Ind As Implementation Guide

Ind AS
Implementation
Guide
February 2020
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Foreword
About Indian Accounting Standards (Ind AS)
implementation in India
Ind AS involve application of several new and
complex concepts, which require a significant level of
judgement and estimation, accompanied by detailed
qualitative and quantitative disclosures. As Indian
entities gain experience of implementing Ind AS, they
should also support consistent application of the
standards.
The Ind AS Technical Facilitation Group (ITFG)
The Accounting Standards Board (ASB) of the
Institute of Chartered Accountants of India (ICAI)
constituted the ITFG to provide clarifications on
various issues related to the applicability of Ind AS
and its implementation. The preparers, users and
other stakeholders have raised a number of issues to
ITFG. Till date, ITFG has issued 23 bulletins covering
complex implementation issues on various Ind AS
such as, revenue from contracts with customers,
leases, consolidation, financial instruments, business
combinations, income taxes, etc.
Educational Materials (EMs) on Ind AS
The ICAI through its Ind AS implementation group has
brought out 14 EMs till date on various Ind AS such as
revenue from contracts with customers, presentation
of financial statements, consolidation, business
combinations, leases, etc. The EMs are in the form
of Frequently Asked Questions (FAQs) which cover
Ind AS implementation issues which are expected
to be encountered frequently while implementing a
standard.
Expert Advisory Opinions (EACs) on Ind AS
The Expert Advisory Committee (the committee) of
the ICAI has till date issued 21 EACs on some key
implementation issues under various Ind AS. These
EACs are based on the facts and circumstances
of each case as presented to the committee, the
accounting/auditing principles and practices and the
relevant laws applicable on the dates the committee
finalised the respective EAC opinions.
© 2020 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
About the publication the ITFG clarifications. These are expected to assist
Our publication ‘Ind AS Implementation Guide’ is companies in effective implementation of Ind AS and
designed to assist companies in understanding guidance provide a context for users of financial statements
and key principles on Ind AS issued in the various ITFG to better understand the information reported by
Bulletins, EMs and Ind AS EAC opinions when preparing companies under Ind AS.
financial statements in accordance with Ind AS. The EAC opinions
publication is designed to provide a brief overview of For ease of understanding and use, we have included in
the Ind AS and highlights the key differences from the every chapter a summary of key takeaways from the Ind
respective International Financial Reporting Standards AS EAC opinions issued by ICAI.
(IFRS). It contains 10 chapters, which provide an
essence of the principles within Ind AS pertaining to References to EMs
each topic. Some chapters may contain multiple topics/ This section contains a reference of the issues
Ind AS application issues. discussed in the EM pertaining to a standard in the form
The publication is based on the Ind AS notified by the of a table.
Ministry of Corporate Affairs (MCA), including Ind AS Need for judgement
115 and Ind AS 116. It also includes all the issues of the This publication intends to highlight some of the
23 clarifications’ bulletins that have been issued by practical application issues with the help of certain facts
ITFG till 10 February 2020, reference to 14 EMs and key and circumstances detailed in the examples used. In
principles highlighted in the 21 EAC opinions on Ind AS practice, transactions or arrangements involving Ind
issued by the ICAI. AS may be complex. Therefore, further interpretation
Each chapter includes the sections below: and significant use of judgement may be required for
an entity to apply Ind AS to its facts, circumstances
Key principles
and individual transactions. Further, some information
This section provides a brief overview of the significant contained in this publication may change as practice and
principles prescribed within Ind AS covered by the implementation guidance continue to develop. Users
chapter. It highlights key principles articulated in the are advised to read this publication in conjunction with
specific Ind AS to assist preparers and other users of the actual text of the standards and implementation
financial statements in understanding the significant guidance issued, and to consult their professional
requirements related to the topics covered in each advisors before concluding on accounting treatments for
chapter. their transactions.
Significant differences from IFRS References
While Ind AS is largely converged with the IFRS issued References to relevant guidance and abbreviations,
by the International Accounting Standards Board when used, are defined within the text of this
(IASB), there are certain additional requirements/ publication.
exemptions provided in Ind AS, or certain requirements/
exemptions provided in IFRS that have been excluded
from Ind AS, known as ‘carve-outs’ from IFRS. These
divergences from IFRS are intended to smoothen the
implementation and applicability of the standards from
an Indian context.
Post implementation of Ind AS, many corporates
may continue to report under the IFRS framework.
This publication therefore highlights the significant
differences from IFRS in each chapter.
Practical implications arising out of ITFG clarifications
This section summarises the various Ind AS clarifications
issued by the ITFG in simple and easy to understand
Sai Venkateshwaran Ruchi Rastogi
Partner and Head Partner
language. Our publication captures their essence CFO Advisory Assurance
by highlighting the key principles that emerge from KPMG in India KPMG in India
Table of
contents
Sr. No. Topic Page No.
1. Consolidation 1
2. Business combinations 15
3. Financial instruments 25
4. Tangibles and Intangibles Assets 47
5. Income taxes 57
6. Revenue 67
7. Leases 75
8. Effects of changes in foreign exchange rates 87
9. First-time adoption of Ind AS 91
10. Other topics 109
Presentation of Financial Statements
Statement of Cash Flows
Accounting Policies, Changes in Accounting Estimates and Errors
Accounting for Government Grants and Disclosure of Government Assistance
Borrowing Cost
Related Party Disclosures
Separate Financial Statements
Earnings per Share
Provisions, Contingent Liabilities and Contingent Assets
Operating Segments
Applicability of Ind AS
Other opinions by EAC
Other EMs
1
1. Consolidation
Summary
This chapter covers:
• Ind AS 110, Consolidated Financial Statements
• Ind AS 111, Joint Arrangements
• Ind AS 28, Investments in Associates and Joint Ventures
In India, the Companies Act, 2013 (2013 Act), mandates preparation of Consolidated Financial
Statements (CFS) in addition to the requirement of preparing Separate Financial Statements (SFS),
if a company has one or more subsidiaries, associates or joint ventures. Ind AS 110 establishes
principles for the presentation and preparation of CFS when an entity controls one or more other
entities.
Ind AS Implementation Guide I 2
Key principles
• An investor controls an investee when the former • Losses relating to subsidiaries have to be attributed
is exposed to, or has rights, to variable returns from to NCI, even if it results in a negative balance.
its involvement with the investee and has the ability
• A limited exemption from consolidation is available
to affect those returns through its power over the
to an investment entity, which is not required to
investee.
consolidate its subsidiaries if it measures all of
• Only substantive rights are considered while its subsidiaries at fair value through profit or loss in
assessing whether an investor controls the relevant accordance with Ind AS 109, Financial Instruments.
activities.
• An associate is an entity over which the investor
Significant differences from IFRS1
has significant influence which is the power to
participate in the financial and operating policy • IAS 28, Investment in Associates and Joint
decisions of the investee but is neither control nor Ventures, requires that for the purpose of
joint control of those policies. applying equity method of accounting in
• If an entity holds, directly or indirectly (e.g. through the preparation of an investor’s financial
subsidiaries), 20 per cent or more of the voting statements, uniform accounting policies should
power of the investee, it is presumed that the entity be used. In other words, if the associate’s
has significant influence, unless it can be clearly accounting policies are different from those of
demonstrated that this is not the case. Conversely, the investor, the investor should change the
if the entity holds, directly or indirectly (e.g. through financial statements of the associate by using
subsidiaries), less than 20 per cent of the voting the same accounting policies.
power of the investee, it is presumed that the entity • In Ind AS 28, the phrase, ‘unless impracticable
does not have significant influence, unless such to do so’ has been added in the requirement
influence can be clearly demonstrated. A substantial for uniform accounting policies. This has been
or majority ownership by another investor does done, since certain associates, for example,
not necessarily preclude an entity from having Regional Rural Banks (RRBs), being associates
significant influence. of nationalised banks, are not in a position to
• A joint arrangement is an arrangement over which use the Ind AS as these may be too advanced
two or more parties have joint control. There are two for RRBs.
types of joint arrangements - a joint operation and • IAS 28 requires any excess of the investor’s
joint venture. share of net assets in an associate over the
• Non-Controlling Interests (NCI) in subsidiaries acquisition cost to be recognised as a gain in
is required to be presented in the consolidated the profit and loss account. Ind AS 28 requires
balance sheet within equity, separately from the such a gain to be recognised as a capital
equity of the owners of the parent. reserve in the balance sheet.
1. Indian Accounting Standards (Ind AS): An Overview

(Revised 2019) issued by ICAI.
3
Guidance from ITFG clarifications In order to apply Ind AS to a group, relationships

between entities (such as holding/subsidiary/
The control model joint venture/associate of an entity) should
Principle of control as per Ind AS 110 to be applied be assessed on the basis of relevant Ind AS
Control definition as per Ind AS 110 would be applied (regardless of the status of such an entity under
to assess whether an investor controls another entity. previous GAAP). An entity that has to apply
An entity was not required to consolidate a subsidiary Ind AS is required to perform a detailed and
under AS 21, Consolidated Financial Statements, careful assessment based on its interests in/
(previous GAAP) when control was intended, to be relationships with other entities for preparing
temporary or there were severe long term restrictions CFS. These interests may be in the form of
that impair the ability to transfer funds in the near investment in equity instruments, representation
future. However, Ind AS 110 does not provide an on board of directors, interest in unstructured
exemption from consolidation due to temporary or special purpose vehicle, participating rights
control or severe long term restrictions. An entity is held under shareholder’s agreements, etc. This
required to consolidate all its subsidiaries unless they exercise may involve significant time and efforts
meet the specific exemption criteria (i.e. meets the for some companies.
recognition criteria of an investment entity).
(ITFG 5, Issue 1)
Consider potential voting rights while assessing

whether an investment meets the criteria of an associate
A Ltd. C Ltd.
Warrants
26% B Ltd.
In a certain situation, an entity (A Ltd.), invested 26 B Ltd. is an associate company of C Ltd. since C Ltd.
per cent in another entity B Ltd. and accounted it as an has potential voting rights over B Ltd.
associate for statutory reporting requirements under
In the given scenario, in accordance with Ind AS, B
previous GAAP. Another entity C Ltd. owned share
Ltd. also ceases to be an associate of A Ltd. Therefore,
warrants that were convertible into equity shares of B
B Ltd. need not to comply with Ind AS from the
Ltd. and had potential voting rights, which if exercised
financial year 2016-17 though the company was an
would give additional voting power to C Ltd. over the
associate company of A Ltd. under previous reporting
financial and operating policies of B Ltd.
framework.
The definitions given in Ind AS would be applied both
If C Ltd. voluntarily complies with Ind AS or meets
for the purpose of preparing financial statements and
any specified criteria on standalone basis, then B Ltd.
determining the relationship with another entity (i.e.
being its associate company as per Ind AS 28 should
subsidiary, associate, joint venture, etc.)
comply Ind AS from the same financial year from
In the present case, by applying the relevant which C Ltd. starts preparing financial statements as
requirements of Ind AS 28, it has been concluded that per Ind AS. (ITFG3, Issue 5)
Entities included in CFS

Section 8 companies to required Ind AS financial
statements if covered under road map
The companies covered under Section 8 of the
2013 Act, are required to prepare Ind AS financial
statements unless and until any exemption is provided.
(ITFG 6, Issue 2)
Consequently, Section 8 companies are considered
to be covered in the Ind AS road map, if they meet
the specified criteria themselves or are subsidiaries,
associates or joint ventures of an entity that is covered Accounting of amounts outstanding towards
by the Ind AS road map. retired partners’ capital balances
Consolidation of non-corporate entities For discussion on the topic, please refer chapter 3,
In a certain situation, a company A Ltd. (that is covered Financial instruments. (ITFG 15, Issue 9)
in the Ind AS road map) has an investment in a non- Structured entities
corporate entity, for example, a partnership firm.
Though Ind AS is not applicable to partnership firms, Consolidation by an investment entity
but the purpose of consolidation, the partnership Ind AS 110 provides that an entity is an investment
firm will be required to provide financial statements entity, if it meets the following ‘three essential tests’:
data prepared as per Ind AS to A Ltd provided the a. Obtains funds from one or more investors for
partnership qualifies as a subsidiary/joint venture/ the purpose of providing those investor(s) with
associate of A Ltd. (ITFG 11, Issue 7) investment management services
b. Commits to its investor(s) that its business purpose
Not only an entity that falls within the Ind AS
is to invest funds solely for returns from capital
road map would be required to perform a
appreciation, investment income, or both and
detailed and careful assessment based on its
interest/relationships with other entities, other c. Measures and evaluates the performance of
entities too (e.g. non-corporate entities) would substantially all of its investments on a fair value
be required to put in dual financial information basis.
systems if they fulfil the criteria of a subsidiary, In a situation, A Ltd. is an investment entity as per Ind
associate or joint venture. This exercise may AS 110 which holds controlling stake in several start–
involve significant time and efforts for some ups including exit strategies for each of its investments
companies/entities. in the start-up companies.
In the Year 1
Funds from several overseas investors
A Ltd.
(investment
entity)
I. II. III.
(Start-up ) (Start-up ) (Start-up )
5
Subsequently, A Ltd. incorporates a wholly-owned to provide investment management services to the

subsidiary, S Ltd. which invests in infrastructure e.g. investors as well as to third parties.
office space, Information Technology (IT) equipment S Ltd. is funded by equity contribution from A Ltd.
and specialised software and hires skilled employees Other than the above, A Ltd. has no other asset,
liability or activity.
incorporates
A Ltd. (investment entity) S Ltd.
Funds from several (wholly owned
overseas investors subsidiary)
A Ltd. does not have any exit strategy in place for its In the Year 2
investments in S Ltd. In its CFS, A Ltd. values the The above position continues in Year 2.
investments in start-up subsidiaries at Fair Value
Through Profit and Loss (FVTPL) and consolidate In the Year 3 (i.e. the year of re-structuring)
S Ltd. as per Ind AS 110. A Ltd. transfers investments (in start-ups and S Ltd.)
to a newly formed wholly- owned subsidiary, B Ltd.
against shares in B Ltd.
A Ltd. S Ltd.
B Ltd.
A Ltd. does not have any exit strategy in place for its
investment in B Ltd., but the exit strategies for each of Ind AS 110 provides that an investment entity is
the investments in start-up companies continue to be not required to have a potential exit strategy for
in place. its investment in another investment entity that
was formed in connection with the entity for legal,
ITFG clarified on the following accounting issues:
regulatory, tax or similar reasons, provided that
In the post-restructuring scenario, whether A Ltd. the investment entity investee has a potential exit
is still an investment entity? strategy for all of its investments that could be
In the post-restructuring scenario, A Ltd. holds the held indefinitely.
investments in subsidiaries indirectly through B Ltd.
Further, B Ltd. satisfies all the three conditions of It was concluded in this case that even though A
definition of the investment entity as given in Ind AS Ltd. does not have an exit strategy in respect of B
110 for classification as an investment entity. Ltd., it still qualifies as an investment entity since B
While A Ltd. has no exit strategy in place for its Ltd. has exit strategies in place in respect of start-
investment in B Ltd., exit strategies for each of the up companies and satisfies the other conditions for
investments in start-up companies are still in place. classification as an investment entity.
Hence, in the given case A Ltd. is an investment entity
in the post-restructuring scenario also.
Whether B Limited qualifies to be an investment

entity? As per Ind AS 28, the equity method requires
B Ltd. qualifies as an investment entity since it has exit entities to prepare its financial statements using
strategies in place in respect of start-up companies uniform accounting policies for like transactions
and satisfies the other conditions for classification as and events in similar circumstances unless in
an investment entity. case of an associate, it is impracticable to do
Post-restructuring, is A Ltd. required to prepare so. If different accounting policies are being
CFS? If yes, how will A Ltd. consolidate its used for like transactions and events in similar
subsidiaries and what would be the valuation circumstances, adjustments shall be made to
basis? make the associate’s or joint venture’s accounting
policies conform to those of the entity (investor)
It was clarified that in the given case, A Ltd. should for applying the equity method.
prepare CFS since post restructuring also, it has
subsidiaries including S Ltd. and start-up companies.
Further, A Ltd. should consolidate S Ltd. and measure In the given case, it was clarified that the associate’s
investments in the start-up companies at FVTPL. financial statements would need to be redrawn on the
(ITFG 20, Issue 2) basis of Ind ASs, except to the extent the exception
relating to impracticability applies.
Different accounting periods and policies
Further, the redrawn financial statements would
Different policies and estimates being adopted by
be special-purpose financial statements and do not
an associate and an investor
replace general purpose financial statements prepared
Ind AS 28 is to be applied by all the entities where in accordance with local laws. The preparation of
investors have joint control of or significant influence special-purpose financial statements are for the
over, an investee. The standard prescribes the limited purpose of application of equity method by the
requirements for the application of the equity method investor and would not tantamount to breach or non-
when accounting for investments in associates and compliance of the local laws applicable to the associate.
joint ventures. (ITFG 20, Issue 5)
In a given case, L Ltd. has an overseas associate Uniform accounting policies vs uniform accounting
M. Subsequently, M undertakes two business estimates
combinations, one of these being under common For further discussion on the topic, please refer
control business combination. M prepares its annual Chapter 10, Other topics- Accounting Policies,
financial statements by following its local GAAP and Changes in Accounting, Estimates and Errors.
laws. The local GAAP and laws followed by M has (ITFG 11, Issue 6).
difference in certain accounting policies/estimates as
compared to Ind ASs used by L. The differences are as
follows:
• Both business combinations effected by M are
accounted for as per pooling of interest method as
ordered by the local corporate regulator
• Fixed assets of M are depreciated using the
straight-line method to comply with local taxation
and corporate laws while L Ltd. uses method that
reflects the pattern of consumption of the asset.
• Fixed assets are depreciated over useful life
prescribed by local laws rather than over useful life
as per factors prescribed in Ind AS 16.
An issue arose as to how should the difference of
accounting policies/estimates of M would be dealt
while applying equity method by L Ltd.
7
Non-controlling interest An entity may have multiple subsidiaries and could

have a negative net worth as on 31 March 2015. When
Accounting for accumulated losses of subsidiaries
such a group transitions to Ind AS, then the allocation
A subsidiary may incur losses and such losses may of accumulated losses of the subsidiaries will take
exceed the minority interest in the equity of the place in the following manner:
subsidiary. Under AS 21, the excess, and any further
losses applicable to the minority are adjusted against • Past business • Past business
the majority interest except to the extent that the combinations not combinations
minority has a binding obligation to, and is able to, restated on transition restated on transition
make good the losses. to Ind AS: In this to Ind AS: In this
case, the entity case, the entity
would be required should attribute the
Under Ind AS 110, entities are required to
to attribute the total accumulated losses
attribute the total comprehensive income of their
profit or loss and of the subsidiaries
subsidiaries to the owners of the parent and to
each component of to the owners of the
the NCI (even if this results in the NCI with a
Other Comprehensive parent and to the
deficit balance).
Income (OCI) to NCI from the date
the owners of the of application of Ind
parent and to the NCI AS 103, Business
prospectively from Combinations, in its
the date of transition. CFS, on the date of
transition.
(ITFG 8, Issue 6)
Intra-group transactions (though there is no loss of control of the parent on its

subsidiary) on account of infusion of additional funds in
Treatment of intra-group profit in the CFS and
the subsidiary by another investor.
previous GAAP deemed cost exemption
As per Ind AS 110, changes in a parent’s ownership
In a certain situation, an associate entity was
interest in a subsidiary that do not result in the parent
accounted under the equity method in the CFS of
losing control of the subsidiary are equity transactions
the parent under previous GAAP. However, due to
(i.e. transactions with owners in their capacity as
principles of defacto control as per Ind AS 110, the
owners). Additionally, in accordance with Appendix B
above associate became a subsidiary. Before transition
to Ind AS 110, when the proportion of the equity held
to Ind AS, the parent had sold some goods (which
by NCI changes, an entity is required to adjust the
represented Property, Plant and Equipment (PPE) in
carrying amounts of the controlling entity investor and
the subsidiary) at a profit margin.
NCI to reflect the changes in their relative interests in
At the time of transition, the parent entity opted to the subsidiary. Any difference between the amount
apply the deemed cost exemption as provided under by which NCI are adjusted and the fair value of the
paragraph D7AA of Ind AS 101, First-time Adoption consideration paid or received should be recognised
of Indian Accounting Standards. As per this, a first- directly in equity and should be attributed to the
time adopter to Ind AS may elect to continue with the owners of the parent.
carrying value for all of its PPE as per the previous
GAAP and use that as its deemed cost as at the date
of transition after making necessary consequential At the time of initial recognition i.e. at the date of
adjustments permitted under Ind AS. business combination, NCI are recorded at fair
value (or proportionate share in the recognised
Ind AS 101 further provides that in the CFS, the
amounts of the acquiree’s identifiable net
previous GAAP amount of the subsidiary should be
assets, if so chosen). However, subsequent
that amount used in preparing and presenting CFS.
purchases or sales of ownership interests when
Where a subsidiary was not consolidated under control is maintained, are recorded at the NCI’s
previous GAAP, the amount to be reported by the proportionate share of the net assets.
subsidiary as per previous GAAP in its individual
financial statements is required to be the previous
GAAP amount.
Therefore, such transactions have no impact on
goodwill or the statement of profit and loss. The
Ind AS 110 requires full elimination of intra-group entity is required to recognise directly in equity any
assets and liabilities, equity, income, expenses difference between the amount by which the NCI are
and cash flows relating to transactions between adjusted and the fair value of the consideration paid or
entities of the group (profits or losses resulting received and attribute it to the owners of the parent.
from intra-group transactions that are recognised
in assets such as inventory and PPE are The entity should provide disclosures of change in
eliminated in full). ownership interest as follows:
• In SFS: As there is no impact on the investment
in the subsidiary, it may continue to be disclosed
In this case, such unrealised profit existing in the at its carrying amount in the SFS of the parent.
PPE would require elimination in the CFS. Therefore, However, as there is a reduction in the shareholding
the parent would first eliminate the intra group profit of the parent in the subsidiary is required then this
recognised in SFS of the subsidiary since Ind AS 110 fact should be disclosed in the SFS of the parent
requires full elimination of intra-group profits or losses. even though there is no loss of control. This is an
Subsequent to the elimination of intra-group profit additional disclosure to be made in the financial
in the SFS of its subsidiary, the parent may apply the statements.
deemed cost exemption under paragraph D7AA of Ind • In CFS: In accordance with the specific
AS 101. (ITFG 12, Issue 5) requirements contained in Ind AS 112, Disclosure
Changes in ownership interests while of Interests in Other Entities, an entity is required to
present a schedule that shows the effects on the
retaining control equity attributable to owners of the parent of any
Accounting for partial disposal of an investment in changes in its ownership interest in a subsidiary that
a subsidiary do not result in a loss of control. (ITFG 13, Issue 7)
A situation may arise involving a parent and its
subsidiary where the stake of parent gets reduced
9
Loss of control
Equity accounting in the CFS of investor in case of
loss of control
In a scenario, an entity B Ltd., a subsidiary of another
entity A Ltd. (parent), owned an investment property
that was measured at cost in accordance with Ind AS
40, Investment Property, A Ltd. sold a portion of its
equity shareholding in B Ltd., and consequently B Ltd.
became a joint venture between A Ltd. and another
entity Z Ltd.
In accordance with the requirements of Ind AS 28
equity method is required to be applied in the CFS of
A Ltd. to account for its investment in the joint venture
(i.e. B Ltd.). Thus, in CFS of A Ltd., equity method
requires the identifiable assets and liabilities of the
investee (i.e. B Ltd.) be fair valued and appropriate
adjustments be made to an entity’s (i.e. A Ltd.’s) share
of investee’s profit or loss.
Ind AS 40, however, does not allow an investment
property to be measured at fair value.
The ITFG considered two accounting issues as
following:
• Whether any contradiction exists between Ind
AS 40 and Ind AS 28
From the perspective of an investor who acquires, a
controlling interest in an entity (or an interest giving
the investor joint control or significant influence over
the investee), Ind AS require the investor to identify
whether it has made a bargain purchase gain or
whether the consideration includes an element of
payment for goodwill. The amount of any bargain
purchase gain or of any payment for goodwill would
be determined with reference to the fair values of the
identifiable assets and liabilities of the investee as at
the acquisition date and not with reference to their
book values as at that date.
Accordingly, the relevant standard (e.g. Ind AS 28 in
the case of a joint venture or an associate) requires
determination of fair values of identifiable assets and
liabilities of the investee for this purpose. This fair
value requirement does not indicate a contradiction
between Ind AS 28 (or Ind AS 110 in case of acquisition
of a controlling interest) on one hand and the standards
that require a cost based measurement in the balance
sheet of the investee on the other.
Therefore, ITFG clarified that there does not seem any
contradiction between Ind AS 40 and Ind AS 28.
• Whether the adjustments arising out of fair

