foreign operation shall exclude the cumulative exchange difference before the date of transition to IFRS.

41. Hedge Accounting  Under the previous GAAP, net of the foreign exchange payables and receivables was identified as a hedge against a highly probable forecast transaction. How would it get affected on first time adoption  IAS 39 prescribes norms of hedge accounting and conditions.  IFRS 1 prohibits retrospective application of Hedge accounting norms. That means on date of transition, all derivatives shall be valued at fair value and there shall not be any deferred unrecognized losses / gains  The opening IFRS statement shall not carry any hedging relation ship which is not in compliance of IAS 39. Therefore any hedges that existed under previous GAAP, which is not in compliance of IAS39, to discontinue hedge accounting before transition.  Transactions happened before transition date shall not be retrospectively designated as hedges

42. Estimates on First time adoption  Estimates under IFRS at the date of transition has to be consistent with estimates made under previous GAAP  If there are objective evidences that those estimates were in error, appropriate modification in estimates is possible.  If the adoption results in change of accounting policy, say, an employee termination liability is accounted under constructive obligation as per IAS19, the estimates to reflect necessary adjustment for such policy changes.  Variables such as interest rates, foreign exchange rate, market prices etc to reflect conditions existed on the date of transition

43. Events after balance sheet date  Transition date is 1-4-2010. Information received on June 1 requires revision of an estimate made under previous GAAP, as per IAS 10. Should the opening IFRS have been amended with changed estimate. What is the implication on first time adoption.  Changes in estimates is a prospective adjustment item. Under IFRS 1 also, there is prohibition in changing opening IFRS statement consequent to adjusting events (requiring change of estimates )  However if the change was a change of policy or due to error, the effect of it would affect the financials (P/L) of 2010-11

44. Non current assets held for sale  Non current assets held sale ( disposal group) is valued at lower of cost or net realizable price as per IFRS 5.  Entities having transition date after 1-1-05 shall apply IFRS 5 retrospectively. Accordingly all the items under this classification to appear as per IFRS 5 in the opening IFRS statement  To give effect to retrospective application, transition provisions on 1-1-05 in IFRS 5 can be used as on that date. Practically that means retrospective application since 1-1-05

45. Non controlling interest  On consolidation, IAS 27 is required to be complied with, which requires presentation on non controlling interest separately. Total comprehensive income also requires separation as to parent interest and non controlling interest  In case parents ownership interest undergoes change, without resulting in loss of control, that also would reflect in non controlling interest.  When there is loss of control over subsidiary, derecognition of assets, liabilities, non controlling interest and recognition of consideration received and gain or loss of disposal etc.. as per IAS 27 required.  First time adopter shall apply above requirement of IAS 27 prospectively from the date of transition

46. Reconciliations in the interim reports in First IFRS statement  Are the requirements for reconciliation on first time adoption, same for interim periods also ?  Yes, In case of Interim period reports comparative reconciliation as in the case of full reporting period is required

47. IFRS Adoption date at variance in the case of a parent  If an entity adopts IFRS later than its subsidiary, in the consolidation it shall carry the figures as per the subsidiary’s separate financials, subject to consolidation adjustments  If a parent company becomes a first time adopter for its separate financial statements earlier or later than for its consolidated financials, it shall measure its assets and liabilities at the same amounts in both the financial statements.

48. Disclosure  In addition to disclosure in the form of explanations (reconciliations) and unreserved statement on compliance with IFRS the following disclosures also needed  Fair value of financial assets /financial liabilities designated in each category ( At FV thro P/L or AFS ) as on date of designation and their classification and value in the previous financial statements  In the case PPE, Investment Property and Intangible assets, used the fair value as deemed cost, the aggregate of fair value of those items, aggregate adjustment to the carrying amount reported under previous GAAP.

49. Thanks