valuation of investment property as required
under Ind AS 28 should be made in the CFS of
the investor
In accordance with Ind AS 110, if a parent loses
control of a subsidiary, it recognises any investment
retained in the former subsidiary at its fair value
when control is lost. Such fair value is regarded as
the cost on initial recognition of an investment in a
joint venture (or an associate).
Further Ind AS 28, as mentioned above, provides
that an investment is accounted for using the equity
method from the date on which it becomes an
associate or a joint venture. On acquisition of the
investment, any difference between the cost of
the investment and the entity’s share of the net
fair value of the investee’s identifiable assets and
liabilities is accounted for as follows:
a. Goodwill relating to an associate or a joint
venture is included in the carrying amount of the
investment. Amortisation of that goodwill is not
permitted
b. Any excess of the entity’s share of the net fair
value of the investee’s identifiable assets and
liabilities over the cost of the investment is
recognised directly in equity as capital reserve in
the period in which the investment is acquired.
Appropriate adjustments to the entity’s share
of the associate’s or joint venture’s profit or loss
after acquisition are made in order to account, for
example, for depreciation of the depreciable assets
based on their fair values at the acquisition date.
Similarly, appropriate adjustments to the entity’s
share of the associate’s or joint venture’s profit
or loss after acquisition are made for impairment
losses such as for goodwill or PPE.
Ind AS require the application of a mixed

measurement model in preparing the balance
sheet of an entity – some assets and liabilities
are measured at fair value while other assets and
liabilities are measured on a different basis (or
bases) such as historical cost. Besides, Ind AS
prohibit the recognition of certain assets such as
internally- generated goodwill and brands.
In accordance with the above, on acquisition of the

investment, any difference between the cost of the
investment and the entity’s share of the net fair value
of the investee’s identifiable assets and liabilities is
recognised in the manner stated above. The fair value
of identifiable assets and liabilities are considered to
be the cost of the assets and liabilities for the investor
to the extent of its share in the investee.
Accordingly, appropriate adjustments arising out of fair
valuation of assets/liabilities impacting profit or loss
would be made in the CFS of the investor.
(ITFG 17, Issue 5)
11
Refer to educational material on Ind AS 110 for following issues/topics:

Issue
Topic
number
Applicability of Ind AS 110 for the purposes of preparation of financial statements under the
1
Companies Act, 2013
2 Applicability of Ind AS 110 to de facto control Situations
Applicability of Ind AS 110/Ind 111/Ind AS 28 to consolidate, Limited Liability Partnership Firm
3 (LLP) / a partnership firm/ associate or a joint venture.
(Similar to ITFG 11, Issue 7 and ITFG 18, Issue 5)
4 Applicability of Ind AS 110 to consolidate a subsidiary acquired for disposal.
Applicability of Ind AS 110 to prepare CFS when an entity disposes of its last subsidiary during
5
the current reporting.
6 Evaluation of exemption given in Ind AS 110 from preparation and presentation of CFS
7 Guidance on consolidation of investment entities
8 Guidance on consolidation of trusts or other structured entities
9 Assessment of control when an investor has power to direct

Assessment of control when there is a shareholders’ agreement regarding appointment of
10
directors
11 Assessment of control – restructuring of debt into shares.
Assessment of control1 when shares held as security and voting rights are subject to breach of
12
conditions
Assessment of control when non-payment of interest on preference shares results in investor
13
gaining voting rights on an investee
14 Assessment of control when power is subject to occurrence of a contingent event
15 Assessment of control when an entity is economically dependent of a customer

Assessment of control when there are potential voting rights (time to exercise call option vs
16
timing of decision) (Similar to ITFG 3, Issue 5)
17 Assessment of control when an investor has tag along or drag along rights
18 Assessment of control when an investor has veto rights
19 Assessment of control in a franchise agreement
20 Assessment of control when there is a shareholders’ Agreement.
Assessment of control1 when investments in shares are managed by a fund manager (agent vs.
21
principal evaluation)
22 Accounting in CFS of the borrowing costs associated with the term loan
23 Guidance on consolidation procedures for indirect subsidiaries
24 Application of consolidation procedures on direct and indirect holding in a subsidiary

Determination of NCI in the subsidiary for the purposes of its CFS when part of the interest in
25
subsidiary is held by parent’s associate (direct and indirect holding)
26 Accounting of deferred taxes in CFS on temporary differences arising from intra-group transfers
Accounting treatment in the CFS of the investor for when an associate sells certain interest of
27
its subsidiary
Guidance on accounting of different accounting policies followed by subsidiaries/associates for
28
valuing inventories (Similar to ITFG 11, Issue 6)
Guidance on classification and measurement of financial assets based a subsidiary’s business
29
model and alignment with group’s uniform accounting policies
30 Assessment of control1 when an investor has potential voting rights (Similar to ITFG 3, Issue 5)
Guidance on intragroup elimination in CFS when a parent and its subsidiary have different
31
reporting period end
Classification of current/non-current in CFS when parent and its subsidiary have different
32
reporting dates
Guidance on alignment in case of differences in of current/non-current classification with re-
33
spect to Ind AS vis-à-vis IFRS
Accounting of transaction cost incurred to acquire outstanding part of NCI (wholly or partially) or
34
sell (without loss of control)
Accounting for changes in a parent’s ownership interest in a subsidiary (not resulting in the loss
35
of control) (Similar to ITFG 13, Issue 7)
36 Accounting impact on NCI of interest free loan given to subsidiary without repayment condition
Guidance on apportionment of profit or loss between parent and NCI in case of change in
37
proportion of the equity held by NCI
38 Accounting treatment on loss of control of the subsidiary in the CFS (Similar to ITFG 17, Issue 5)
Guidance on accounting of an investment entity as per Ind AS 110 that provides investment
39 management services
(Similar to ITFG 20, Issue 2)
Guidance on accounting for an investment entity as per Ind AS 110 (with an option to buy
40
investments in subsidiary)
13

Issue
Topic
number
1 Guidance on determination of joint arrangement
2 Assessment of joint arrangement when established through articles of association
3 Assessment of joint control when there a contractual agreement
Assessment of joint control when each party can unilaterally take decisions concerning some of
4
the relevant activities
Assessment of joint control when decisions concerning the relevant activities require
5
unanimous consent of the two parties
6 Assessment of joint control when one of the party to joint arrangement has veto rights
7 Assessment of joint control when a nominee director has a casting vote
Assessment of joint control when one of the party to the joint arrangement has an option to buy
8 other party’s shareholding at any time in the event of disagreement on any decision relating to
relevant activities of the joint arrangement
9 Assessment of joint control when unanimous consent is required implicitly
10 Assessment of joint control when there are layers of governing structures
11 Assessment of joint operation vis-à-vis joint venture

Joint operation vis-à-vis joint venture- when each party is entitled to the assets, and is liable for
12
the obligations, relating to its respective area of activities
Joint operation vis-à-vis Joint venture arrangement to buy a building that has number of floors,
13
which they will lease to other parties.
Joint operation vis-à-vis Joint venture when an arrangement is structured through a separate
14
legal entity
Joint operation vis-à-vis Joint venture when parties to the contract have equal share in
15
partnership firm/LLP
16 Financial statements of parties to a joint operation
Accounting treatment of a joint arrangement where certain parties have joint control while oth-
17
ers account for it as a joint operation.
The accounting on intragroup balances in the separate and consolidated financial statements of
18
a joint operator

Issue
Topic
number
Guidance on assessment of significant influence-with regard to voting rights on shares held by
1
nominee or in a fiduciary capacity.
Guidance on assessment of significant influence when the investee to an entity has restrictions
2
on the transfer of funds
Application of the equity method in CFS when investor owns venture capital organization that
3
invests in an associate
4 Application of the equity method in CFS in various scenarios
Application of the equity method in CFS when an investment entity has investment in a
5
subsidiary and associate that are non-investment entities
Application of the equity method and consolidation procedure by a non-investment entity over
6
an associate that is an investment entity which in turns has a non-investment entity subsidiary
Guidance to measure initial carrying amount when an investor loses control of subsidiary but
7
retains interest that meets the definition of associate (Similar to ITFG 17, Issue 5)
Guidance provided to measure interest in an indirect holding (through subsidiary, associate and
8
joint venture) in an associate
Guidance provided for accounting by a holding company for its share of an associates or a joint
9 venture's profits, OCI and net assets under the equity method on the amounts before or after
NCI in the associates or joint venture's consolidated accounts
Guidance on elimination of transactions between the reporting entity and its associates or joint
10
ventures at the time of applying equity method of consolidation
Guidance on computation of goodwill/capital reserve on step increase in an existing associate/
11
joint venture
Guidance on use of the most recent available financial statements of the associate or joint
12
venture by the entity in applying the equity method
Guidance on accounting for reciprocal holdings in associates and calculation of Earnings per
13
Share (EPS)
Guidance on accounting of appropriation to mandatory reserves for the purpose of computing
14
the investor's share
Guidance on accounting for an investment in an investee on account of piece-meal acquisition
15
when such an investment provides it significance influence over the investee
16 Guidance on discontinuance of equity method due to sale of interest in an associate
Guidance on accounting for partial disposals of interests in associate or joint venture where the
17
equity method continues to apply
15
2. Business combinations
(including common control
transactions)
Summary
• Ind AS 103, Business Combinations
Certain business combinations such as mergers and amalgamations are dealt with under
Chapter XV-Compromises, Arrangements and Amalgamations of the Companies Act, 2013 (2013
Act). With the notification of the relevant sections dealing with compromises, arrangements and
amalgamations (including fast track amalgamations and demergers), companies are required to
make an application to the National Company Law Tribunal (NCLT) in case of such schemes.
Key principles
General principles
• Ind AS 103 provides guidance on accounting for – Acquisition of an asset or group of assets that
business combinations under the acquisition does not constitute a business
method. A business combination is a transaction or
– Acquisition of an investment in a subsidiary that
other event in which a reporting entity (the acquirer)
is required to be measured at Fair Value through
obtains control of one or more businesses (the
Profit or Loss (FVTPL) by an investment entity.
acquiree). The date of acquisition is the date on
which the acquirer obtains control of the acquiree. • A ‘business’ is an integrated set of activities and
assets that are capable of being conducted and
• There are certain exceptions to acquisition
managed to provide a return to investors by way of
accounting:
dividends, lower costs or other economic benefits.
– Formation of a joint arrangement
Ability to
Input Processes
create output
Assets and liabilities (other than goodwill)

• The identifiable assets acquired and the liabilities
assumed are recognised separately from goodwill
• IFRS 3, Business Combinations excludes from
at the date of acquisition if they meet the definition
its scope business combinations of entities
of assets and liabilities and are exchanged as part of
under common control. Ind AS 103 (Appendix
the business combinations.
C) provides guidance in this regard.
• The identifiable assets acquired and the liabilities
• IFRS 3 requires bargain purchase gain arising
assumed are measured at the date of acquisition at
on business combination to be recognised in
their fair values, with limited exceptions.
the statement of profit and loss. Ind AS 103
• The acquirer should measure the components of requires that the bargain purchase gain should
NCI in the acquiree that are present ownership be recognised in OCI and accumulated in equity
interests and entitle their holders to a proportionate as capital reserve. If there is no clear evidence
share of the entity’s net assets in the event of for the underlying reason for classification
liquidation at fair value or the present ownership of the business combination as a bargain
instruments’ proportionate share in the recognised purchase, then it should be recognised directly
amounts of the acquiree’s identifiable net assets, at in equity as capital reserve.
the acquisition date.
• On 25 October 2018, the IASB has revised the
• All other components of NCI (such as equity definition of the term ‘business’. Determining
components of convertible bonds under share whether a transaction results in an asset
based payments arrangements) should be or a business acquisition has long been a
measured at fair value in accordance with other challenging but important area of judgement.
relevant Ind AS. The IASB has issued amendments to IFRS 3
that clarify this matter. There is however, no
Consideration transferred
consequential change in the definition of the
• Consideration transferred is required to be term ‘business’ as given in Ind AS 103.2
measured at fair value, which is calculated as the
• On 30 March 2019 MCA notified, as part of the
sum of the acquisition-date fair values of the assets
annual improvements to Ind AS, an amendment
transferred by the acquirer, the liabilities incurred by
that provides additional guidance on Ind AS
the acquirer to former owners of the acquiree and
103 with regard to acquisition accounting.
the equity interests issued by the acquirer.
The amendment clarifies that when an entity
• An obligation to pay contingent consideration that obtains control of a business that is a joint
meets the definition of a financial instrument should operation, then the acquirer would remeasure
be recognised as a financial liability or as equity in its previously held interest in that business
accordance with Ind AS 32, Financial Instruments: such that the transaction would be considered
Presentation. as a business combination achieved in stages
and would be accounted for on that basis. The
Acquisition related costs
amendment is effective prospectively from
• Acquisition related costs are costs which an acquirer 1 April 2019.
incurs to effect a business combination and are
excluded from the consideration transferred and
1. Indian Accounting Standards (Ind AS): An Overview (Revised 2019)
expensed when incurred except costs to issue debt issued by ICAI.
or equity securities which are to be recognised in 2. The ICAI in February 2019 issued an Exposure Draft (ED) to amend the
accordance with Ind AS 32 and Ind AS 109. definition of ‘business’ in line with the revised definition as per IFRS 3.
Goodwill or a gain from a bargain accumulated in equity as capital reserve after

purchase reassessing the values used in the acquisition
accounting.
• Goodwill is measured as the difference between
the consideration transferred in exchange for the net Business combinations of entities under
of the acquisition date amounts of the identifiable common control
assets acquired and the liabilities assumed.
Goodwill previously recorded by the acquiree is not • Common control business combination means
recorded as a separate asset by the acquirer. a business combination involving entities or
businesses in which all the combining entities or
• In case of bargain purchase (i.e. the amount of businesses are ultimately controlled by the same
identifiable assets acquired and the liabilities party or parties both before and after the business
assumed exceeds the amount of consideration combination and that control is not transitory.
transferred), the amount of gain should be
recognised in OCI on the acquisition date and • Common control business combinations should be
accounted for using the pooling of interests method.
17
Guidance from ITFG clarifications the combining entities are reflected at their carrying
amounts. Accordingly, post-merger, the SFS of the
merged entity would reflect combination of the
Business combination under common carrying amounts of assets and liabilities reflected
control in the SFS of the entities (as appearing in their
Accounting for business combinations of entities respective SFS)
under common control • Situation 2: Merger of subsidiary with its parent:
Under IFRS, there is limited authoritative guidance An entity merges with its parent entity. In such a
on accounting for legal mergers or common control case, nothing changes and the transaction only
business combinations. However, internationally means that the assets, liabilities and reserves of the
practices have developed where it is acceptable subsidiary which were appearing in the CFS of the
to choose an accounting policy (to be applied group immediately before the merger, would now
consistently) to determine values of assets and be a part of the SFS of the merged parent entity.
liabilities of the acquiree entity. The acquirer in a The SFS of the parent entity (to the extent of such
common control transaction can use either of the a common control transaction) would be considered
following in its CFS: as a continuation of the consolidated group.
Accordingly, it would be appropriate to recognise
• Book value (carry-over basis) accounting on the
the carrying value of assets, liabilities and reserves
basis that the investment has simply been moved pertaining to the combining subsidiary, as appearing
from one part of the group to another, or in the CFS of the parent entity. (ITFG 9, Issue 2)
• IFRS 3 accounting on the basis that the acquirer is
a separate entity in its own right and should not be Restatement of financial statements
confused with the economic group as a whole.
The ITFG considered two situations with respect The pooling of interest method requires that the
to common control transactions and provided financial information in the financial statements
clarifications as below: in respect of prior periods should be restated as if
• Situation 1: Merger of two fellow subsidiaries: An the business combination had occurred from the
entity merges with its fellow subsidiary (i.e. another beginning of the preceding period.
entity with the same parent entity). Appendix C of
Ind AS 103 provides that the assets and liabilities of
Restatement of comparative period’s financial statements of entities under common control
A Ltd.
B Ltd. C Ltd.
Following situations arose in a financial year: • Situation 1:

Situation 1: B Ltd. merges with A Ltd. and appointed
date for the merger is 1 October 2018. A Ltd.
Situation 2: A Ltd transferred one of its division to C
Ltd and appointed date for the transfer is 1 October Merged with
2018.
The issue under consideration is while preparing
B Ltd.
the financial statements for the year ended 31
March 2019, would previous year figures in financial
statements of A Ltd. and C Ltd. have to be restated In this case, the ITFG clarified that the merger of B
as per requirements of Appendix C, Business Ltd. with A Ltd. represents merger of a subsidiary
Combinations of Entities Under Common Control to into its parent. Accounting for such a merger should
Ind AS 103. be dealt with similar to the above ITFG clarification in
Bulletin 9 (Issue 2).
Situation 2: ITFG assumed that division transferred In the given case, ITFG noted that there is only a
from A Ltd to C Ltd. constitutes a transfer of business change in composition of the reporting entity and it is
under Ind AS 103. The transfer would be qualified as not retrospective application of an accounting policy or
a common control business combination transaction retrospective restatement/reclassification.
from the perspective of C Ltd. on the basis the Accordingly, PQR Ltd would be required only to
following analysis: restate financial statements for the year ended 31
• C Ltd obtains control of a business that it did not March 2019 with comparative information for 31
previously control March 2018. A third balance sheet as at 1 April 2017 is
• Both the combining parties, i.e., C Ltd. (the not required to be presented. (ITFG 22 Issue 5)
acquirer) and the division transferred, are controlled Requirement to restate in case of common control
by A Ltd. before and after the transfer. merger
• Control of A Ltd. over the transferee (C Ltd.) and the Two entities B Ltd. and C Ltd. (both under common
transferor (the transferred division) cannot be said control of another entity A Ltd.) filed a scheme of
to be transitory since C Ltd. has been a subsidiary arrangement with NCLT in the year 2017. As per the
of A Ltd. since January 2016 scheme, one of the business divisions of B Ltd. was
Since the transfer qualifies as common control to be demerged and merged with C Ltd. The scheme
business combination, C Ltd. would be required to was approved by the NCLT in June 2019 (i.e. before
account for the transfer of the division in its financial the approval by the Board of Directors of the financial
statements by applying the pooling of interests statements for the year ended 31 March 2019).
method as per Appendix C to Ind AS 103. The appointed date of merger as per the scheme was
Further C Ltd. would be required to prepare 1 April 2018. Both the entities are required to prepare
its financial statements (including comparative their first Ind AS financial statements for year ended
information) for the year ended 31 March 2019 as 31 March 2018.
if the transfer of the division had occurred from the In this situation, ITFG considered and clarified on the
beginning of the comparative period presented in the following two issues:
financial statements for the year ended 31 March 1. Whether the financials of C Ltd. for the financial
2019 i.e., 1 April 2017, and not the appointed date of 1 year 2017-18 should be restated considering that
October 2018 specified in the scheme. (ITFG 19, Issue the appointed date of the merger is 1 April 2018
5)
The ITFG clarified that as per requirements of Ind
Restatement of comparative information in case of AS 103, C Ltd. would be required to restate financial
common control business combination statements for the year ended 31 March 2019
A company ABC Ltd. merges into PQR Ltd (common with comparative information for 31 March 2018
control business combination). The order of NCLT (financial year 2017-18) regardless of appointed date
approving the scheme of merger was received on 27 as 1 April 2018.
March 2019 (appointed date for the merger is 1 April 2. Whether the financials of B (demerged entity) for
2016). PQR Ltd has been applying Ind AS with effect the financial year 2017-18 should be restated
from financial year beginning 1 April 2016 (transition
The issue under consideration is with regard
date is 1 April 2015).
to applicability of Appendix C of Ind AS 103 to
The issue under consideration is while preparing the demerged entity (i.e. transferor in the given case)
financial statements for the year ended 31 March with respect to restatement of comparative
2019, whether reinstatement of comparatives is information. Appendix C of Ind AS 103 requires
required only for 31 March 2018 or whether a third accounting for a common control business
balance sheet as of 1 April 2017 is also required to be combination only from the perspective of the
presented. transferee.
The ITFG clarified that Appendix C of Ind AS 103 Accordingly, ITFG clarified restatement of
requires only restatement of comparative information comparative information applies only to the
and does not require a third balance sheet at the transferee (i.e. C Ltd.) and not the transferor (i.e.
beginning of the preceding period. B Ltd.). However, B Ltd.is required to evaluate
Ind AS 1 requires third balance sheet as at the any disclosure to be made in consonance with
beginning of the preceding period when an entity Ind AS 105, Non-current Assets Held for Sale and
applies an accounting policy retrospectively or makes Discontinued Operations. (ITFG 22, Issue 6)
retrospective restatement of items or reclassifies
items in its financial statements.
19
Retrospective restatement of business Application of Ind AS to past business

combination under a court scheme combinations of entities under common control
XYZ Ltd. is a first-time adopter of Ind AS with date In another situation, an entity (Y) merged with its
of transition 1 April 2017. A scheme of amalgamation wholly- owned subsidiary (X) prior to transition to Ind
was implemented in the year 2011-12 under the order AS. On the day prior to the merger, the promoters of
of the High Court. In accordance with the scheme, Y held 49.95 per cent stake in Y. On transition to Ind
a particular item of the transferor company was AS, X did not opt for the exemption from applying Ind
capitalised by the transferee company. However, AS 103 retrospectively to past business combinations
under Ind AS, this item would not meet the definition (under Ind AS 101).
of an asset and needs to be charged to the statement Ind AS 101 provides where a first-time adopter of Ind
of profit and loss. XYZ Ltd. wishes to retrospectively AS restates its past business combinations to comply
restate the above business combination in accordance with Ind AS 103, it is also required to apply Ind AS 110
with Ind AS 103. Other than the amalgamation from that same date.
referred to above, XYZ Ltd has not effected any other
business combination in the past.
Ind AS 110 widens the concept of control and
With regard to the issue of restatement of past accordingly, investors with less than majority
business combinations (effected under a court voting rights can also exercise control over the
scheme), the ITFG has clarified as follows: investee (e.g. through contractual arrangements,
• Business combination post Ind AS adoption: A de facto control, potential voting rights, etc.). It
business combination occurs on or after the date also specifies the accounting treatment for a
of transition by the entity to Ind AS but the scheme business combination involving entities under
approved by the relevant authority (Court or NCLT) common control.
prescribes an accounting treatment that differs
from the accounting treatment required as per
Ind AS 103. In that case, the treatment prescribed In this regard, ITFG clarified that X should evaluate
under the scheme would override the requirements whether both X and Y were under common control
of Ind AS 103. before and after the amalgamation. Assuming
• Business combination before Ind AS adoption: A there was common control, X would be required to
business combination that occurred before the apply the provisions of Appendix C to Ind AS 103
date of transition of the entity to Ind AS but the retrospectively to the merger. (ITFG 15 Issue 6)
scheme approved by the relevant authority (Court
or NCLT) prescribed an accounting treatment that
differs from the accounting treatment required as
per Ind AS 103. An entity would need to evaluate
whether the restatement of a business combination
upon transition to Ind AS is legally permissible. The
entity would also need to evaluate the facts and
stipulations contained in the scheme. (ITFG 18,
Issue 4)
As the schemes approved by the relevant

authorities have varying stipulations, each case
requires a separate consideration of the issue of
legal permissibility of restatement based on its
specific facts. Where it is evaluated that under law,
the scheme approved by the relevant authority
does not preclude restatement of business
combination accounting upon transition to Ind AS,
the restatement would be permissible subject to
complying with the conditions laid down in this
behalf in Ind AS 101, First-time Adoption of Indian
Accounting Standards.
Demerger of one of the businesses of parent to its • Scenario B: Accounting treatment of demerger
subsidiary and court approved scheme prescribed in the court-approved scheme: The
In a given case, a parent P demerged one of its ICAI had made an announcement which provides
businesses under the order of the High Court and that the accounting treatment of a transaction as
sold it to its subsidiary S in financial year 2016-17. required under an order of a court or tribunal (or
Both P and S are covered in phase II of the Ind AS other similar authority) overrides the accounting
implementation road map. S acquired the assets and treatment that would otherwise be required to be
liabilities of the demerged business at their fair values followed in respect of the transaction. Therefore, it
and issued its consideration (calculated on the basis of is mandatory for the respective company to follow
the fair value of the business of P) (as required under the treatment as per the order of the court/tribunal.
the previous GAAP). The acquisition of business by Accordingly, in the given case, if the court approved
S from P is a common control business combination scheme of demerger prescribed the accounting
within the meaning of Appendix C to Ind AS 103 (since treatment for the demerger in the books of
S is covered under the Ind AS road map and needs to company A (for instance, recognition of assets and
apply Ind AS 103 on the date of transition). liabilities acquired at their respective fair values as
An issue arose whether S was required to apply Ind at the date of demerger), then company A would
AS 103 on the acquisition of business from P. be required to follow the treatment prescribed
in the scheme in its financial statements for the
In this case, the demerger of one of the business of P
financial year 2016-17. Further, if the effect of such
occurred in financial year 2016-17 and in that year Ind
accounting treatment has to be carried over in
AS was not applicable to either P or S. Therefore, S
subsequent years, then also the same treatment of
accounted for the assets and liabilities acquired under
court approved scheme would be followed in the
previous GAAP at their respective fair values as at the
subsequent years subject to compliance of auditing
date of demerger.
standards.
Later S had to adopt Ind AS from the financial year
Further, appropriate disclosures should be made in
2017-18 wherein the comparative amounts would be
the financial statements:
presented for financial year 2016-17 under Ind AS. The
above demerger transaction occurred after the date of – A description of the accounting treatment made
transition to Ind AS and would be covered under Ind along with the reason that the same has been
AS 101. adopted because of the court/NCLT order
The following two scenarios were considered for the – Description of the difference between the
given case: accounting treatment prescribed in the AS and
• Scenario A: Accounting treatment of demerger not that followed by the company
prescribed in the court-approved scheme: In this – The financial impact, if any, arising due to such a
case, the court approved scheme did not prescribe difference.
any accounting treatment for the demerger in the
books of S. As the demerger occurred after the Therefore, in the present case it was concluded that
date of transition to Ind AS by S, the demerger the subsidiary S would be required to follow the
transaction would qualify as a common control accounting requirements of Ind AS which were not in
business combination. Therefore, S would be conflict with the provisions of the court scheme. (ITFG
required to account for the demerger as per 16, Issue 5)
Appendix C to Ind AS 103 i.e. under ‘pooling of
interest method’ in the financial statements for the
financial year 2016-17. Accordingly, S in its financial
statements, would be required to recognise
assets and liabilities acquired from the parent P
at their respective book values (i.e. as appearing
in the books of P). In this case if P and S were
under common control as on 1 April 2016, then
the business combination would be restated from
1 April 2016 irrespective of the actual date of the
business combination. Therefore, while presenting
the comparative amounts in the Ind AS financial
statements for financial year 2017-18, the subsidiary
S would be required to restate the amount of
assets and liabilities recognised under previous
GAAP for financial year 2016-17 following pooling of
interest method.
21
Acquisition date in a scheme approved by NCLT • Business combination is not under common
Ind AS 103 requires an acquirer to identify an control: In such a case, Ind AS 103 provides that
acquisition date which is the date on which it obtains the date of acquisition is the date from which an
control of the acquiree. Such a date is generally the acquirer obtains control of the acquiree.
closing date on which the acquirer legally transfers In cases where the auditor is of the view that as per
the consideration, acquires the assets and assumes the proposed accounting treatment, the date from
the liabilities of the acquiree. However, an acquirer which the amalgamation is effected in the books of
could obtain control on a date earlier or later than the accounts of the amalgamated company is different
closing date (e.g. a written agreement provides that from the acquisition date as per the standard
the acquirer obtains control of the acquiree on a date i.e., the date on which control has been actually
before the closing date). An acquirer should consider transferred, then the auditor should state the same
all relevant facts and circumstances in making this in the certificate as required to be issued as per the
assessment. proviso to Section 232(3) of the 2013 Act. However,
In accordance with the provisions of the 2013 Act if the NCLT approves the scheme with a different
(proviso to Section 232(3)), a scheme of arrangement appointed date as compared to the acquisition date
would not be sanctioned by the NCLT unless a as per Ind AS 103, the appointed date as approved
certificate by the company’s auditor has been filed by NCLT under the scheme will be the acquisition
with the NCLT. The certificate should comment on the date. In this situation, the company should provide
effect of the accounting treatment, if any, proposed appropriate disclosures and the auditor should
in the scheme of compromise or arrangement and consider the requirements of relevant auditing
specify whether it is in conformity with the accounting standards. (ITFG 12, Issue 8)
standards prescribed under Section 133 of the 2013
Act. On 21 August 2019, MCA issued a circular
In a situation pursuant to a court scheme, a company and clarified that an appointed date could be a
is merged with another company with an appointed specific calendar date or it could be tied to the
date approved by NCLT. In this case the appointed occurrence of an event, such as grant of license
date was prior to Ind AS implementation date for the by a competent authority or fulfilment of any
company. preconditions agreed upon by the parties, or
Ind AS 103 requires that an entity is first required to meeting any other requirement as agreed upon
assess whether the business combination is under between the parties which are relevant to the
common control. Therefore, the accounting treatment scheme. Accordingly, concerned companies can
would depend on following scenarios: choose and state the agreed appointed date in
the scheme.
• Business combination is under common control:
In such a case, an entity is required to restate its

financial statements as if the business combination
had occurred from the beginning of the preceding
period in the financial statements.
If an auditor considers that as per the proposed
accounting treatment, the date from which the
amalgamation is effected in the books of accounts
of the amalgamated company is different from the
acquisition date as per Ind AS 103 i.e. the date on
which control has been actually transferred, then
the auditor should state the same in the certificate
to be issued under Section 232(3) of the 2013 Act.
Additionally, if the NCLT approves the scheme
with a different appointed date as compared to
the acquisition date as per Ind AS 103, then the
appointed date approved by the NCLT would be
considered as the acquisition date for business
combinations. The company would be required
to provide appropriate disclosures and the auditor
would need to consider the requirements of
relevant auditing standards when issuing its
certificate.
Business combination after the year end but

before approval of accounts to be considered an
adjusting event
In a situation, two fellow subsidiaries (i.e. entities
under common control), which are covered under
phase I of Ind AS road map, filed a scheme of
arrangement in April 2017 for merger of one fellow
subsidiary (say entity X, transferor) into another entity
(say entity Y, which is the transferee in this case).
Ind AS 10, Events After the Reporting Period,

provides that events after the reporting period are
those events, favourable and unfavourable, that
occur between the end of the reporting period
and the date when the financial statements are
approved by the board of directors in case of a
company, and, by the corresponding approving
authority in case of any other entity for issue.
In accordance with the requirements of Section 230(7)

of the 2013 Act, the auditor’s certificate states that
the accounting treatment proposed in the scheme
of compromise or arrangement is in conformity with
the Ind AS. The certificate was filed with NCLT by
the entity X. The NCLT approved the scheme with
an appointed date of 1 April 2018 (i.e. after the close
of financial year on 31 March 2018 but before the
approval of financial statements by the board of
directors).
Ind AS 10 provides that a major business combination
after the reporting period is a non-adjusting event.
However, in this case, since the court order approved
a scheme with a retrospective effect subsequent to
the balance sheet date but before the approval of
financial statements, the effective date for accounting
is prior to the balance sheet date. The court’s
approval is an event that provides additional evidence
to assist the estimation of amounts of assets and
liabilities that existed at the balance sheet date.
Therefore, an adjusting event has occurred which
requires adjustment to the assets and liabilities of the
transferor entity which are being transferred.
The effect of business combination of entity X and
entity Y is required to be incorporated in the SFS of
entity Y for the financial year ending on 31 March
2018. (ITFG 14, Issue 4)
23

Issue
Topic
number
1 Describes guidance for identification of a ‘business’ for development stage entities
Guidance on when group of assets would constitute business in two cases:
2 • Development stage entity
• Investment property
3 Guidance on key differences in accounting of an asset acquisition vis-à-vis business combination
Guidance on identification of business combination in two cases:
4 • Change in the rights of other shareholders resulting in obtaining control
• Repurchase by investee of its own shares from other parties resulting in obtaining control
Guidance on identification of an acquirer in case of a business combination effected by a newly
5
incorporated company
Guidance on determination of date of acquisition in case of a business effected without a court
6
approved scheme
7 Guidance on determination of an acquisition date when regulatory approval is required
Guidance on determination of an acquisition date when an acquirer is consulted on major
8
decisions
Guidance on accounting of contingent consideration payable by acquirer and whether it would
9
be recognised as a part of equity and liability
10 Guidance on subsequent measurement and accounting of contingent consideration
Guidance on accounting of the consideration in an escrow account while computing contingent
11
consideration
Guidance on accounting for the working capital adjustments while computing contingent
12
consideration
Guidance on accounting for an arrangement where contingent consideration would be forfeited
13
on the termination of employment
Guidance on accounting for contingent consideration arrangements to employees who are
14 former owners of acquiree in which payments are automatically forfeited if employment
terminates
Guidance on valuation of deferred consideration for determining the consideration to be
15
transferred and computation of goodwill
Guidance on business combinations before transition to Ind AS where the arrangement includes
16
contingent consideration which is payable post transiton to Ind AS
17 Guidance on acquirer share-based payment awards that are exchanged for acquiree awards
18 Guidance on acquisition related cost i.e. stamp duty paid on acquisition of land
19 Guidance on acquisition related cost i.e. additional payment to a regulator
20 Guidance on accounting of contingent liability in a business combination
21 Guidance on accounting of indemnification asset in a business combination
Guidance on exceptions to recognition and measurement principles for indemnification assets

22
in a business combination
23 Guidance on accounting of adjustments to provisional amounts in a business combination
24 Accounting for adjustment in provisional accounting and adjustment of comparatives
25 Guidance on measurement of NCI
Guidance on recognition of assets acquired on business combination i.e. assembled workforce,
26
contingent assets, potential contracts with new customers and future contract renewals
Guidance on recognition of acquired intangibles assets with regard to research and develop-
27
ment
Guidance on recognition of separate provision or impairment allowance on a financial asset at
28
fair value while accounting for business combination at the date of acquisition
Guidance on measurement of assets acquired in a business combination i.e customer
29
warranties and brands
30 Guidance explains measurement of assets on acquisition in a business combination
31 Guidance on accounting of business combination achieved in stages
32 Guidance on accounting of reacquired rights (pre-existing relationships)-
33 Guidance on accounting for a reverse acquisition
34 Guidance on accounting of a lease acquired in a business combination

Guidance on accounting of investments in subsidiaries in the separate financial statements of
35
the acquirer entity
36 Guidance on accounting for gain on bargain purchases
Guidance on determining common control transactions when there is a shareholders'
37
agreement
Guidance on determination of common control transactions in the absence of shareholders'
38
agreement
39 Guidance on evaluation of a common control transaction with the help of a case study
40 Guidance on common control transactions and evaluation of transitory common control

Guidance on common control transactions when there is restatement of the financial
41 information in the financial statements.
(Refer ITFG 19, Issue 5 and ITFG 22, Issue 5 and 6)
42 Guidance on restatement of financial statements and recognition of capital reserve
Guidance on common control transactions and retrospective application on Ind AS 103 on
43
transition to Ind AS
Guidance on common control transactions in restated financial statements and guidance on
44
presentation of cash/equity consideration payable to shareholders
Guidance on common control transactions when excess consideration is paid and recognition of
45
such excess in the absence of reserves with transferee
Guidance on accounting by an acquirer for an acquisition of a controlling interest in another
46
entity that is not a business
25
3. Financial instruments
Summary
• Ind AS 32, Financial Instruments: Presentation
• Ind AS 107, Financial Instruments: Disclosures
• Ind AS 109, Financial Instruments
Transactions in financial instruments are pervasive across many entities in India. Financial
instruments include financial assets, financial liabilities, equity instruments, compound financial
instruments, etc. Under the Ind AS framework, detailed guidance on recognition, classification,
measurement, presentation and disclosure of financial instruments is available in three Ind AS
(collectively referred to as the ‘FI standards’ in the chapter).
Key principles
• Financial instruments that give rise to a contractual • The hedge accounting principles permit excluding
obligation to deliver cash or another financial asset the time value of options, forward element of
are classified as financial liabilities. Instruments that forward contracts, and foreign currency basis
encompass a residual interest in the assets of an spread of currency swaps from the designated
entity after deducting all of its liabilities are classified hedging instrument. These components may be
as equity. Instruments may also have a component separately recognised as a ‘cost of hedging’.
of both - liability and equity, these components will • Financial assets and financial liabilities are required
be classified and presented separately. to be presented on a gross basis. However, an entity
• Puttable instruments are generally classified as may offset these and present them as a net amount
financial liabilities, however, Ind AS 32 specifies the only if it has a legal right, and intends to settle both,
conditions under which these can be considered as the asset and liability simultaneously.
‘equity’. • Adequate disclosure of financial instruments and
• Interest, dividends, losses and gains on financial related risks are imperative to reflect an entity’s
instruments or their components are recorded financial position and performance, the nature and
either in the statement of profit and loss or in Other extent of risks that it is exposed to, and the manner
Comprehensive Income (OCI), depending upon the in which it manages those risks. Accordingly,
classification of the related instrument as financial entities are required to provide quantitative and
liability or equity. qualitative disclosures for exposure to financial
• Financial assets are classified on initial recognition instruments and financial risks, including liquidity
and subsequently measured at amortised cost, Fair risk, credit risk and market risk (which includes
Value Through Profit or Loss (FVTPL) or Fair Value currency risk, interest rate risk and other price risks).
Through Other Comprehensive Income (FVOCI),
depending upon the business model within which Significant differences from IFRS1
they are held and the contractual cash flows of the
instrument (i.e. whether the contractual cash flows Ind AS 32 compared with IAS 32, Financial
are solely in the nature of principal and interest on Instruments: Presentation
the principal amount outstanding).
• IFRS requires an equity conversion option that
• Financial assets measured at amortised cost and is embedded in a foreign currency convertible
at FVOCI are assessed for impairment at each bond, to be recognised as a financial liability
reporting date, using an Expected Credit Loss (ECL) at inception as the conversion price is fixed in
model. foreign currency and not in the entity’s functional
• A modification in the terms of financial instruments currency. Hence, it does not result in an exchange
may result in their derecognition. The FI standards of a fixed amount of cash (in the entity’s functional
prescribe accounting for such modifications, and currency) for a fixed number of shares. Therefore,
the conditions that would result in derecognition the conversion option would not be classified as
equity under IFRS. However, Ind AS provides a
• Hybrid contracts may be treated as a single financial
specific exemption in the definition of a financial
instrument measured at FVTPL, or under certain
liability and states that an exchange of a fixed
specified conditions, embedded derivatives may be
number of shares for a fixed amount of cash in
separated from the host contract, and accounted for
any currency would result in a derivative financial
separately.
instrument being classified as equity.
• All derivatives are generally classified as and
measured at FVTPL, with mark-to-market gains and
losses being recognised in the statement of profit
and loss. However, those derivatives that qualify
as hedging instruments and are designated in a
hedging relationship, are treated in accordance with
the hedge accounting principles prescribed by the FI
standards.

issued by ICAI
27
Guidance from ITFG clarifications an understanding between the government and the
potential applicant/entity that on complying with the
stipulated conditions attached to the scheme, the
Ind AS 32 defines a financial instrument as a contract entity would be granted benefits of the scheme. Once
that gives rise to a financial asset of one entity and the entity has complied with the conditions attached
a financial liability or an equity instrument of another to the scheme then it rightfully becomes entitled to
entity. Generally, Ind AS 109 applies to all types of the incentives attached to the scheme. Thus, such an
financial instruments, though, it has certain exceptions incentive receivable would fall within the definition of
as well. financial instrument and accounted for as a financial
asset in accordance with Ind AS 109. (ITFG 15, Issue 3)
Accounting of shares held by a broking
entity for trading on its own account
In practice, evaluation may require the exercise of
significant judgement by entities that are entitled
Investments in shares of other entities’ meet the to receive incentives from the government, in
definition of financial instruments. Accordingly, order to determine whether a ‘contractual’ right
these would be recognised and measured in exists resulting in the recognition of a financial
accordance with Ind AS 109, presented as per the asset. This interpretation may affect accounting
requirements of Ind AS 32 and disclosed as per of various types of government grants.
the principles enunciated in Ind AS 107.
Accounting for amounts outstanding

The ITFG clarified that shares held by a broking entity
for trading on its own account (as stock-in-trade) are towards retired partners’ capital balances
financial instruments and are specifically excluded Ind AS 32 defines a financial liability as a contractual
from the scope of Ind AS 2, Inventories. Accordingly, obligation to deliver cash or another financial asset
these shares would be accounted for and disclosed in to another entity, or a contractual obligation to
accordance with the requirements of Ind AS 32, Ind AS exchange financial instruments with another entity
109 and Ind AS 107. (ITFG 14, Issue 5) under conditions that are potentially unfavourable. It
also includes certain derivatives and non-derivative
Incentives receivable from the government contracts that may be settled in the entity’s own
considered as financial instruments equity instruments. Careful analysis of the terms and
Ind AS 32 defines a financial asset as a contractual conditions of the financial instruments is required
right to receive cash or another financial asset from to determine whether such an instrument would be
another entity. It further defines ‘contract’ and classified as a financial liability.
‘contractual’2 as an agreement between two or more In a scenario, where a partnership firm was required
parties that have clear economic consequences that to prepare Ind AS financial statements for the purpose
the parties have little, if any, discretion to avoid, usually of consolidation3 (in accordance with Ind AS 110),
because the agreement is enforceable by law. It also ITFG has provided a clarification on the accounting for
clarifies that contracts, and thus financial instruments amounts outstanding towards retired partners’ capital
can take a variety of forms and need not be in writing. balances.
Ind AS 109 provides that an entity should recognise a
financial asset or a financial liability in its balance sheet
when the entity becomes a party to the contractual
provision of the instrument. 3. Ind AS is not applicable to partnership firms, however, partnership
firms which are ‘controlled’ by entities to whom Ind AS is applicable,
It has been clarified that when the government
are required to prepare Ind AS financial statements for the purpose of
provides incentives (for example, taxation benefits, consolidation.
etc. to promote an industry or for some other reasons)
it may not enter into a one to one agreement with
each entity availing those benefits with regard to the
rights and obligations of the scheme. Instead there is
2. The definition of a contract in Ind AS 115, Revenue from Contracts with

Customers, focusses on legal enforceability. However, the definition of a
contract was not amended in Ind AS 32. As a result, there are two definitions
of contract in Ind AS - one in Ind AS 115 and another in Ind AS 32.
In this case, capital balances could be demanded Accounting

by the retired partners anytime and the firm is 1. By the issuer
contractually obliged to deliver cash or another
financial asset. Hence such balances meet the
definition of a financial liability. Accordingly, as per Ind As per Ind AS 109, on initial recognition financial
AS 109, these amounts should be measured at fair guarantee contracts are recognised as a liability
value, computed as per the principles of Ind AS 113, (i.e. deferred income liability, such as ‘unearned
Fair Value Measurement. financial guarantee commission’) at their fair
value, with a corresponding debit given to an
Guidance under Ind AS 113 provides that the fair value appropriate account. The fair value of a financial
of a financial liability with a demand feature is not less guarantee contract issued in a stand-alone arm’s
than the amount payable on demand, discounted from length transaction to an unrelated party is likely
the first date that the amount could be required to be to equal the premium received. Where no up-
paid. front payment of premium is charged between
Accordingly, retired partners’ capital balances would unrelated parties, the fair value is likely to be zero.
not be required to be discounted on initial recognition
and subsequent measurement. (ITFG 15, Issue 9)
The application of Ind AS 115 would result in the
amount of unearned financial guarantee commission,
Similarly, fair value of an interest-free loan recognised initially as liability being amortised over the
liability or a low-interest bearing liability which period of the guarantee. Consequently, the balance
the lender can demand immediate repayment is of the unearned financial guarantee commission
not discounted on initial recognition. The impact would decline progressively over the period of the
of this requirement is that interest expense guarantee. Additionally, at each reporting date, the
would be recognised at the coupon rate for a issuer of the guarantee, would be required to compare
low-interest financial liability with an immediate the unamortised amount of the deferred income with
demand feature. the amount of loss allowance determined in respect
of the guarantee in accordance with the requirements
of section 5.5 of Ind AS 109. Accordingly, the guidance
Financial guarantee contracts would be as below:
Ind AS 109 defines a financial guarantee contract • Amount of loss allowance is lower than the
as one that requires the issuer to make specified unamortised amount of deferred income: Liability
payments to reimburse the holder for a loss that it with respect to financial guarantee would be
incurs because a specified debtor fails to make a represented by the unamortised amount of the
payment when it is due in accordance with original or financial guarantee commission.
modified terms of a debt instrument.
• Amount of loss allowance is higher than the
Legal form unamortised amount of deferred income: A further
Financial guarantee contracts can have various legal liability equal to the excess of the amount of the
forms. Such contracts may include a comfort letter, loss allowance over the amount of the unamortised
on the basis of which a credit holder receives a bank unearned financial guarantee commission would be
loan and the significant feature of the instrument is the recognised. (ITFG 16, Issue 1)
contractual obligation to make specified payments in
case of default by the credit holder. (ITFG 12, Issue 3)
29
Initial measurement • Guarantee provided by subsidiary to its parent:

Where an entity provides a financial guarantee Similar to the assessment above, the economic
against a loan taken by its related entity4, and receives substance of the arrangement in this case may be
a guarantee commission from that related entity, considered as a distribution made by the subsidiary
it should determine whether the commission is to its parent. Accordingly, the debit should be
equivalent to the premium that its related entity would made to an appropriate head under ‘equity’. It
pay to obtain a similar guarantee in a stand-alone arm’s would not be appropriate to debit fair value of
length transaction. If so, then, on initial recognition, the the guarantee to profit or loss (as if it were a non-
fair value of the financial guarantee contract is likely to reciprocal distribution to a third party) as it would
equal the commission received. (ITFG 12, Issue 11) fail to properly reflect the existence of the parent-
subsidiary relationship that would have caused the
If on the other hand, an entity issues a financial subsidiary not to charge the guarantee commission.
guarantee against a loan taken by its related entity5, (ITFG 16, Issue 1)
and no fee/commission is charged by the entity, then
on initial recognition, it would recognise the financial Subsequent measurement
guarantee contract at its fair value. Financial guarantee contracts should subsequently
As there is no specific guidance in Ind AS 109 or be measured in accordance with Ind AS 109. (ITFG 12,
any other standard with respect to determination of Issue 11 and ITFG 16, Issue 1)
fair value of such financial guarantee, the following 2. By the beneficiary
approaches have been suggested (by ITFG) for
determining fair value based on the principles of Ind AS
113: Ind AS 109 does not specifically address the
accounting for financial guarantees by the
• Fair value of the financial guarantee (at initial
beneficiary. However, in an arm’s length
recognition) could be the amount that an unrelated,
transaction between unrelated parties, the
independent third party would have charged for
beneficiary of the financial guarantee would
issuing the financial guarantee.
recognise the guarantee premium or fee paid as
• Estimate the fair value of the financial guarantee an expense in its statement of profit and loss.
as the present value of the amount by which the
interest (or other similar) cash flows in respect of
the loan are lower than what they would have been Where a director of the beneficiary company has
if the loan was an unguaranteed loan. issued a financial guarantee in favour of a bank,
which has provided a loan to the company, the
• Estimate the fair value of the financial guarantee as
beneficiary company would be required to assess the
the present value of the probability-weighted cash
substance of the transaction, taking relevant facts and
flows that may arise under the guarantee (i.e. the
circumstances into consideration, to determine the
expected value of the liability). (ITFG 16, Issue 1)
accounting treatment as follows:
While a liability is created on initial recognition of a
• Guarantee fee: If the company has paid a guarantee
financial guarantee, the corresponding debit has to be
fee or a premium to the director for the guarantee
given to an appropriate head. Where no commission is
provided, then it would account for such fee in
paid by a related entity (or where the payments are not
accordance with Ind AS 109.
equivalent to the fair value of the financial guarantee
contract), the financial guarantee contract will be • Other compensation: Where a director is being
accounted for as below: compensated for providing the guarantee, an
appropriate accounting treatment based on the
• Guarantee provided by parent to its subsidiary/
principles of the relevant Ind AS would be followed
associate: The fair value of the guarantee would
to recognise such compensation.
have been charged for issuing a similar guarantee
for a loan taken by an unrelated third party.
Therefore, a parent entity may consider that the
guarantee has been provided in its capacity as a
4. ITFG clarification bulletin 12, Issue 11, dealt with a situation where a
shareholder, consequently, the fair value of the financial guarantee had been issued by a parent against a loan taken by
guarantee (or the difference between the fair value its associate company.
and the payments received from the subsidiary/ 5. ITFG clarification bulletin 16, Issue 1, clarified a situation in which a
associate) would be considered as a capital financial guarantee was issued by a subsidiary, against the loan taken by
contribution to the subsidiary/associate. its parent.
Therefore, if no fee has been paid to the director Accordingly, the accounting in SFS would be as
(or other related party), and such party is not being follows:
compensated in any other manner, the company is • If the investment in a subsidiary has been
not required to account for such a financial guarantee accounted for at cost: Credit the distribution
in its financial statements considering that the unit of received to the statement of profit and loss.
account is the guaranteed loan. The loan is recognised Impairment loss, if any, would be separately
at its fair value that is expected to be the face value of considered.
the loan proceeds received by the company. However,
this transaction needs to be evaluated for disclosure • If the investment in subsidiary has been
under Ind AS 24, Related Party Disclosures which accounted for in accordance with Ind AS 109
requires disclosure of any guarantees given to or then accounting depends upon whether its
received from related parties. (ITFG 13, Issue 2) FVOCI or FVTPL as below:
– Measured at FVOCI: Recognise distribution in
the statement of profit and loss in accordance
A similar scenario may involve a parent entity
with guidance in Appendix B to Ind AS 109,
providing a financial guarantee to a bank relating
unless the distribution clearly represents a
to a loan advanced to its subsidiary. While Ind AS
recovery of part of the cost of the investment.
109 requires the guarantor, the parent entity to
recognise the guarantee liability at its fair value, – Measured at FVTPL: Credit the distribution
there is no specific accounting guidance relating received to the statement of profit and loss.
to a situation where a subsidiary does not pay Further, in accordance with Ind AS 24, in this situation
any guarantee fee or premium to the parent too, disclosures of related party transactions during
entity. In this case, we consider that this is akin the periods covered by the financial instruments,
to a deemed capital contribution by the parent including details of any guarantees given or received
to its subsidiary and should be recognised as an by the entity are required to be made. Based on this,
additional investment in the subsidiary. the parent would be required to make necessary
Additionally, ITFG has clarified the treatment for disclosure of the financial guarantee provided by its
such a case as above. subsidiary. (ITFG 16, Issue 1)
Financial guarantee by a parent for a loan taken
by its subsidiary that is repaid earlier than the
Where a subsidiary had issued a financial guarantee scheduled term
against a loan taken by its parents, ITFG clarified that
In a case where a financial guarantee was issued by
since the financial guarantee is an integral part of
a parent (P Ltd.) against a loan taken by its subsidiary
the loan taken, the parent should debit the fair value
(S Ltd.). The loan was initially scheduled to be repaid
of the guarantee to the carrying amount of the loan
over a period of 10 years and therefore, a liability (of
(which would have the effect of such fair value being
say INR1,000) was created by the parent which was
included in determination of Effective Interest Rate
to be amortised over a period of 10 years. When the
(EIR) on the loan) and credit the same in accordance
loan was prepaid within six years, ITFG clarified that
with the requirements of Ind AS 27 (as it is deemed as
guidance provided in Ind AS 8, Accounting Policies,
distribution made by the subsidiary).
Changes in Accounting Estimates and Errors should be
considered to account for the change in the estimate
In accordance with requirements of Ind AS 27, of expected life of the loan.
investment in a subsidiary should be accounted
for at cost or in accordance with Ind AS 109 in the
SFS of the parent.
31
Financial guarantee given by P Ltd.
Loan taken by S Ltd. for 10 years

but repaid in six years
P Ltd. S Ltd.
As per Ind AS 8, the effect of change in an accounting Debt-equity classification

estimate, should be recognised prospectively by
As per Ind AS 32, financial instruments or their
including it in profit or loss in the:
components are classified as a financial liability
• Period of the change: If the change affects that or equity in accordance with the substance of the
period only or contractual arrangement. Instruments are classified
• Period of the change and future periods: If the as a financial liability if they include a contractual
change affects both. obligation to deliver cash or other financial assets.
Equity instruments on the other hand, evidence
Further, if a change in an accounting estimate gives
a residual interest in the assets of the entity after
rise to changes in assets and liabilities, or relates to an
deducting all its liabilities.
item of equity, it should be recognised by adjusting the
carrying amount of the related asset, liability or equity
item in the period of the change.
The attribution debited to ‘investment’ upon

Financial instruments
providing guarantee is in substance the
consideration that the parent would have
collected for providing similar guarantee to
an unrelated third party. Generally, in case
of prepayment of loan by an unrelated third
party, the parent would not have refunded
the consideration and would have recognised
the entire unrecognised commission in the Financial Financial
statement of profit and loss. Similar approach assets Equity
liabilities
should be followed for guarantee given to the
subsidiary.
Financial instruments or their components that

Accordingly, in the given case, amount of financial are in the nature of derivatives that may be
guarantee obligation initially recognised at INR1, 000 settled in the issuer’s own equity instruments,
would be amortised as income in each accounting would be classified as equity, only if the terms
period as per Ind AS 109. At the end of year six, P of the instrument require an exchange of a
Ltd. would have INR400 as the carrying value of fixed amount of cash or other financial assets
financial guarantee in its financial statements. Since for a fixed number of the issuer’s own equity
S Ltd. has repaid the loan and no obligation exists instruments (known as the ‘fixed for fixed’
for P Ltd., therefore, P Ltd. should reverse the criterion).
balance outstanding as guarantee obligation with
corresponding recognition of revenue of INR400 in the
statement of profit and loss. (ITFG 16, Issue 7)
Classification as debt or equity a. The terms of the instrument provide it with the
ability to avoid making cash payment (of the
The primary factor determining the classification dividend as well as of the principal), and convert
of a financial instrument either as a financial the instrument into a fixed number of its own
liability or equity, is whether the entity that shares at any time,
has issued the instrument, has a contractual b. The conversion option is already considered
obligation to make payments (either principal, in determining the classification of the entire
interest/dividend or both) or has a contractual instrument, and hence is not accounted for
right to avoid making such payment. separately as an embedded derivative and
c. Discretionary payment features (such as
discretionary dividend) on equity instruments
are considered as an integral component of the
Discretionary dividends paid on a compound instrument. Considering these facts, the entire
financial instrument, i.e. an instrument that is instrument would be classified as equity in the
partly equity in nature may relate to the equity SFS of S.
component of the instrument. In this scenario,
an entity needs to assess whether discretionary – In the SFS of H: Ind AS 27 provides entities
dividend should be presented in equity. with an accounting policy choice to account for
Depending upon the facts and circumstances in their investments in subsidiaries, joint ventures
certain situations, discretionary dividends could and associates in their SFS, either at cost or in
be presented in profit or loss because dividend accordance with Ind AS 109. Assuming that H
payments on an instrument wholly recognised as has not chosen to account for its investment in
a liability are recognised as an expense. accordance with Ind AS 109, it would account for it
at cost.
– In the CFS: These transactions, being intra-group
In the context of debt-equity classification, the transactions, would be eliminated in accordance
ITFG considered the accounting for the following with Ind AS 110. (ITFG 14, Issue 7)
instruments: Foreign Currency Convertible Bonds (FCCB): In
• Non-cumulative, optionally convertible preference another situation, an entity (PQR) had issued
share issued by a entity (S) to its holding entity (H). FCCBs prior to transition to Ind AS at an interest
rate of six per cent per annum, payable on a half
yearly basis for a period of five years and one day.
These FCCBs would mature post transition to Ind
AS since PQR was required to comply with Ind AS
Issues
from 1 April 2017. The holder of the instruments
Non-cumulative had an option to convert them into fixed number of
optionally convertible shares of PQR.
S H
preference shares A borrowing in the same currency, with a similar
time period and credit status, but without the
As per the terms of issue, S has the option to convert conversion option would have carried an interest
or redeem the stated preference shares. Assuming rate of seven and a half per cent per annum.
that S has an option to convert the preference shares
into a fixed number of its own shares, and dividend
From the perspective of the issuer, the FCCB
payment is discretionary, the accounting for the
had both a liability and an equity component.
instrument will be as follows:
The liability component comprised a contractual
– In the SFS of S: While assessing the classification obligation of PQR to deliver cash to the holder,
of the preference shares in its SFS, S assesses that: and the equity component comprised the
holder’s equity conversion option embedded in
the FCCB to acquire a fixed number of entity’s
own equity instruments. Although the FCCB
was denominated in a foreign currency, the
conversion option would meet the definition of an
equity instrument based on the guidance in Ind
AS 32.
33
PQR would be required to split the FCCB into a. For each equity share of Class B held, the
the liability and the equity components on initial shareholder is entitled to subscribe to 100 equity
recognition and present these separately in the shares of Class A.
balance sheet. (ITFG 15, Issue 1) b. The rights offer price was fixed at:
• Compulsorily Redeemable Non-Cumulative – INR60 per Class A share for Indian shareholders,
Preference Shares (RNCPS): In case RNCPS issued and
by an entity (ABC) with a dividend of six per cent
per annum, redeemable in cash after 10 years. – USD1 per Class A share for overseas
The market rate of interest for similar instruments shareholders.
was four per cent per annum. It was clarified that c. The rights offer was valid for six months.
in accordance with Ind AS 32, the RNCPS are
compound financial instruments, since the payment
Ind AS 32 lays down the principles for the
of dividend to preference shareholders is at the
classification of financial instruments as financial
discretion of the issuer, i.e. ABC. Additionally, it was
assets, financial liabilities or equity instruments
clarified that any discretionary dividends would be
from the issuer’s perspective.
recognised when they are actually declared and paid
and since they relate to the equity component, they
would be disclosed in the statement of changes in The definition of financial liabilities, inter alia, states
equity as a distribution of profit or loss. that a financial liability is any liability that is a derivative
(ITFG 15 Issue 2) that would or may be settled other than by the
• Optionally convertible preference shares with exchange of a fixed amount of cash or another financial
discretionary dividend and an embedded call option: asset for a fixed number of the entity’s own equity
An entity K issued 12 per cent, five year, optionally instruments. For this purpose, rights, options or
convertible preference shares with discretionary warrants to acquire a fixed number of the entity’s own
non-cumulative dividend, at par in its functional equity instruments for a fixed amount of any currency
currency. As per the terms of issue: are equity instruments if the entity offers the rights,
a. The holder of the preference shares had an option options or warrants pro rata to all of its existing owners
to convert them into fixed number of equity of the same class of its own non-derivative equity
shares at the end of five years instruments…’
b. If the conversion option was not exercised, then Considering the above definition, ITFG evaluated the
the preference shares would be redeemed at par terms of the rights issue as below:
c. Throughout the five year period, the holder had an – The rights offer was for acquiring a fixed number of
option to put the preference shares back to entity the entity’s own equity instruments (i.e. for each
K at its par amount6. equity share of Class B held, the shareholder was
entitled to subscribe to 100 equity shares of Class A)
In accordance with Ind AS 32, the initial carrying
amount of the compound financial instrument would – The right exercise price was a fixed amount - i.e.
be allocated to its equity and liability components. INR60 per share for Indian shareholders and USD1
(ITFG 17, Issue 9) per share for overseas shareholders
For a discussion on the measurement of above – Entity X had made the rights offer to all the existing
compound financial instruments, please refer the shareholders of Class B equity shares pro-rata to
section on ‘Measurement of compound financial their holding of Class B equity shares.
instrument’. On the basis of the above evaluation, since all the
• Issue of rights offer: An entity X, with INR as conditions for equity classification were met, ITFG
its functional currency had two classes of non - concluded, that the rights offer to Class B shareholders
puttable equity shares - Class A and Class B. Post to acquire Class A shares should be classified as an
the date of transition to Ind AS, entity X made a equity instrument. (ITFG 17, Issue 10)
rights offer to all holders of Class B equity shares.
The terms of the right offer were:
6. For the purpose of this issue, it was assumed that issuance of

preference shares on these terms was permissible in the relevant
jurisdiction. Further, transaction costs were assumed to be
negligible.
• Preference shares issued in foreign currency:

An entity Y, with INR as its functional currency,
issued preference shares with three years term
denominated in a foreign currency to an overseas
investor. As per the terms of issue, at the end of
three years, entity Y had an option to either redeem
each preference share at USD10 or get it converted
into three equity shares of entity Y.
As a general principle, a derivative is a financial

liability if it will or may be settled other than
by the exchange of a fixed amount of cash or
another financial asset for a fixed number of the
entity’s own equity instruments. The term ‘fixed
amount of cash’ referred to an amount of cash
fixed in the functional currency of the reporting
entity. Since an amount fixed in a foreign currency
has the potential to vary in terms of functional
currency of the reporting entity due to exchange
rate fluctuations, it does not represent a ‘fixed
amount of cash’. However, as an exception,
Ind AS 32 regards an equity conversion option
embedded in a convertible bond denominated
in a foreign currency to acquire a fixed number
of the entity’s own equity instruments to be
an equity instrument if the exercise price was
fixed in any currency (i.e. functional or foreign
currency) .
Ind AS 32 made the aforementioned exception7 only in

the case of an equity conversion option embedded in
a convertible bond denominated in a foreign currency,
even though it explicitly recognised at several other
places that other instruments could also contain equity
conversion options. Given this position, it does not
seem that the above exception could be extended by
analogy to equity conversion options embedded in
other types of financial instruments denominated in a
foreign currency such as preference shares.
Accordingly, ITFG concluded that the equity conversion
option forming part of terms of issue of preference
shares under discussion would be a (derivative)
financial liability of entity Y Ltd. (ITFG 17, Issue 11)
7. IAS 32 does not have this exception and conversion option denominated
in a foreign currency does not meet the ‘fixed amount of cash’ criterion.
35
Measurement of compound financial • RNCPS: The liability component represents a

instrument contractual obligation to redeem the preference
shares in cash. Accordingly, the fair value of the
For compound financial instruments, entities are liability component on initial recognition would
required to follow ‘split accounting’ by separately be computed as the present value of the eventual
classifying and recognising the liability (mandatory redemption amount discounted at the market
coupon payable at a fixed interest rate) and equity interest rate. (ITFG 15, Issue 2)
components (principal component convertible into a
fixed number of equity shares). The equity component would be measured at the
residual amount, after deducting the fair value of the
financial liability component from the fair value of the
While measuring the liability and equity entire compound instrument. (ITFG 13, Issue 10 and
components, the entity first determines the fair ITFG 15, Issues 1 and 2)
value of the liability component (assuming there • Optionally convertible preference shares with
is no embedded derivative) by computing the discretionary dividend and an embedded call
present value of the contractually determined option: In case of entity K which issued optionally
stream of future cash flows. These cash flows are convertible preference shares with discretionary
discounted at the rate of interest applied at that non-cumulative dividend at par in its functional
time by the market to instruments of comparable currency with an embedded call option (since per
credit status and providing substantially the same the terms of issue the holder had an embedded call
cash flows, on the same terms, but without the option throughout the five year period)
equity component (such as a conversion option in
case of CCDs). In accordance with Ind AS 32, the initial carrying
amount of the compound financial instrument would
be allocated to its equity and liability components.
It would be computed as below for the following Further, Ind AS 109 deals with the measurement
instruments: of financial assets and financial liabilities. Equity
instruments are instruments that evidence a residual
• CCDs: CCDs with a mandatory coupon, issued interest in the assets of an entity after deducting all
for a period of 10 years, convertible into a fixed of its liabilities. Therefore, when the initial carrying
number of shares at the end of their term are in amount of a compound financial instrument is
the nature of a compound instruments. The liability allocated to its equity and liability components, the
component of the debentures would be computed equity component is assigned the residual amount
by discounting the interest cash outflows on the after deducting from the fair value of the instrument
compulsorily convertible debentures for 10 years as a whole the amount separately determined for
at the incremental borrowing rate applicable to the the liability component. The value of any derivative
entity for a comparable 10 year loan. (ITFG 13, Issue features (such as a call option) embedded in the
10) compound financial instrument other than the equity
• FCCB: FCCBs issued at an interest rate of six per component (such as an equity conversion option)
cent per annum for a period of five years, which is included in the liability component. The sum of
provide a holder an option to convert them into fixed the carrying amounts assigned to the liability and
number of shares are in the nature of a compound equity components on initial recognition is always
instrument. The liability component of the FCCB equal to the fair value that would be ascribed to the
would be measured at fair value by discounting the instrument as a whole. No gain or loss arises from
scheduled payments of interest and principal under initially recognising the components of the instrument
the instrument at an interest rate applied at that separately.
time by the market to instruments of comparable Accordingly, entity K would be required to first
credit status, providing substantially the same determine the carrying amount of the liability
cash flows on the same terms, but without the component by measuring the fair value of a similar
conversion option (market interest rate). (ITFG 15, liability (including any embedded non-equity derivative
Issue 1) features) that does not have an associated equity
component. The carrying amount of the equity
component would be the residual amount, computed
by deducting the fair value of the financial liability from
the fair value of the compound financial instrument as
a whole. The value of the derivative feature embedded
in the compound financial instrument (the call
option in this case), would be included in the liability

component. There is no ‘rule of thumb’ in terms of an
However, the ITFG noted that in the given case, entity indicative percentage to determine ‘infrequent
K had a contractual obligation to pay the par amount number of sales’ or sales that are ‘insignificant
to the holder of a preference share at any point in time. in value’, considering the differing quantum,
Hence, the liability component had a demand feature configuration and nature of financial assets in
attached. Thus, while measuring the fair value of the various entities. Management should, therefore,
liability component, reference to Ind AS 113 would be exercise judgement and establish criteria to
required to be made. identify situations in which sales of financial
assets occurring before maturity may be
consistent with a ‘held to collect’ business model.
As per Ind AS 113, the fair value of a financial
(Frequently asked questions (FAQs) issued by the
liability with a demand feature (e.g. a demand
ASB of the ICAI on elaboration of terms used in
deposit) is not less than the amount payable on
Ind AS 109).
demand, discounted from the first date that the
amount could be required to be paid.
Measurement of financial assets
Therefore, in accordance with the above, the whole On initial recognition, a financial asset or a financial
price of the preference shares would be allocated liability is measured at fair value plus or minus directly
to the liability component and no amount would be attributable transaction costs, unless:
assigned to the equity component. (ITFG 17, Issue 9) • The instrument is classified as at FVTPL, in which
case transaction costs are not included, or
On initial recognition, Ind AS 109 requires entities • The instrument is a trade receivable that is initially
to classify financial assets into the amortised measured at the transaction price as defined in Ind
cost, FVOCI or at FVTPL categories based on the AS 115.
business model within which they are held and Normally, the fair value on initial recognition is the
the nature of their contractual cash flows. transaction price as described in Ind AS 109 i.e. the
fair value of the consideration given or received for the
financial instrument. If part of the consideration given
Classification of financial assets or received is for something in addition to the financial
The classification determines the basis on which such instrument, then the entity separately measures the
financial assets are subsequently measured. Entities fair value of the financial instrument in accordance
may hold financial assets within a business model, with Ind AS 113.
which has an objective to either: Low interest and interest free financial instruments8
• Hold assets in order to collect contractual cash An entity may sometimes receive or give certain
flows (‘held to collect’) interest-free or low interest financial instruments, e.g.
• Both collect contractual cash flows and sell financial inter company loans, government loans, interest-free
assets (‘held to collect and for sale’), or security deposits, etc., the transaction price of which
may not necessarily reflect an instrument’s fair value.
• Hold assets for sale (‘held for sale’).
In such a case, the fair value of the instrument is
Financial assets held within a ‘held to collect’ business computed in accordance with Ind AS 113.
model are generally managed by collecting the cash
Ind AS 113 requires entities to maximise the use of
flows generated by the asset over its life. However,
quoted prices or other relevant observable inputs.
Ind AS 109 clarifies that entities need not hold all
However, if these are not available, a valuation
instruments until maturity. Thus, it becomes necessary
technique may also be used, such as a present value
to consider the frequency, value and timing of sales
technique with inputs that include future cash flows
in prior periods, and expectations about future sales
and discount rates that reflect assumption that
activities when assessing the business model. In this
market participants would apply in pricing the financial
context, Ind AS 109 states that sales of instruments
instrument. The difference between the fair value
could be consistent with a ‘held to collect’ business
of the instrument and the transaction price on initial
model if they are infrequent (though significant in
recognition of the instrument would be accounted for
value) or are insignificant in value both individually and
separately. The accounting treatment for these will
in aggregate (even if frequent). Ind AS 109, however,
depend upon the nature of the element included in the
does not define ‘infrequent’ or ‘insignificant’.
instrument.
8. EAC- January 2019 edition of the ICAI Journal ‘The Chartered Accountant’
37
ITFG clarified that since S Ltd. is under an obligation

There has been significant debate and diversity to repay the loan provided to it by H Ltd., the loan
in the accounting treatment for interest-free represents a financial liability of the subsidiary
refundable security deposits, specifically on and should be so recognised. Additionally, on a
adjustment of time value of money. Accounting consideration of the substance of the transaction
for security deposits is dependent on their nature and in the absence of any factors that lead to a
and the purpose for which these have been different conclusion as to its nature, the excess of the
placed as well as the terms of the contract. loan amount over the fair value of the loan at initial
recognition should appropriately be regarded as an
equity infusion by the parent and should therefore, be
The ITFG considered an interest-free refundable credited directly to equity. (ITFG 18, Issue 3)
security deposit given by an entity (for example, a
lease deposit). Since the deposit represents the In assessing whether the interest charged
entity’s contractual right to receive cash from on a loan is at a below market rate, an entity
the holder of the deposit, it is a financial asset in should consider the terms and conditions of the
accordance with Ind AS 32. ITFG stated that where loan, local industry practice and local market
the effect of time value of money is material, the circumstances. Evidence that a loan is at market
refundable security deposit would be discounted and rates might include the interest rates currently
be shown at its present value at the time of initial charged by the entity, or by other market
recognition. With regard to the rate at which these participants for loans with similar remaining
would be discounted, the entity should evaluate maturities, cash flow patterns, currency credit
on the basis of its own facts and circumstances. risk, collateral and interest basis.
Further, whether the effect of time value of money is
material should be determined on the basis of overall
consideration of total cash flows, etc. The difference
Interest, dividends, losses and gains on
between the transaction price and the fair value as
determined above should be accounted in accordance financial instruments
with Ind AS 109. (ITFG 15 (revised), Issue 7) Ind AS 32 requires interest, dividends, losses and
For example, in case of an interest free rent deposit gains on financial instruments to be recognised
paid to a lessor, the difference between the present either in the statement of profit and loss or in equity,
value of deposit and the amount of deposit paid would depending on the classification of the financial
form the part of the Right-Of-Use (ROU) asset and instruments or components of financial instruments to
would be depreciated over the lease term9. which they pertain.
In a scenario a subsidiary company (S Ltd.) received
an interest-free loan from its holding company (H Ltd.).
The subsidiary is under an obligation to repay the loan
at the end of five years. In accordance with Ind AS 109,
S Ltd. is required to initially recognise the loan at its fair
value determined according to the principles laid down
in Ind AS 113.
Interest free loan

Repayable in five
H Ltd. years S Ltd.
ITFG considered the accounting treatment of the

difference between the loan amount and the fair value
of the loan at initial recognition in the books of S Ltd.
9. Question 52 from education material on Ind AS 116, Leases,

published in January 2020 by the ICAI
Dividends on financial liabilities At the date of transition, the amortised cost of the
As per Ind AS 32, dividends paid on financial preference shares (which includes unpaid dividend)
instruments that are classified as financial liabilities, would be computed retrospectively from the date of
would be presented as ‘interest expense’, and their issue using the EIR method (Ind AS 101 does
accounted for accordingly. not provide any mandatory exception or optional
exemptions for such financial instrument).
Ind AS 10, Events after the Reporting Period states that
when entities declare dividends to holders of equity While computing the amortised cost of the preference
instruments after the reporting period, they should not shares using the EIR method, the dividends that have
recognise a liability for those dividends at the end of accrued but not paid would be reflected in the carrying
the reporting period. amount of the liability.
Dividend/interest on financial instruments or In accordance with Ind AS 101, the difference between
components classified as liabilities are ‘interest the amortised cost and the carrying amount of the
expenses’, and hence, should accrue at the end of the preference shares as per the previous GAAP would be
reporting period, irrespective of when the dividend adjusted directly in retained earnings (or, if appropriate,
is declared (even after the reporting period) or paid. If another category of equity) as at the date of transition.
the liability is classified and subsequently measured Further, dividend for periods after the date of transition
at amortised cost, the dividend/interest would be would be accrued in each period, in the same manner
computed using the EIR method and debited to as interest, and if unpaid would get reflected in the
interest expense (in the statement of profit and loss). amortised cost as at the end of the period.
(ITFG 7, Issue 6) (ITFG 20, Issue 3)
Accounting for accumulated arrears of dividend on
cumulative preference shares on transition to Ind When an instrument is classified as a financial
AS liability, all coupon payments are recognised as
A loss-making entity (P) issued cumulative preference part of finance costs in the statement of profit
shares prior to transition to Ind AS. Other facts are as and loss under the EIR method10.
below:
– It did not pay dividend to its preference In the above case, if the dividends were discretionary,
shareholders then the issuer considers whether unpaid dividends
– The accumulated arrears of cumulative preference are added to the redemption amount of the preference
dividend were disclosed as ‘contingent liability’ in shares. If any unpaid dividends are added to the
the notes to the financial statements redemption amount and the entity does not have
the unconditional ability to avoid redemption before
– On transition to Ind AS, the preference shares liquidation, then the dividends are not in substance
were classified as financial liability in accordance discretionary and the entire instrument including the
with the principles of Ind AS 32. discretionary dividend feature is a financial liability.
ITFG clarified that preference shares that are classified Furthermore, if an entity is or may be obliged to
in entirety as a financial liability are accounted for redeem the instrument at fair value, then unpaid
under Ind AS 109 in the same manner as a redeemable dividends are implicitly added to the redemption
debenture or a typical loan. This implies, inter alia, that amount if the payment of dividends decreases the fair
the dividends on the preference shares are accrued in value of the instrument being redeemed.
the same manner as interest on debentures or loans. Also, an entity should evaluate implication on
In the given situation, the preference shares would Minimum Alternate Tax (MAT) computation under the
be classified as financial liability in their entirety (the Income-Tax Act, 1961 (IT Act) with regard to dividend
covenants of their terms of issue relating to dividends on preference shares.
would represent a contractual obligation of P to
pay such dividends). Accordingly, these dividends
would be accrued in the same manner as interest on
debentures or loans. 10. EIR is the rate that exactly discounts estimated future cash
payments or receipts through the expected life of the financial asset/
liability. It is used to compute the gross carrying amount of financial
assets or the amortised cost of financial liabilities.
39
Dividend distribution taxes

Ind AS 12, Income Taxes provides that when an
entity pays dividend to its shareholders, it may be
required to pay a portion of the dividends to the
taxation authorities on behalf of shareholders. In
many jurisdictions, this amount is referred to as a
withholding tax. Such an amount paid or payable to
taxation authorities is charged to equity as a part of the
dividends.
It has been clarified that DDT, in substance, is a
payment by the company on behalf of shareholders
and therefore, would covered in guidance of Ind AS 12.
Further, the presentation of DDT paid on dividends to
be consistent with the presentation of the transaction
that created those income tax consequences.
Therefore, the presentation of dividend and DDT in an The manner of computation of income and its
entity’s SFS would be as follows: recognition as per Ind AS 109 is explained below:
• Financial instruments classified as debt: • Debt instrument subsequently measured at
Dividend on the financial instruments and DDT amortised cost: The interest income is computed
thereon should be charged to the statement of by applying the EIR to the gross carrying amount of
profit and loss. the financial asset, when the instrument is not
‘credit- impaired’. Instruments are said to be credit
• Financial instrument classified as equity:
impaired if they are unable to meet their financial
Dividend on the financial instruments and DDT
contractual obligations due to detrimental cash
thereon should be recognised in equity and
flows. Interest income on such assets is computed
presented in the statement of changes in equity.
in the manner specified below:
(Revised FAQ on Presentation of Dividend and
Dividend Distribution Tax issued by the ASB of the – Where the asset was credit-impaired on its
ICAI) purchase or on origination: Interest income
is computed on such assets by applying the
In another issue, ITFG clarified that when the
credit adjusted EIR to the amortised cost of the
preference shares are classified as a liability in their
financial asset
entirety the related DDT should be regarded as part of
interest cost and should form part of EIR calculation. – Where the asset has subsequently become
(ITFG 17, Issue 2) credit impaired: Interest is computed by applying
EIR to the amortised cost of the financial asset
Recognition of interest income
during the period that the asset is considered as
Ind AS 109 requires interest revenue on financial credit impaired. When the credit risk improves
assets at amortised cost or FVOCI (investments so that the financial asset is no longer credit
in debt instruments) to be computed using the EIR impaired, interest income is computed by
method, wherein the EIR is applied to the gross applying the EIR to its gross carrying amount.
carrying amount of a financial asset, except in certain
• Debt instrument is classified and measured
circumstances.
at FVOCI: Interest income is recognised in the
statement of profit and loss in accordance with the
Dividend income on an investment in a debt EIR method.
instrument would be recognised in the form
• Debt instrument is classified and measured at
of ‘interest income’ by an investor. However, the
FVTPL: Interest income is generally presented
manner in which income would be computed and
as part of the fair value gains or losses on the
recognised would depend on the classification
instrument or may be presented separately in the
and measurement category of the investment in
statement of profit and loss. An entity is required
a debt instrument, as determined as per Ind AS
to disclose its accounting policy on this aspect in its
109.
financial statements. (ITFG 8, Issue 9)
ITFG has also provided further clarification for a and processing fees) are treated as an adjustment to
financial asset while classifying under amortised cost the EIR and are amortised over the expected life of the
and FVOCI (debt) categories. instrument.
Therefore, in accordance with Ind AS 109, to be (Please refer chapter 10 on Other topics- Borrowing
classified as amortised cost or FVOCI (debt) category, Costs for more details on capitalisation of DDT paid on
a financial asset must meet the following two preference shares dividend and processing charges to
conditions: the cost of qualifying asset) (ITFG 13, Issue 1 and ITFG
• Business Model Test and 14, Issue 1)
• Contractual Cash flow Characteristic test (SPPI test). Undisbursed loans
Ind AS 109 provides guidance on the SPPI and

Processing fees paid relating to term loans are
business model test.
in the nature of origination fees and are adjusted
The ITFG considered an example of a redeemable in the EIR of the term loan. However, where the
preference shares as a debt instrument with legal form loan is drawn down in tranches, processing fees
of income as dividend. In order to assess if SPPI test need to be evaluated for each tranche separately.
is met for a redeemable preference share, an entity
would need to evaluate if the dividend is discretionary
or non- discretionary. For undisbursed term loans, the processing fees
Where payment of dividend is not at the discretion of should be accounted for as follows:
the issuer, the contractual cash flows (dividends and • Where it is probable that the undisbursed
redemption proceeds) associated with the preference term loan will be drawn down in the future:
share would be akin to those associated with a plain- The processing fee pertaining to the loan should
vanilla loan or other plain-vanilla debt instrument be considered as a transaction cost under Ind AS
unless the cash flows do not meet the SPPI test. 109, and amortised to the statement of profit and
On the other hand, where the payment of dividend loss over the period of the loan tranche it pertains
on the preference share, whether cumulative or to, when it is drawn down. Until then, the amount
non-cumulative, is at the discretion of the issuer, the would be recognised as a deferred expense in the
contractual cash flows characteristics differ from those balance sheet.
of a basic lending arrangement as interest is also a • Where it is not probable that the undisbursed
contractual cash flow in a basic lending arrangement. portion of the term loan will be drawn down in
Accordingly, a preference share with a discretionary the future: The entire processing fee pertaining to
dividend feature cannot be said to represent a basic the loan should be recognised as an expense on a
lending arrangement. Hence, such a preference share straight-line basis, over the term of the loan.
fails the SPPI test and cannot, therefore, be classified (ITFG 10, Issue 2)
as at amortised cost or FVOCI. Therefore, such However, further clarity may be required on the period
preference share would be classified at FVTPL. over which the processing fees should be amortised,
In case the preference shares meet the SPPI test and i.e. whether this is the remaining drawdown period or
business model test then the dividend income would the tenor of the disbursed component of the loan.
be accounted for using EIR method provided the If, on the other hand, the fees paid by the entity are in
instrument is classified under either at amortised cost the nature of facility or commitment fees for ensuring
or FVOCI. availability of funds during the draw-down period
In case, it does not meet above tests or the entity has of a loan, we consider that it may be appropriate to
chosen the fair value option, the instrument would recognise such fees on the undrawn component as an
be classified at FVTPL and the entity would give expense over the facility commitment period. In that
disclosures for its accounting policy in accordance with scenario, the fees would relate to arranging the loan
disclosure requirements contained in Ind AS 107. facility, and are intended to compensate the bank for
(ITFG 17, Issue 4) keeping funds available during the commitment period.
This commitment period could be shorter than the
EIR - Transaction costs term of the loan (relating to the component that may
On initial recognition of an instrument, Ind AS 109 have been drawn down).
requires entities to identity transaction costs and fees
that are an integral part of the EIR of such instruments.
These transaction costs and fees (such as origination
41
Modification of financial instruments Quantitative and qualitative factors are described as

below:
The terms of financial instruments may be Quantitative assessment: Terms are considered
renegotiated, resulting in a modification in the to have been substantially modified when the net
timing and/or amount of contractual cash flows present value of the cash flows under the new terms,
of the instrument. The modified terms need to be including any fees paid, net of any fees received and
evaluated to ascertain the extent of modification, discounted using the original EIR differ by at least 10
which would determine the accounting treatment per cent from the present value of the remaining cash
for the transaction. flows under the original terms (this is also called as the
’10 per cent test’).
Qualitative assessment: The purpose of a qualitative
Modification of terms that do not result in
assessment is to identify substantial differences in the
derecognition
terms of the modification that by their nature are not
Where the modification of a financial instrument would captured by a quantitative assessment.
result in revised cash flows whose timing and amount
Substantial modification of terms would lead to
is not substantially11 different from those of the original
derecognition of the original loan and recognition of
instrument, such modification would not result in
the new (modified) loan, at its fair value. The difference
derecognition of the instrument. In this case, the gross
between the amount derecognised and the fair value
carrying amount of the instrument is recalculated
of the new loan is treated as a modification gain or
by discounting the modified contractual cash flows
loss and recognised in the statement of profit and loss.
using the original EIR. Any difference between this
Expenses incurred on such modification, including
recalculated amount and the existing gross carrying
transaction costs should be assessed to determine
amount (of financial assets or amortised cost of
their accounting treatment.
financial liabilities) is recognised in the statement of
profit and loss as a modification gain or loss. Refinancing arrangements
If a debt instrument is in default in a particular financial When an entity enters into a refinancing arrangement
year (say year 1), and the terms of the instrument have for its old loan facility, wherein it takes a new loan
been renegotiated in the next financial year (say year to pay off its old loan facility, this arrangement is
2) (prior to approval of the financial statements), the considered as a modification resulting in derecognition
modification gain or loss on the renegotiated debt of the old loan. Such a transaction involves various
instrument would be recognised in the financial year in fees, including processing fees for the new loan and
which the renegotiation contractually takes place prepayment premium for the old loan. The accounting
(i.e. year 2). (ITFG 13, Issue 6) treatment for the transaction would be as follows:
Modification of terms that result in derecognition • Original loan: The difference between the carrying
of a financial liability amount of the original loan repaid (or extinguished)
and the consideration paid on extinguishment would
As per Ind AS 109, a financial liability is derecognised
be recognised in the statement of profit and loss.
when it is extinguished – i.e. it is discharged or
cancelled or expires. This may happen when: • Unamortised processing fees on old loan: These
would be charged to the statement of profit and
• Payment is made to the lender, e.g. when the issuer
loss.
of a debt instrument redeems the instrument
• Prepayment premium: Refinancing of the old loan
• The borrower is legally released from primary
is in the nature of a modification in the terms of the
responsibility for the financial liability, or
loan that would lead to derecognition of the old loan.
• There is an exchange between an existing lender Accordingly, the prepayment fees paid by the entity
and borrower of debt instruments with substantially would be considered as costs or fees incurred on
different terms or a substantial modification of the extinguishment of the loan, and would be included
terms of an existing debt instrument. as a part of gain or loss on extinguishment of the
loan (in the statement of profit and loss).
To determine whether there is a substantial • New loan processing fees: Processing fees on the
modification of terms, entities need to consider new loan facility are not a modification/renegotiation
both quantitative and qualitative factors.
11. As per Ind AS 109, the extent of modification needs to be determined

considering qualitative and quantitative factors.
fee. Instead, these are an integral part of originating • Change of lender results in legal release
the new loan and would be considered as a from primary liability: It should derecognise
transaction cost that is included in the computation entire amount of the existing loan and the new
of EIR of the new loan. (ITFG 12, Issue 4) arrangement with ARC would be accounted for as
a new loan. The difference between the carrying
It is imperative to note that modification of amount of the financial liability extinguished and
accounting treatment (described above) may the consideration paid (including any non-cash
not apply to situations where the contractual assets transferred or liabilities assumed) would be
terms of a loan are modified/restructured due recognised in the statement of profit and loss.
to financial difficulties. Entities would have to • Change of lender does not result in legal release
analyse the relevant facts and circumstances from primary liability: It should consider whether
to determine whether the modified loan should there is a substantial modification of terms of the
be derecognised and the consequent impact existing financial liability (or part of it) based on the
on costs and fees incurred in relation to the quantitative and qualitative assessment.
origination or modification of the loan.
• In this case, ITFG highlighted that there were
no additional factors that would require B Ltd. to
Restructuring of loan perform a qualitative analysis. Therefore, if the
quantitative threshold of 10 per cent is met, then
Where a non-performing loan was transferred to modification of terms should be considered to be
an Asset Reconstruction Company (ARC) and was substantial and vice-versa.
restructured by the ARC, the borrower (say B Ltd.)
was required to assess whether this would lead to • In this case, a part of the loan had been settled by
derecognition of the existing loan. The restructuring way of issue of equity shares of B Ltd. Therefore,
involved: fair value of the equity shares should be accounted
for in accordance with Appendix D, Extinguishing
• A hair cut by ARC for some portion of the loan Financial Liabilities with Equity Instruments to Ind
• Partial settlement of the loan by issue of fully paid- AS 109 and guidance contained in Ind AS 109. With
up equity shares at traded market price and respect to the balance portion, the modifications
• The balance loan amount would be paid in relate to terms that were captured by the
installments over seven years at a revised interest quantitative test (i.e. the haircut, rescheduling of
rate, which was linked to the Marginal Cost of repayment, and change in interest rate). Accordingly,
funds-based Lending Rate (MCLR). if the modification of balance loan was considered
to be substantial, then B Ltd. would be required
to derecognise the balance loan and recognise
The guidance given in Ind AS 109 relating to
the new modified loan. Any difference between
extinguishment of a liability and modification of
the carrying amount of the original loan and new
debt provides that an entity should derecognise
modified loan would be recognised in the statement
a financial liability (or a part of a financial
of profit and loss. (ITFG 16, Issue 3)
liability) from its balance sheet only when it is
extinguished or is substantially modified.
In the given case, it was clarified that B Ltd. would

be required to assess whether change of the lender
(assignment of loan) from bank to the ARC is a legal
release from the primary liability to the bank.
Accordingly, if B Ltd. concluded that:
43
Hedge accounting loss and equity would be affected by reasonably

possible changes in the relevant risk variable at the
Ind AS 109 permits an entity to apply hedge accounting
reporting date.
principles to its derivative transactions if it meets the
qualifying criteria specified in the standard. Ind AS 109 Paragraph D13AA of Ind AS 101 permits an entity
specifies that ‘a cash flow hedge is a hedge of the to continue the policy (if selected under AS) of
exposure to variability in cash flows that is attributable capitalising/transferring to reserves the foreign
to a particular risk associated with all, or a component exchange differences arising from translation of long-
of, a recognised asset or liability (such as all or some term foreign currency monetary items recognised
future interest payments on variable rate debt) or a prior to the date of implementation of Ind AS. The
highly probable forecast transaction, and could affect financial risk related disclosure requirements of Ind
profit or loss.’ In a cash flow hedge the fair value gains AS 107 would also apply to such long-term foreign
or losses on the derivative hedging instrument are currency monetary items (for which the option under
recognised in reserves and recycled to the statement paragraph D13AA of Ind AS 101 has been availed). This
of profit and loss when the hedged item/hedged is because, the entity still remains exposed to foreign
transaction affects profit or loss. currency risk in respect of such instruments, and
these could lead to an indirect impact in the statement
of profit and loss or equity, for example through
An entity that has, under paragraph D13AA of Ind
depreciation or amortisation of the capitalised amount
AS 101, continued its previously adopted policy
of exchange differences. (ITFG 13, Issue 8)
of capitalising foreign exchange differences on its
long-term foreign currency loan will not recognise
these foreign exchange differences in profit or
loss. These foreign exchange differences form
part of the carrying value of the related fixed
asset and are depreciated over the balance useful
life of the asset.
An entity that has availed of the option available under

paragraph D13AA of Ind AS 101 and continues to
capitalise (to the cost of the related asset) the foreign
exchange differences arising from a long-term foreign
currency loan, has no corresponding foreign currency
exposure (arising from that loan) that affects profit or
loss. Accordingly, cash flow hedge accounting under
Ind AS 109 would not be applicable to any foreign
currency derivatives transacted to hedge the foreign
currency risk of such foreign currency loans. The
derivatives would therefore be considered as held for
trading and any change in fair value recognised in profit
or loss. (ITFG 3, Issue 10)
Disclosure
Market risk disclosures for certain instruments
As per Ind AS 107, entities are required to provide
quantitative and qualitative disclosures of their
exposure to various financial risks arising from financial
instruments. Ind AS 107 also requires disclosure
of an entity’s objectives, policies and processes for
managing those risks and other concentrations of risk.
Additionally, with respect to market risk, in addition
to disclosing the exposure to foreign currency risk,
interest rate risk, and other price risk, an entity is
required to provide an analysis of sensitivity to these
risks. This sensitivity analysis reflects how profit or
45
EAC opinions facility as this cost would not have been incurred if the
entity had not incurred the loan liability.
Expected Credit Loss (ECL) on the Thus, the financial guarantee fee paid (initially as well
as subsequently) by the entity should be considered
amount due in the course of business for computation of EIR while measuring the loan
from government organisations12 liability at amortised cost in compliance with the
Ind AS 109 provides guidance for impairment provisions of Ind AS 109.
recognition of ECL on financial instruments.
Further, the use of practical expedients when Treatment of financial liability under Ind
measuring ECL, if they are consistent with the AS 32 and Ind AS 10914
principles provided therein, is permitted by Ind AS Please refer to similar guidance discussed in the
109. chapter in earlier section on ‘Low interest and interest
EAC considered a situation in which A Ltd. (a free financial instruments’.
government entity) is mainly engaged in business
Treatment of ‘prepayment penalty’
with central government, state government,
autonomous bodies or public sector undertakings. incurred for foreclosure of existing loan
In accordance with Ind AS 109, A Ltd. applies
and availing new loan borrowings15
ECL model for measurement and recognition of The EAC deliberated on the accounting treatment of
impairment loss for financial assets. the ‘prepayment penalty’ incurred for foreclosure of an
existing loan and availing new loan/borrowing
As a practical expedient A Ltd. has adopted
(from a new bank).
‘simplified approach’ using the provision matrix
method for recognition of expected loss on its Transaction costs are the incremental costs which are
trade receivables. directly attributable to the acquisition or disposal of a
financial liability.
EAC deliberated on whether Ind AS 109 provides
an exemption from application of ECL model. Ind AS 109 requires that at the time of initial
recognition, financial liability should include only the
The EAC concluded that the impairment
transaction costs that are directly attributable to the
requirements of Ind AS 109 are mandatory and
acquisition or issue of the new financial liability and not
there are no exceptions. Trade receivables are
the transaction cost of disposal of the existing financial
measured at amortised cost then they are subject
liability.
to the impairment requirements of Ind AS 109.
In this case, EAC clarified that prepayment penalty is
Computation of EIR on borrowings13 the transaction cost of disposal of the existing financial
The EAC deliberated on the issue related liability (loan) which is payable to the existing loan
to accounting for guarantee fee paid to the provider rather than the incremental cost of acquisition
Government of India in relation to the loan taken or issue of the new financial liability (new loan) from
from the foreign lender (since Government of India a new bank. Further, such a penalty is incurred to
is not directly a party/lender in given situation). extinguish the existing liability and to get the benefits
of a lower cost liability (loan). It is not incurred to
Ind AS 109 requires that the fees paid or received
acquire a new financial liability (loan). Therefore, this
between parties to the contract that are an
penalty could not be treated as directly attributable
integral part of the EIR and transaction costs are to
to the acquisition of the new financial liability and
be considered while applying EIR method.
should be recognised as part of the gain or loss on
Ind AS 109 further provides that transaction costs extinguishment/derecognition of the old loan in the
are incremental costs that are directly attributable statement of profit and loss.
to the acquisition or issue of a financial liability and
an incremental cost is one that would not have
been incurred if the entity had not acquired or 12. EAC-October 2018 edition of the ICAI Journal ‘The Chartered
Accountant’
issued the financial instrument.
13. EAC-August 2019 edition of the ICAI Journal, ‘The Chartered Accountant’
Accordingly, in the above situation, the EAC 14. EAC- January 2019 edition of the ICAI Journal ‘The Chartered
clarified, the guarantee fee paid (initially as well Accountant’
as subsequently) is an incremental cost which is 15. EAC- January 2019 edition of the ICAI Journal ‘The Chartered
directly attributable to the acquisition of the loan Accountant’
Accounting for Funded Interest Term • Where B Ltd. was acting in its capacity of a
Loan (FITL) subsequent to restructuring shareholder (by providing financial support
in the form of interest-free funding): The
of a loan taken from a shareholder16 difference between the nominal amount and the
Due to financial difficulties, an entity restructured its fair value on initial recognition of the FITL would
loan and availed a Funded Interest Term Loan (FITL). be recognised in an appropriate component of
As a result of restructuring agreement, the equity (as a non-reciprocal capital contribution by
repayment terms of the original loans were the shareholder) on transition to Ind AS (Similar to
extended and the interest accrued thereon was guidance of ITFG 18, Issue 3)
converted into another loan called FITL. Further, • Where B Ltd. was acting as a lender (similar
the entity under the previous Indian GAAP, to an unrelated lender by providing financial
derecognised the interest accrued and recognised restructuring package to its borrower due to
FITL as an unsecured term loan under financial difficulty): The difference between the
‘long-term borrowings’ in its financial statements. FITL amount and its fair value would generally be
Ind AS 109 requires an entity to assess whether recognised in profit or loss, unless it qualifies for
the modification in the terms of the borrowings recognition as an asset or liability.
would result in its derecognition and the recognition Government grant
of a new liability. Further, Ind AS 101 prohibits
retrospective application of the derecognition If the lender is government entity then it needs to
requirement (where such derecognition was prior be evaluated if the lender is acting in its capacity of
to transition to Ind AS), unless the information a government.
required to apply the same was obtained at the time Ind AS 20, Accounting for Government Grants and
of initially accounting for those transactions. Disclosure of Government Assistance, provides
Assuming that the entity in this case did not have that the government grants are assistance by
the information required to apply the derecognition government in the form of transfers of resources to
requirements retrospectively, in accordance with an entity in return for past or future compliance with
Ind AS 101, the entity should not reassess whether certain conditions relating to the operating activities
the derecognition of accrued interest on the old of the entity.
loans and recognition of the new loans (including The FITL is an interest-free loan extended by the
the FITL) would have been appropriate under Ind AS. lender to the entity as a consequence of a financial
Accounting for interest-free loan restructuring package due to financial difficulty. The
interest-free benefit is, therefore, not in the nature
Since the FITL is an interest-free loan (the EAC of government assistance or benefits provided
noted), entity would have to determine its fair value to similar entities in general. There are no further
on initial recognition (i.e., at the time of the financial terms or conditions attached to the receipt of this
restructuring), being its discounted present value benefit that need to be complied with by the entity.
based on the prevailing market interest rate (for These factors indicate that the lender is not acting in
a similar instrument as to currency, term, type of its capacity as government in providing the interest-
interest rate and other factors with a similar credit free FITL to the entity.
rating) at the time of initial recognition.
Hence, the EAC clarified that the FITL does not
Additionally, the EAC clarified that the amortised meet the definition of a government grant.
cost on the date of transition would then be
determined by unwinding the discount for the
period from the date of initial recognition to the 16. EAC-March 2019 edition of the ICAI Journal ‘The Chartered
transition date. The resultant adjustment, related Accountant’
to the unwinding of the discount, should be
recognised in retained earnings on transition.
In the given situation the entity would be required to
determine whether B Ltd. (while providing the loan)
was acting as a shareholder or a lender. Thereafter
the accounting treatment would be as below:
47
4. Tangibles and
Intangibles Assets
Summary
• Ind AS 16, Property, Plant and Equipment
• Ind AS 38, Intangible Assets
• Ind AS 40, Investment Property
Non-financial assets recognised by an entity under Ind AS may include, tangible fixed assets
such as Property, Plant and Equipment (PPE), investment property and intangible assets such
as technology, brands, etc. This chapter includes a discussion on key clarifications on the
implementation issues on applying the standards on non-financial assets.
Key principles Significant differences from IFRS1
General principles Revenue based amortisation for toll road

intangible assets
• PPE are tangible items that are held for use in the
production or supply of goods or services, for rental As per paragraph 7AA in Ind AS 38, the
to others, or for administrative purposes and are amortisation method prescribed by Ind AS 38
expected to be used during more than one period. would not apply to an entity that opts to amortise
intangible assets arising from service concession
• Intangible asset is an identifiable non-monetary
arrangements in respect of toll roads in
asset without physical substance. It is ‘identifiable’
accordance with the exception given in paragraph
if it is separable or arises from contractual or legal
D22 of Ind AS 101. This exception is applicable
rights.
to toll road related intangible assets recognised
• Investment property is property (land or a building-or in the financial statements for the period ending
part of a building-or both) held (by the owner or by immediately before the beginning of the first Ind
the lessee as a right-of-use asset) to earn rentals or AS reporting period. This exception should be read
for capital appreciation or both rather than for use in conjunction with Schedule II of the 2013 Act.
in the production or supply of goods or services or
for administrative purposes or sale in the ordinary
1. Indian Accounting Standards (Ind AS): An Overview
course of business. (Revised 2019) issued by ICAI
Recognition criteria • An intangible asset with an indefinite useful life is

not amortised but tested for impairment.
• The cost of an item of PPE or an intangible asset
is required to be recognised as an asset if and • The estimates for the residual value, useful life of an
only if it is probable that future economic benefits asset and the method of depreciation/amortisation
associated with the item flow to the entity and the should be reviewed at a minimum at each financial
cost of the item can be measured reliably. year-end. In addition if expectations differ from
previous estimates, the change(s) is accounted for
• Items such as spare parts, stand-by equipment and
as a change in an accounting estimate in accordance
servicing equipment are recognised in accordance
with Ind AS 8.
with Ind AS 16 when they meet the definition
of PPE. Otherwise, such items are classified as
inventory. Significant differences from IFRS
Measurement at initial recognition Applicability of fair value model to investment
• An item of PPE or an intangible asset that qualifies property
for recognition as an asset should be measured IAS 40, Investment Property, permits both cost
initially at its cost. The initial measurement of an model and fair value model (except in some
intangible asset depends on whether it has been situations) for measurement of investment
acquired separately, acquired as part of a business properties after initial recognition while Ind AS 40
combination or internally generated. permits only the cost model.
• Internally generated goodwill, brands, mastheads,
publishing titles, customer lists and items similar
in substance (e.g. start-up costs, advertising Derecognition
and promotional activities and relocation or a • The carrying amount of an item of PPE or an
reorganisation expenses) should not be recognised intangible asset should be derecognised on
as intangible assets. disposal or when no future economic benefits
• The cost of an item of PPE includes all expenditure are expected from its use or disposal. The gain or
directly attributable to bringing the asset to the loss arising from the derecognition of an item of
location and working condition for its intended PPE is recognised in profit or loss when the item
use. Also, the estimated costs of dismantling and is derecognised unless it is a sale and leaseback.
removing the item and restoring the site. Gains are not to be classified as revenue.
• Internal development expenditure relating to • An investment property would` be derecognised on

intangible assets is capitalised if specific criteria are its disposal or when it is permanently withdrawn
met. These capitalisation criteria are applied to all from use and no future economic benefits are
internally developed intangible assets. expected from its disposal. Transfers to or from
investment property are made only if there has
• Internal research expenditure is expensed as it is been a change in the use of the property.
incurred.
• The intention to sell an investment property without
• Investment property is initially recognised at cost. redevelopment does not justify reclassification from
After initial recognition all investment property are investment property into inventory. The property
measured under the cost model. continues to be classified as investment property
Depreciation until disposal unless it is classified as held-for-sale.
• When an item of PPE comprises individual

components for which different depreciation
methods or rates are appropriate, each component
is depreciated separately.
• Any item of PPE or an intangible asset with finite
useful life is depreciated/amortised on a systematic
basis over its useful life. The depreciable amount of
an asset is determined after deducting its residual
value.
• The depreciation method/amortisation method used
would reflect the pattern in which the asset’s future
economic benefits are expected to be consumed by
the entity.
49
Guidance from ITFG clarifications • Capitalisation of enabling assets: Ind AS 16

prescribes that an item may be capitalised as
PPE, if it is probable that future economic benefits
Initial recognition and measurement associated with it will flow to the entity, and the cost
of the item can be measured reliably.
Capitalisation of spares
Entities may purchase spares, standby equipment, Any costs directly attributable to bring the asset
etc. which may be used along with the relevant item to the location and condition necessary for it to be
of PPE. In a situation where an entity uses spare capable of operating in the manner intended by
parts for an item of PPE, issues may arise on whether the management would form part of the cost of
such spare parts should be recognised as inventory the PPE.
or capitalised as PPE and recognised as part of
that equipment or whether depreciation should be
computed separately for that spare part. In this context, although the entity cannot restrict
In the cases where spare parts meet the definition of others from using the railway sidings, roads, bridges,
PPE and satisfy the recognition criteria in Ind AS 16 etc., these are required to facilitate the construction
then they, should be capitalised as PPE separately of the related item of PPE and for its operation.
from the equipment with which it is intended to be Expenditure on enabling assets is incurred in order to
used. The depreciation on an item of spare part would get future economic benefits from the project/PPE as
begin when the asset is available for use i.e. when it a whole. Hence, these expenses should be capitalised
is in the location and condition necessary for it to be in the financial statements of the entity.
capable of operating in the manner intended by the • Presentation of enabling assets: Since the
management. The spare parts may be readily available entity may not be able to restrict others from
for use and may be depreciated from the date of its using the enabling asset, it cannot capitalise
purchase. In determining the useful life of the spare them as individual items of PPE. Accordingly,
part, the life of the machine (in respect of which it the expenditure incurred will be considered as
could be used) could be one of the determining factors. part of the overall cost of the related project and
(ITFG 2, Issue 4). accordingly, would be allocated to and capitalised
(Please refer chapter 9, First time adoption of Ind AS as a part of the items of the project. These assets
for more details on capitalisation and depreciation of would be presented within the class of asset to
spare parts on transition to Ind AS) (ITFG 3, Issue 9 and which they relate.
ITFG 5, Issue 6) • Depreciation of enabling assets: Ind AS 16
Capitalisation of enabling assets requires that an item of PPE with a cost that is
significant in relation to the total cost of the PPE
Ind AS 16 states that the cost of an asset would
should be depreciated separately (component
include all expenditure directly attributable to bringing
accounting). Accordingly, enabling assets would be
the asset to the location and working condition for its
depreciated as follows:
intended use. By the same analogy, it is often argued
that expenditure on enabling assets (i.e. assets which – Useful life is different: If the components have
are not owned or controlled by the entity) should be a useful life which is different from the useful life
capitalised as such an expenditure is necessary for of the PPE to which they relate, they should be
facilitating construction of a related item of PPE or depreciated separately over their useful life. The
making the relevant item of PPE capable of operating useful life, however should not exceed that of
in the manner intended by the management. the asset to which they relate.
Capitalisation of expenditure incurred on construction – Useful life and depreciation method are the
of enabling assets, such as an access road or a railway same: If the components have a useful life and
siding on a land not owned by an entity, would depend depreciation method that are the same as the
on facts and circumstances of each case. useful life and depreciation method of the PPE,
(ITFG 2, Issue 5) then they may be grouped with the related PPE
and depreciated as a single component.
The entity may not have ownership rights and
consequently these enabling assets would be available – Directly attributable costs: Where the
for use to other entities and public at large. In such components have been included in the cost
a situation, guidance on issues related to manner of of PPE as directly attributable cost, then they
capitalisation of enabling assets, their presentation and should be depreciated over the useful life of the
depreciation is as follows: PPE. The useful lives of components should not
exceed that of the asset to which they relate.
(ITFG 11, Issue 8)
Accounting for restoration cost in case of a

leasehold land Ind AS 1, Presentation of Financial Statements,
(ITFG 14, Issue 2) is based on Ind AS 17, Leases. Since states that OCI comprises items of income and
Ind AS 17 is not applicable from 1 April 2019, this ITFG expense (including reclassification adjustments)
Bulletin is no longer relevant. that are not recognised in profit or loss as
required or permitted by other Ind AS.
Revaluations
Application of revaluation model for
land and building Therefore, the entity should apply the revaluation
model of Ind AS 16 to its PPE. On the date of transition
When an entity that is transitioning to Ind AS has to Ind AS, the revaluation reserve determined in
certain immovable properties, such as land or building, accordance with the requirements of Ind AS 16
it is required to first evaluate whether the land and (carried from previous GAAP) would be recognised as
building held by it meets the definition of ‘investment a revaluation surplus in equity. The opening balance
property’ in accordance with Ind AS 40 or is considered of revaluation surplus (determined in accordance with
as PPE in accordance with Ind AS 16. The entity may previous GAAP) should be transferred to retained
consider if it is permitted to use the revaluation model earnings or if appropriate, another category of
for such immovable properties instead of cost model equity. Any revaluation gains arising on subsequent
in its first Ind AS financial statements on the following recognition, i.e. after the date of transition, should be
basis: recognised in the OCI. (ITFG 14, Issue 6)
• Land and building is classified as PPE: Measure
the land or building initially at cost. For subsequent
measurement, the entity has an option to select
the cost model or revaluation model for this class of
PPE.
• Land and building is classified as an investment
property: Only the cost model should be used for
initial and subsequent measurement.
A related issue is whether an entity is permitted to opt
for the cost model for some classes of PPE and apply
the revaluation model for other classes of PPE in its
first Ind AS financial statements.
Ind AS 16 states that ‘if an item of PPE has been

revalued, the entire class of PPE to which that
asset belongs should be revalued’.
An entity may elect to apply the revaluation model to a

particular class of PPE and cost model to another class
of PPE. (ITFG 12, Issue 1)
Retrospective application of revaluation model in
PPE
An entity applied revaluation model under previous
GAAP. On transition to Ind AS, it elected not to apply
the deemed cost exemption under Ind AS 101. The
entity opted to retrospectively apply the requirements
of Ind AS 16 to all items of PPE and opted for
revaluation model of Ind AS 16 for subsequent
measurement.
Ind AS 16 states that in case an asset’s carrying
amount is increased as a result of a revaluation, the
increase should be recognised in OCI and accumulated
in equity under the heading of revaluation surplus.
51
Other clarifications
Revenue-based amortisation
Ind AS 38 requires the amortisation method used for
intangible assets with a finite useful life to reflect the
pattern in which an asset’s future economic benefits
are expected to be consumed by an entity. There is a
rebuttable presumption that an amortisation method
based on revenue generated based on the use of
an intangible asset is inappropriate except in limited
circumstances. Generally, intangible assets with a
finite useful life are amortised on a straight-line basis
over their useful life.
Paragraph 7AA of Ind AS 38 read with paragraph D22
of Ind AS 101 specifically permits revenue-based
amortisation for intangible assets arising from service
concession arrangements in respect of toll roads
recognised in the financial statements for the period
ending immediately before the beginning of the first Accounting for mining lease rights as intangible
Ind AS reporting period. This method of amortisation is assets after demonstration of technical feasibility
not generally permitted for intangible assets related to and commercial viability of extracting a mineral
toll roads that are recognised subsequently. resource
Earlier Schedule II to the 2013 Act, permitted Both Ind AS 16, Property, Plant and Equipment and Ind
revenue- based amortisation for such intangible asset AS 116, Leases exclude from their respective scopes
without any reference to any financial year. This was the accounting for mining for extraction of lime stone
inconsistent with the guidance in Ind AS 101. or similar such resources.
(ITFG 3, Issue 13)
Accounting guidance related to exploration for and
evaluation of mineral resources is provided in Ind
The Schedule II to the 2013 Act was amended AS 106, Exploration for and Evaluation of Mineral
by MCA on 9 December 2016 to clarify that Ind Resources. However, Ind AS 106 also does not apply
AS entities would be unable to apply revenue- after both the following characteristics of extracting a
based amortisation method to toll road related mineral resource are demonstrable:
intangible assets that are recognised after the
• The technical feasibility and
beginning of the first year of adoption of Ind AS.
• Commercial viability.
In the given case, ABC Ltd. is a cement manufacturer.
(Please refer Chapter 9, First-time Adoption of Ind AS
It has entered into a lease agreement with PQR Ltd.
for more details on revenue-based amortisation of toll
for rights for the extraction of lime stone (i.e. principal
roads and application of exemption to toll roads under
raw material for manufacture of cement).
construction)
Rights for extraction of limestone
PQR Ltd. ABC Ltd.
In the current scenario, ITFG considered the following Also, Ind AS 38 recognises that in choosing an
two issues related to extraction of mineral resources appropriate amortisation method, an entity could
(such as limestone), after the establishment of determine the predominant limiting factor that is
technical feasibility and commercial viability of inherent in the intangible asset. For example, the
extracting the mineral resource: contract that sets out the entity’s rights over its use
• Classification of such rights as assets of an intangible asset might specify the entity’s use
of the intangible asset as a predetermined number of
• Amortisation of such rights i.e., whether to be years (i.e. time), as a number of units produced or as a
based on lease term in years (period-based) or fixed total amount of revenue to be generated.
based on
quantity of mineral reserves (quantity based).
Identification of such a predominant limiting
Classification of mineral rights as assets factor could serve as the starting point for
In the current scenario. ITFG considered the following: the identification of the appropriate basis of
amortisation, but another basis may be applied if
• The rights do not relate to a mine in exploration
it more closely reflects the expected pattern of
and evaluation stage but to a mine for which
consumption of economic benefits.
the technical feasibility and commercial viability
of extracting the limestone has already been
determined In accordance with the above guidance, ITFG clarified
• The payment made (or to be made) by the entity that selection of an appropriate amortisation method
for obtaining the mining lease rights is neither for the mining lease requires consideration of the exact
expenditure on ‘development’ nor on ‘extraction’ facts and circumstances of the case. This assessment
of minerals or other non-regenerative resources. would need to be made by the entity itself in the light
of its detailed and in-depth knowledge of the facts and
In view of the above, the ITFG concluded that the
circumstances of its particular case. (ITFG 22, Issue 3)
mining rights under the current scenario would be
classified as intangible assets and accordingly be Applicability of Ind AS 115, Revenue from
accounted for as per Ind AS 38. Contracts with Customers to distribution of gifts
Amortisation of mineral rights In a given case, ABC Ltd. (a pharmaceutical company)
distributed gifts (mobile phones, decorative items and
In accordance with the guidance provided by Ind AS 38,
the like) along with its product catalogues to doctors to
the depreciable amount of an intangible asset with a
encourage them to prescribe medicines manufactured
finite useful life is to be allocated on a systematic basis
by it. No conditions are attached with the items
over its useful life.
distributed.
Further, Ind AS 38 requires that the amortisation
The issue under consideration by ITFG is with regard
method used should reflect the pattern in which the
to application of Ind AS 115 to distribution of gifts to
asset’s future economic benefits are expected to
doctors or whether these are to be treated as part of
be consumed by the entity. If that pattern cannot
sales promotion activities.
be determined reliably, the straight-line method
should be used. Ind AS 38 recognises that a variety The ITFG reiterated the scope of Ind AS 115 among
of amortisation methods could be used to allocate other things to include following:
the depreciable amount of an asset on a systematic
basis over its useful life. These methods include the
following:
• The Straight-Line Method (SLM)
• The diminishing balance method and
• The Units Of Production (UOP) method.
The method used is selected on the basis of the
expected pattern of consumption of the expected
future economic benefits embodied in the asset and Existence Counterparty The goods or
is to be applied consistently from period to period, of contract to the contract services are
unless there is a change in the expected pattern of between the is customer an output of
consumption of those future economic benefits. parties the entity’s
ordinary
activities.
53
In the given case, in absence of all the above

ingredients, ITFG clarified that the distribution of gifts
to doctors does not fall under the scope of Ind AS 115.
The only benefit of items distributed as gifts by ABC
Ltd. is sales promotion by developing brands or create
customer relationships, which, in turn, generate
revenue.
The guidance contained in Ind AS 38 applies, among
other things, to expenditure on advertising, training,
start-up, research and development activities. Further,
Ind AS 38 prohibit an entity from recognising internally
• generated goodwill, brands, customer lists and items
similar in substance as intangible assets on the basis
that expenditure on such internally generated items
cannot be distinguished from the cost of developing
the business
Additionally, an entity is specifically required to
recognise expenditure on such items as an expense
when it has a right to access those goods regardless of
when such goods are distributed.
Accordingly, ITFG clarified the timing of recognition of
expenditure on items to be distributed as gifts as an
expense when it owns those items or otherwise has a
right to access them regardless of when it distributes
such items to doctors. (ITFG 22, Issue 4)
Opinion by EAC of finance department, normally, the costs

incurred are not directly attributable costs, but
are considered as administration and general
Accounting treatment of expenditure relating overheads. Therefore, such costs should
to employee benefits expenses, rent expenses, not be capitalised. However, in certain rare/
travelling expenses and house-keeping exceptional circumstances, where and to the
expenses which are compulsorily required to extent, the finance department is engaged
be incurred for construction of the project3 in the construction activities, the same
In accordance with the guidance laid down in may be considered as directly attributable
Ind AS 16, the basic principle to be applied while costs and could accordingly be capitalised.
capitalising an item of cost to a PPE is that it Similarly, employee benefit expenses of the
is directly attributable to bringing the asset to managing director are normally of the nature of
the location and condition necessary for it to be administration and general overheads and should,
capable of operating in the manner intended by ordinarily, not be capitalised with the item of PPE.
management. However, in certain exceptional cases where
it could be clearly demonstrated that these are
Though various expenses may be incurred during directly attributable to construction, these could
construction period, however, it is not necessary be capitalised. Further, the employee benefit
that all such expenses are eligible to be capitalised expenses of HR department and company law
to the project/asset being constructed. department cannot be considered as directly
The capitalisation of an item of cost to a fixed attributable costs.
asset/project would depend upon the nature of – Rent expenses: Rent expenses in relation
such expenses in relation to the construction/ to site offices may be considered as directly
acquisition activity in the context of laid down attributable cost and can be capitalised to Capital
requirements of Ind AS in this regard. Further, Work in Progress (CWIP) till the time the item of
just because the only activity at the time being PPE is in the location and condition necessary
undertaken by A Ltd. was the construction of for it to be capable of operating in the manner
the rail project would not mean that all the costs intended by the management. However, if the
incurred were directly attributable costs of rail project execution related activities are also being
project in accordance with the requirements of performed at head office resulting into
Ind AS 16. ‘directly attributable costs’, and these could
The EAC clarified that the select guidance of be ascertained on a reasonable and reliable
Ind AS 16 related to self-constructed asset is basis, then only to that extent, rent should be
applicable when the self-constructed asset is capitalised as the cost of the project.
also produced/made by the company for sale in – Travelling expenses: These are required to
its normal course of business. Therefore, only in be examined keeping in view the nature and
such cases, principles of Ind AS 2 could be applied. purpose of such expenses and the extent to
Thus, principles of Ind AS 2 could not be applied in which these expenses are directly attributable to
all cases of self-constructed assets. the construction of the train project. For example,
In accordance with the requirements of Ind AS the travel expenses of managing director, are
16, administrative and general overhead expenses normally for general and administration purposes
should, ordinarily, not be capitalised with the item and ordinarily, should not be capitalised. However,
of PPE. However, in certain exceptional cases in certain exceptional cases where it could be
where it could be clearly demonstrated that these clearly demonstrated that these are directly
are directly attributable to construction, such attributable to construction, these could be
costs could be capitalised. capitalised.
The EAC specifically clarifies for certain expenses – House-keeping expenses: These expenses are
as follows: purely in the nature of administration expenses.
– Employee benefit expenses: Employee In accordance with guidance provided in Ind AS
benefit expenses in respect of project 16, these could not be considered as ‘directly
associated departments are apparently attributable cost’ and therefore, could not be
directly attributable costs and can be capitalised as cost of an item of PPE.
capitalised with the cost of the project. In
respect of employee benefit expenses
3. EAC-January 2020 edition of ICAI Journal ‘The Chartered Accountant’
55
Issue
Topic
number
Guidance on capitalisation of expenditure incurred to obtain regulatory permission to set-up a
1
factory
Guidance on capitalisation of expenditure incurred on enabling assets (such as railway sidings,
roads, bridges) when an entity does not acquire ownership rights and guidance on accounting
2
for their depreciation
(Refer ITFG 2, Issue 5 and ITFG 11, Issue 8)
Guidance on presentation of the enabling assets when an entity does not acquire ownership
3
rights
Guidance on accounting when certain items are expensed as incurred that are below certain
4
threshold determined by the management
Guidance on capitalisation of machinery spares used for ‘more than one period’
5
(Refer ITFG 2, Issue 4)
Guidance on accounting for spares used for ‘more than one period’
6
7 Guidance on accounting for paintings and sculptures held for aesthetic purposes
Guidance on capitalisation of subsequent costs incurred on renovation of food court and gaming
8
zone as PPE or to be expensed in the statement of profit and loss
Guidance on accounting for subsequent overhauling costs incurred on replacement of critical
9
parts and servicing charges thereoff
Guidance on accounting for site preparation costs which are directly attributable to the
10
construction of a new factory
11 Guidance on accounting for production costs incurred during trial runs
Guidance on accounting for costs to be incurred to relocate an existing manufacturing facilities
12
at a temporary site
13 Guidance on accounting for renovation expense prior to commencement of operation
Guidance on whether employee benefit expenses incurred on a project are directly attributable
14 to bringing the asset to the location and condition necessary for it to be capable of operating in
the manner intended by management.
Guidance on whether relocation costs incurred to relocate the residents to another site should
15
be capitalised
Guidance on whether the cost of technical know-how fee related to plant design incurred under
16
the engineering agreement should be capitalised as an intangible asset
Guidance on whether cancellation fees on a contract would be considered directly attributable
17 to bringing the asset to the location and condition necessary for it to be capable of operations in
the manner intended by management
Guidance on whether liquidated damages in case of failure to meet performance conditions

18
would be considered directly attributable to the construction of a plant
19 Guidance on accounting for liquidated damages on delay by a contractor
Guidance on accounting for acquisition of land with an existing building in the books of accounts
20
of a real estate developer
Guidance on accounting for fixed costs, including abnormal costs incurred during period on
21
interruption
Guidance on whether demurrage should be considered as an element of cost for the purpose of
22
determining the cost of imported plant and machinery
23 Guidance on accounting of exchange of a non-monetary asset

Guidance on definition of ‘class of asset’ in the revaluation model
24
25 Guidance on the classification of PPE on the basis of its geographical location
Guidance on accounting for revaluation of assets acquired in accordance with Ind AS 103,
26
Business Combinations
Guidance on whether PPE held under finance lease be classified as a separate class of assets
27
from the assets owned by the entity
Guidance on accounting for revaluation of plant and machinery and depreciation subsequent to
28
revaluation
Guidance on whether technical advice from an external or an internal expert is necessary in
29
case useful life is determined as per Schedule II is different from the Companies Act, 2013
Guidance on accounting of depreciation of PPE which contains significant component with

30
separate of useful life
Guidance on allocation of total cost to each significant component of an asset when separate
31
costs are not available
32 Guidance on accounting for dry docking costs incurred by an entity

Guidance on depreciation accounting for standby equipment, spare parts and servicing
33 equipment
Guidance on whether an entity can apply Units Of Production (UOP) method while depreciating
34
its tools
35 Guidance on accounting for insurance claim as a compensation when a PPE is damaged.
36 Guidance to determine the carrying amount of a replacement part of PPE
37 Application of Ind AS 16 vis-à-vis Ind AS 2 for certain items of assets

Guidance on accounting for receipt of sale commission from a broker while purchasing PPE in
38
lieu of discount from vendor
Accounting for expenditure incurred rehabilitation and resettlement costs-whether such
39
expenditure should be capitalised as a part of the cost of the project
Accounting for expenditure incurred rehabilitation and resettlement costs-whether such

39
expenditure should be capitalised as a part of the cost of the project
Guidance on accounting for decommissioning and restoration costs

40
57
5. Income taxes
Summary
• Ind AS 12, Income Taxes
Income taxes include all taxes (domestic and foreign) based on taxable profits. The principal issue
in accounting for income taxes is how to account for the current and future tax consequences of
the following:
• The future recovery (settlement) of the carrying amount of assets (liabilities) that are
recognised in an entity’s balance sheet
• Transactions and other events of the current period that are recognised in an entity’s financial
statements.
Key principles
General principles • Current tax is the amount of income taxes payable
(recoverable) in respect of the taxable profit (tax
• Ind AS 12 includes all domestic and foreign
loss) for a period.
taxes which are based on taxable profits as also
withholding taxes (which are payable by a subsidiary, • Deferred tax liabilities are the amounts of income
associate or joint venture on distributions to taxes payable in future periods in respect of taxable
investors). temporary differences.
• Ind AS 12 requires recognition of tax consequences • Deferred tax assets are the amounts of income
of difference between the carrying amounts of taxes recoverable in future periods in respect of
assets and liabilities and their tax base. deductible temporary differences, carry forward of
unused tax losses and carry forward of unused tax
credits.
• A Deferred Tax Asset (DTA) or a Deferred Tax Offsetting

Liability (DTL) is not recognised if:
• The current tax assets and current tax liabilities
– It arises from the initial recognition of an asset can only be offset against each other when the
or liability in a transaction that is not a business entity has a legally enforceable right to set off and
combination, and it intends either to settle on a net basis or to realise
– At the time of transaction, it affects neither the asset and settle the liability simultaneously.
accounting profit nor taxable profit. • The same principle as above applies for offsetting
• DTL/DTA is not recognised in respect of temporary deferred tax assets and deferred tax liabilities.
differences associated with investments in
Appendix C, Uncertainty over Income Tax
subsidiaries, branches, associates and joint
arrangements if certain conditions are met. Treatments
For example, in the case the investor is able to • Key test is to ascertain whether it is probable the tax
control the timing of the reversal of the temporary authority would accept the company’s chosen tax
differences, and it is probable that the temporary treatment.
difference will not reverse in the foreseeable future. • In case it is not probable that the tax authority
• A DTA is required to be recognised for the carry would accept the treatment, an entity would reflect
forward of unused tax losses and unused tax credits the uncertainty using whichever of the following
to the extent that it is probable that future taxable provides a better prediction of the resolution of the
profit will be available against which the unused tax uncertainty-either:
losses and unused tax credits can be utilised. – The most likely amount
Measurement – The expected value.
• Current and deferred taxes are measured based on • Entities should provide the following disclosures:
rates that are enacted or substantively enacted at – Judgements made
the reporting date.
– Assumptions and other estimates used
• Deferred tax liabilities and assets are measured
based on the expected manner of settlement – Potential impact of uncertainties that are not
(liability) or recovery (asset). reflected.
• Deferred tax assets and liabilities are not discounted.

• The carrying amount of a deferred tax asset is Significant differences from IFRS1
required to be reviewed at the end of each reporting
• IAS 12, Income Taxes, provides that acquired
period.
deferred tax benefits recognised within the
• The total income tax expense (income) recognised measurement period that result from new
in a period is the sum of current tax plus the change information about facts and circumstances
in deferred tax assets and liabilities during the existed at the acquisition date should be applied
period, excluding tax recognised outside profit or to reduce the carrying amount of goodwill
loss. related to that acquisition. If the carrying amount
• Tax consequences that relate to changes in the of that goodwill is zero, any remaining deferred
recognised amount of equity, in the same or a tax benefits should be recognised in profit
different period (not included in profit or loss), shall and loss. However, under Ind AS 103, bargain
be charged or credited directly to equity. purchase gain is recognised in capital reserve
rather than in profit or loss. Therefore, under Ind
• Tax consequences that relate to amounts
AS 12, if the carrying amount of such goodwill is
recognised in OCI are required to be recognised in
zero, any remaining deferred tax benefits would
OCI.
be recognised in the OCI and accumulated in
Presentation equity as capital reserve or recognised directly in
capital reserve.
• A DTA or DTL is classified as a non-current asset or
liability respectively in the balance sheet.
1. Indian Accounting Standards: An Overview (Revised 2019) published
by the ICAI
59
Guidance from ITFG clarifications Since accounting of deferred taxes on freehold

land could be a highly judgmental area therefore all
facts and circumstances would be considered while
Ind AS 12 requires a DTA/DTL to be created for all accounting for deferred taxes. To address uncertainty,
deductible/taxable temporary differences, except in the following steps could be helpful:
specified situations e.g. if it arises from a transaction • Consider all factors concerning its expected
that affects neither accounting profit nor taxable profit profitability, both favourable and unfavourable, when
(tax loss) at the time of the transaction (known as initial assessing whether a DTA should be recognised on
recognition exemption). the basis of availability of future taxable profits. A
In addition, Ind AS 12 requires the measurement of DTA should be recognised if:
DTA/DTL to reflect the tax consequences that would – An entity has stable earnings history
follow from the manner in which the entity expects,
– There is no evidence to suggest that current
at the end of the reporting period, to recover or settle
earnings level will not continue into the future,
the carrying amount of its assets/liabilities. This may
and
require the exercise of judgement based on facts and
circumstances. – There is no evidence to suggest that the tax
benefits will not be realised for some other reason.
Ind AS 12 also specifies that if a non-depreciable asset
is measured using the revaluation model under Ind AS • Assess if the fair value of freehold land is higher than
16, the related DTA or DTL is measured based on the its tax base (due to indexation), then this is a factor
tax consequences of recovering the carrying amount taken into account in assessing the probability of
of such an asset through sale, regardless of the basis whether taxable profits will be available to offset the
of measuring its carrying amount. deductible temporary difference in future.
Recognition of deferred tax on freehold land • While assessing DTA, an entity should also take into
account the appropriate scheduling of the reversal
Entities may hold freehold land which is sometimes
of such temporary differences. If the assessment is
expected to be sold on a slump-sale basis and not
favourable, then a DTA should be recognised for the
individually. In such cases, an issue may arise whether
deductible temporary differences.
or not to recognise a DTA on such land since it will be
sold on a slump sale basis and hence, a temporary tax • Assess the situation where an entity does not have
difference would not exist. an intention to sell freehold land separately, for
example, it has constructed a factory on that land
and the factory is vital for its operations. The entity
should also assess its past experience of slump-sale
Accounting of deferred taxes on freehold land
of such assets.
could be a highly judgmental area for entities
under Ind AS since it involves considerable The difficulty of estimating the timing of the reversal
estimation. Therefore, entities, should consider of the temporary difference is not in itself a reason for
all facts and circumstances while accounting for not recognising a DTA. However, it is a relevant factor
deferred taxes and disclose the judgement taken in assessing the probability of the availability of future
in respect to deferred taxes on a freehold land. tax profits.
In such a case where an entity held freehold land
expected to be sold on a slump sale basis, ITFG
clarified that the entity would be required to exercise
judgement to determine whether the freehold land
will be sold through a slump sale. If so, then the tax
base of the land would be the same as its carrying
amount as an indexation benefit is not available in case
of slump sale under the Income-tax Act, 1961 (IT Act).
Therefore, there would be no temporary difference and
consequently DTA would not be recognised. (ITFG 7,
Issue 7)
Creation of deferred taxes on land converted in The issue considered was whether Z Ltd. recognise
inventory deferred tax on land on the date of transition to Ind AS.
The ITFG discussed the conversion of a capital asset In accordance with guidance provided in Ind AS 12, the
into stock-in trade and its sale after conversion, as per ITFG clarified as follows:
the IT Act. The tax treatment would be as follows: a. On the date of transition to Ind AS (1 April 2017),
• Capital gains tax: There would be capital gains a deductible temporary difference existed for Z
liability in respect of the conversion of capital asset Ltd. arising out of the carrying amount of asset
into stock-in-trade, at market value thereof on the (which is INR100 as on 1 January 2016) and its
date of conversion. Thus, the capital gains will be tax base (which is INR150 as on 1 January 2016,
computed as the difference between the indexed considering indexation benefit). Thus, on the
cost of capital asset to the assessee and the fair date of transition, the entity would recognise a
market value of such capital asset on the date of DTA for the deductible temporary difference of
its conversion into stock-in-trade. However, the tax INR50 in the value of land provided it satisfied
will be computed using the capital gains tax rate other DTA recognition criteria under Ind AS 12.
applicable in the year of actual sale and not in the b. The difference between the indexed cost of
year of conversion. Also, the capital gains tax will land on the date of conversion and its fair value,
be required to be paid only at the time of sale of the however, would not meet definition of temporary
stock-in-trade. difference under Ind AS 12. Additionally, the
• Profit/loss on sale of land as stock-in-trade: As business income under the IT Act would be
regard the sale of the stock-in-trade, any profit computed as a difference between the sale price
realised or loss incurred (i.e. difference between of the stock-in-trade (i.e. date of actual sale of
the sale proceeds and fair value on the date of inventory) and market value of the fixed asset
conversion) will be liable to tax as a business on the date of its conversion into stock-in- trade.
income. Such profit/loss would accrue and be liable Hence, such a tax liability would not arise on the
to tax at the time of sale of the stock-in-trade. If date of transition. (ITFG 17, Issue 7)
there is a business loss in the year of sale of stock- Deferred taxes on capitalised exchange differences
in-trade, the IT Act allows the loss to be offset
against capital gains arising on conversion. Thus, AS 11, The Effects of Changes in Foreign Exchange
the liability for capital gain tax on conversion is not Rates, provided a relief to the entities from reporting
sacrosanct and can vary depending on outcome adverse impact of volatility in exchange rate difference
from sale of stock-in-trade. by providing the following options:
Considering the above, conversion of capital asset into a. Adjust to the cost of the asset, where the long-
stock-in-trade would not require an entity to recognise term foreign currency monetary items relate
any current tax liability. Under the IT Act, the current to the acquisition of a depreciable capital asset
tax liability would arise only on the sale of stock-in- (whether purchased within or outside India),
trade. and consequently depreciate over such asset’s
balance life, or
An entity would need to consider deferred tax b. Accumulate in ‘Foreign Currency Monetary Item
implications under Ind AS 12 when a capital Translation Difference Account’ (FCMITDA) and
asset is converted into inventory. Additionally, amortise over the balance period of long-term
the recognition of DTA would be subject to monetary asset/liability but not beyond 31 March
consideration of prudence. 2020, in cases other than those falling under (a)
above.
In a case, when an entity Z Ltd. purchased certain land

as a fixed asset on 1 January 2007 for INR100 which
was subsequently converted to inventory on 1 January
2016. At the date of conversion indexed cost of land
was INR150 and its fair value was INR1,000.
Z Ltd. adopted Ind AS from 1 April 2018 and its date of
transition was 1 April 2017. On the date of transition,
the land (now classified as inventory) was recognised
at its historical cost (i.e. INR100, which was its carrying
value).
61
On transition to Ind AS, Ind AS 101 and Ind AS Ind AS 12 requires recognition of DTL on the
21, The Effects of Changes in Foreign Exchange undistributed reserves of subsidiaries except where
Rates, allow entities to recognise foreign exchange the parent is able to control the timing of reversal
adjustments as per the policy adopted under previous of the temporary difference and it is probable that
GAAP. Therefore, exchange differences arising from the temporary difference will not reverse in the
translation of long-term foreign currency monetary foreseeable future.
items recognised in the financial statements for the However, in case the board of directors of a subsidiary
period ending immediately before the beginning of the propose to declare dividend for the previous financial
first Ind AS financial reporting period can continue to year, to the extent of such proposed dividend, the
be accounted for as per the previous GAAP. temporary difference (in relation to DDT liability) is
Accordingly, certain entities that availed the relief considered to be probable to reverse.
provided by AS 11 would have added to or deducted In case where the parent is likely to claim the DDT
exchange gain/loss on foreign currency loan from paid by the subsidiary as an offset against its own
the cost of Property, Plant and Equipment (PPE), DDT liability, the ability to claim offset is subject to
before adoption of Ind AS. However, such exchange receipt of approval from the shareholders of the parent
differences capitalised are not allowed deduction (approval of dividend at the Annual General Meeting
under the IT Act including Income Computation and (AGM)).
Disclosure Standards (ICDS). In addition, entities
that chose to follow the previous GAAP accounting Accordingly, while it has been clarified that the parent
policy post transition, such adjustment would may be required to recognise DTL in the Consolidated
lead to temporary differences and recognition of Financial Statement (CFS) (measured based on the
deferred taxes through statement of profit and loss. DDT expense of the subsidiary) to the extent of
Such adjustments are likely to bring volatility to the proposed dividend of the subsidiary, recognition of
statement of profit and loss. DTA to the extent of offset may not be recognised
pending receipt of approval from the shareholders of
Entities would need to recognise deferred taxes the parent. (ITFG 9, Issue 1)
on such differences arising from the adjustment of
exchange difference to the cost of the asset. (ITFG 8, ITFG clarified in its clarifications’ bulletin 18, that
Issue 8) while dealing with the above issue, the intention was
not to preclude recognition of DDT credit in the CFS
Deferred taxes on undistributed profits in the period in which the parent receives dividend
The practical implications on accounting of deferred tax from a subsidiary. A parent should evaluate its facts
on undistributed profits are discussed in detail under and circumstances and if it reasonably expects at the
various situations as follows: reporting date that it would be able to avail of the DDT
i. When a parent receives dividend from its credit upon the declaration of dividend at its AGM (to
wholly-owned subsidiary during the year be held after the end of the financial year), it should
consider the following situations:
• Declaration of dividend by a parent is probable: At
the time of distribution of dividend by a subsidiary
to the parent (and consequent payment of DDT by
Dividend the subsidiary), the parent should recognise the
Wholly-owned Parent associated DDT credit as an asset to the extent that
subsidiary it is probable that a liability for DDT on distribution
of dividend by the parent would arise (against which
At the time of consolidation, the dividend income the DDT credit can be utilised).
earned by the parent would be eliminated against the • Declaration of dividend by a parent not probable: If it
dividend recorded in its equity by the subsidiary as is not probable that a liability for DDT on distribution
a result of consolidation adjustment. The Dividend of dividend by the parent would arise against which
Distribution Tax (DDT) paid by the subsidiary to the the DDT credit could be utilised, the amount of DDT
taxation authorities (being outside the consolidation paid by the subsidiary should be charged to profit or
group) would be charged as expense in the loss in the consolidated statement of profit and loss.
consolidated statement of profit and loss of the parent • Assessment of DDT credit at each reporting period:
(presuming that parent is unable to claim an offset At the end of each reporting period, the carrying
against its own DDT liability). amount of DDT credit should be reviewed. The
carrying amount of the DDT credit should be
reduced to the extent that it is no longer probable
that a liability for DDT on distribution of dividend by
the parent would arise against which the DDT credit

can be utilised. Conversely, any such reduction
made in a previous reporting period should be
reversed to the extent that it is now probable that
a liability for DDT on distribution of dividend by the
parent would arise against which the DDT credit
could be utilised. The corresponding debit (for a
reduction) or credit (for reversal of a previously
recognised reduction) should be made to the
consolidated statement of profit and loss.
At the end of each reporting period, the parent should
reassess any unrecognised DDT credit. The parent
should recognise a previously unrecognised DDT
credit to the extent that it has become probable that
a liability for DDT on distribution of dividend by the
parent would arise against which the DDT credit can
be utilised. The corresponding credit should be made
to the consolidated statement of profit and loss.
To the extent the DDT credit is utilised to discharge
the liability (or a part of the liability) of the parent for
payment of DDT on distribution of dividend to its
shareholders, the DDT credit should be extinguished
by corresponding debit to the parent’s liability for
payment of DDT.
The above assessment can be made only by
considering the particular facts and circumstances
of each case including the parent’s policy regarding
dividends, historical record of payment of dividends by
the parent, availability of distributable profit and cash,
etc. (ITFG 18, Issue 2)
ii. A parent which receives dividend from a
subsidiary which is not wholly owned
A parent owns 60 per cent stake in the subsidiary and
the subsidiary pays a dividend at the rate of INR10 per
share and DDT at the rate of 20 per cent.
Dividend
Subsidiary Parent
Parent owns
60 per cent
stake in the
subsidiary
In such a situation, dividend income earned by the

parent and the dividend recorded by the subsidiary
in its equity would be eliminated in the CFS of the
holding entity as a result of consolidation adjustment
while dividend paid to the NCI shareholders would
be recorded in the statement of changes in equity
as a reduction in the NCI balance (as the shares are
classified as equity in accordance with Ind AS 32).
63
It is important to note here, that the DDT paid to iii. DDT paid by an associate
the taxation authorities by the subsidiary has two Since DDT paid by an associate is not allowed to
components - that paid in relation to the parent entity be set-off against the DDT liability of the investor.
and the other paid in relation to Non-Controlling Therefore the investor’s share of DDT would be
Interest (NCI). As already explained earlier, the DDT accounted by the investor entity by crediting its
relating to the parent entity would be charged as tax investment account in the associate and recording a
expense in the consolidated statement of profit and corresponding debit adjustment towards its share of
loss of the parent since this is paid outside the group. profit or loss of the associate. (ITFG 13, Issue 9)
With regard to the DDT paid on dividend related to NCI,
it would be recognised in the statement of changes in Thus, entities which were recognising both, a deferred
equity along with the portion of such dividend paid to tax liability towards the subsidiary’s DDT liability and a
the NCI. deferred tax asset towards the offset to be claimed in
the future period may now be required to evaluate the
In the same situation, further, when the parent also impact of this clarification on their respective financial
pays dividend to its shareholders and assuming that statements. This may also create significant volatility
it is eligible to claim an off-set in respect of its DDT in the consolidated statements of profit and loss
liability to the taxation authorities to the tune of DDT especially in cases where the subsidiary declares a
paid by its subsidiary on its behalf. Then in such a large one-off dividend.
situation, the total amount of DDT (i.e. DDT paid by the
subsidiary as well as the additional DDT paid by the Additionally, for the purpose of interim financial
parent after utilising the offset claimed in respect of statements, necessary adjustment to the effective tax
DDT paid by the subsidiary) should be recognised in rates may be required to be considered.
the consolidated statement of changes in equity of the Applicability of Accounting Standards
parent entity since the share of the parent in the DDT Interpretation (ASIs) issued under previous GAAP
paid by the subsidiary was utilised by the parent for to situations of tax holiday under Ind AS
payment of dividend to its own shareholders. An entity may be entitled to tax holiday under Sections
In addition, it has been clarified that due to parent’s 80IA and 80IB of the IT Act.
transaction of distribution of dividend to its Under the previous GAAP, certain ASIs were issued by
shareholders (a transaction recorded in parent’s equity) the ICAI to provide guidance on applicability of
and the related DDT set-off, the DDT paid by the AS 22, Accounting for Taxes on Income, in the
subsidiary is effectively a tax on distribution of dividend situations of tax holiday under section 80IA and 80IB of
to the shareholders of the parent entity. Therefore, the IT Act. Some of these, subsequently were included
the DDT paid by the subsidiary and additional DDT in the relevant standard i.e. AS 22, by means of
paid by parent (on account of distribution of dividend explanations and thus became part of previous GAAP.
to its shareholders and claiming the off-set thereon)
should be recognised in the consolidated statement of
changes in equity of the parent entity and no amount Under Ind AS, the principles of Ind AS 12 would
would be charged to the consolidated statement of be applied to determine the treatment of
profit and loss. deferred taxes in the tax holiday period.
Also, it is important to note that in case the DDT

liability of the parent is lower as compared to the off-
set available on account of DDT paid by the subsidiary,
then in such a case, the amount of DDT liability paid
by the subsidiary which could not be utilised as an
offset by the parent should be charged to consolidated
statement of profit and loss.
AS 22 clarified that deferred taxes in respect of timing In this situation, it was assumed that the tax base of
differences which reverse during the tax holiday period the goodwill will be the amount that will be allowed as
should not be recognised to the extent the entity’s deduction in future in accordance with the IT Act.
gross total income is subject to the deduction during Additionally, this transaction will not qualify for the
the tax holiday period. However, timing differences initial recognition exemption under Ind AS 12 as
which reverse after the tax holiday period should be there is no initial recognition of an asset or liability
recognised in the year in which the timing differences arising from the amalgamation of subsidiaries in the
originate. CFS of parent entity (the impact of amalgamation of
ASIs are not effective in the context of Ind AS. Under subsidiaries is eliminated in the CFS of the parent
Ind AS, to determine the treatment of deferred taxes entity). (ITFG 10, Issue 3)
in the tax holiday period, the principles enunciated Treatment of income tax related interest and
in Ind AS 12 are required to be applied. Accordingly, penalties under Ind AS vis-a vis IFRS
under Ind AS, deferred taxes in respect of temporary
differences which reverse during the tax holiday period The Guidance Note on Division II - Ind AS Schedule III
should not be recognised in the financial statements to to the Companies Act, 2013 Act (GN) provides that any
the extent the entity’s gross total income is subject to interest on shortfall in payment of advance income tax
deduction during the tax holiday period in accordance is in the nature of finance cost and hence, should not
with the requirements of section 80IA/80IB of the IT be clubbed with the current tax. Rather, it should be
Act. (ITFG 11, Issue 2) classified as interest expense under ‘finance costs’.
Recognition of deferred tax on tax deductible
goodwill of subsidiary, not recognised in CFS Any interest on shortfall in payment of advance
income-tax is in the nature of finance cost. Hence,
Issue considered involved a situation where two
it should not be clubbed with the current tax, be
subsidiaries of an entity were amalgamated and as a
classified as interest expense under finance costs
result of this transaction, a goodwill was recognised
and disclosed separately.
in the SFS of the amalgamated entity under previous
GAAP. This goodwill was allowed as deduction under
income tax laws in the books of the amalgamated Similarly, any penalties levied under income tax laws
entity. On transition to Ind AS, the parent entity availed should not be classified as current tax. Penalties which
of the optional exemption under Ind AS 101 and are compensatory in nature should be treated as
decided not to restate its past business combinations. interest and disclosed under finance costs. Other tax
Accordingly, on the date of transition to Ind AS such penalties should be classified under ‘other expenses’.
accounting goodwill was eliminated as a result of
An entity’s obligation for current tax arises because
consolidation adjustment in the CFS. However, there
it earns taxable profit during a period. However, an
was an increase in the tax base of assets in the CFS
entity’s obligation for interest or penalties, arises
of parent entity resulting from such tax deductible
because of its failure to comply with one or more of
goodwill.
the requirements of income-tax law (e.g. failure to
In this situation an issue arises whether DTA on the tax deposit income-tax). Therefore, it was concluded that
deductible goodwill should be recognised in the CFS of the obligations for current tax and those for interest or
parent entity prepared as per Ind AS when there is no penalties arise due to reasons that are fundamentally
corresponding accounting goodwill in the CFS. different in nature. Ind AS 1, Presentation of Financial
A deferred tax may be recognised for assets or Statements, requires an entity to separately present
liabilities with a tax base but nil carrying amount in the items of a dissimilar nature or function unless they are
financial statements since Ind AS 12 states that some immaterial except when required by law. Therefore,
items may have a tax base but are not recognised as interest or penalties related to income tax cannot be
assets and liabilities in the balance sheet. clubbed with current tax.
Accordingly, DTA on the tax base of goodwill should be Additionally, it was highlighted that similarity in a
recognised in accordance with Ind AS 12 by crediting particular jurisdiction in the bases of computation of
the consolidated statement of profit and loss, to the amount of current tax and interest/penalties for non-
extent that it is probable that taxable profit will be compliance is not a sufficient ground for clubbing these
available against which the deductible temporary items, as they are different in terms of their nature.
difference can be utilised, in the CFS of the parent.
65
The ITFG also considered the treatment of such a domestic company could give effect to lower tax
interest and penalties under IFRS. IFRS Interpretations rate (in accordance with the Ordinance 2019) while
Committee (IFRIC) in its meeting held on 12 determining current tax and DTA or DTL with the
September 2017 decided that entities do not have purpose to present interim results/interim financial
an accounting policy choice between applying IAS statements as on 30 September 2019 (financial year
12 and IAS 37, Provisions, Contingent Liabilities and 2019-20).
Contingent Assets to interest and penalties. Therefore, Even though, the lower rates of corporate income-
if an entity considers a particular amount payable or tax have been enacted (on 20 September 2019) well
receivable for interest and penalties to be an income before the interim reporting date of 30 September
tax, then the entity should apply IAS 12 to that amount. 2019, the ITFG has clarified that such lower rates
However, if an entity does not apply IAS 12 to a should be applied by a company for measurement
particular amount payable or receivable for interest and of current and deferred taxes only if it expects to opt
penalties, it should apply IAS 37 to that amount. Based for the lower rates. This is in accordance with the
on the IFRIC agenda, it was highlighted that an entity requirements of Ind AS 12.
should consider whether an amount of interest or a
penalty is in the scope of IAS 12 i.e. an entity should Accordingly, if the company expects to opt for the
consider whether the interest or penalty is a tax and lower tax rate (with an intention appropriately
whether that tax is based on taxable profits. evidenced), the current and deferred taxes are
required to be measured using lower tax rate as per
In cases, where it is difficult to identify whether an the Ordinance 2019 for the purpose of presenting
amount payable to (or receivable from) a tax authority interim results/interim financial statements for the
includes interest or penalties (for instance, single quarter/half year ended 30 September 2019.
demand issued by a tax authority for unpaid taxes),
entire amount would qualify within the meaning of IAS Additionally, it was clarified that in case the company
12. expects to opt for the lower tax rate from the next
financial year 2020-21 onwards, the lower tax rate is
An entity should determine whether a particular required to be applied only to the following extent:
amount payable or receivable for interest and
penalties is in the scope of IAS 12 (or Ind AS 12) after • The DTA is expected to be realised or
considering the tax laws applicable in its individual • The DTL is expected to be settled
jurisdiction i.e. an entity should consider whether in the periods during which the company expects to be
tax laws in the jurisdiction and other facts and subject to lower tax rate.
circumstances indicate that this amount is based on a
taxable profit (i.e. a ‘net’ amount). The normal tax rate is required to be applied to the
extent DTA/DTL is expected to be realised (settled) in
It was pointed out that interest and penalty payable earlier periods. (ITFG 23, Issue 1)
under Section 234A/B/C of the IT Act would not qualify
as income-taxes within the meaning of IAS 12 (or Accounting treatment of deferred tax adjustments
Ind AS 12). Therefore, the related amount would be recognised in equity on first-time adoption of
recognised as interest. Similarly, other interest and Ind AS in accordance with Ind AS 101, First-time
penalties under the IT Act would not generally qualify Adoption of Indian Accounting Standards at the
as income-taxes. (ITFG 16, Issue 2) time of transition to Ind AS 115 and Ind AS 116
Measurement of current tax and DTA/DTL to give An entity is required to determine (using the current
effect to concessional tax rates accounting polices) the underlying items (source
transaction/events) with respect to which deferred
The Taxation Laws (Amendment) Ordinance, 2019 taxes were recognised by it at the time of first-time
(Ordinance 2019) came into effect from 20 September adoption of Ind AS or at the time of transition to Ind AS
2019. It has brought out significant changes to 115 or Ind AS 116.
corporate income-tax rates. In accordance with the
Ordinance 2019, the domestic companies have now For more details on the issue please refer to the
been provided with an option to pay income-tax at Chapter 9, First-time adoption of Ind AS (ITFG 23,
a rate lower than the normal corporate income-tax Issue 2).
rate of 30 per cent depending upon certain specified
conditions. However, the option to pay income-tax at
a lower rate is dependent upon not availing certain
exemptions or incentives as specified in the Ordinance
2019. The issue under consideration was whether
Opinions by EAC The DTL/DTA should be computed separately

for each individual investment since the cost of
acquisition, market value and the fair value at
Deferred tax under Ind AS 12 on fair value the reporting date for each investment may vary.
changes of investments under Section 112A of Consequently, the tax base and the temporary
the IT Act2 difference for each individual would vary.
Accounting for deferred tax under Ind AS 12 Regulatory asset and interaction with Ind AS
is applicable on fair value changes of all equity 123
investments including those covered under
Section 112A of the IT Act at each reporting date In this EAC, the case deliberated relates to
(and not at the time of sale). a company in the power sector that receives
certain benefits from the government in relation
DTA on long-term capital loss under Section to its tax liability. The benefit is recognised as
112A of the IT Act should be recognised, only if regulatory deferral account balances as per Ind
the entity has reasonable certainty about taxable AS 114, Regulatory Deferral Accounts. Deferral
income/gain that would arise in future that could account balance would not be recoverable
be set off against the unabsorbed capital loss through adjustment in future income tax
within the prescribed time period. For this purpose, liabilities arising on the company as assessed
the entity should consider, amongst others, future under the IT Act and is, therefore, not a
reversal of existing taxable temporary differences deductible temporary difference resulting in DTA
(for example, future capital gains against which under Ind AS 12. Rather, it is a regulatory deferral
the long-term capital loss could be set-off, existing account balance, as mentioned in Ind AS 114.
carried forward long term capital losses) and tax
planning opportunities.
2. EAC-December 2019 edition of ICAI Journal ‘The Chartered Accountant’

3. Presentation of deferred tax recoverable from beneficiaries (customers)
accounted as ‘Deferred Asset for DTL’ under Ind AS (EAC- May 2019
edition of ICAI Journal ‘The Chartered Accountant’)
67
6. Revenue
Summary
• Ind AS 115, Revenue from Contracts with Customers
Ind AS 115 lays down the principles to be followed for recognition, measurement, and
disclosures in respect of revenue from contract with customers.
Key principles
Overview of the five-step model
• Step 1: Identify the contract with customer – It has commercial substance i.e. the risk, timing
A contract is an agreement between two or or amount of the entity’s future cash flows is
more parties that creates enforceable rights and expected to change as a result of the contract.
obligations. It may be written, oral or implied by
customary business practices and meets all of the
following criteria:
– It is legally enforceable
– It is approved and all the parties are committed
to their obligations
– Rights to goods or services and payment terms
can be identified
– Collection of consideration is considered
probable
• Step 2: Identify the performance obligations in stand-alone selling price of each distinct good or
the contract service (determined at contract inception). The
– At contract inception, entities are required to stand-alone selling price is determined as below:
identify as a performance obligation an implicit * Observable price: The best evidence of a
or an explicit promise to transfer to the customer stand-alone selling price is the observable
a distinct good or service (or bundle of goods or price of a good or service when the entity
services) sells that good or service separately in similar
– A good or service that is promised to a customer circumstances and to similar customers,
is distinct if both the following criteria are met: * Estimated price: If a stand-alone selling
* The good or service is capable of being price is not directly observable, an entity
distinct: Customers could benefit from the should estimate it by considering all
good or service on its own or with other information available to the entity, maximise
readily available resources. Various factors the use of observable inputs and apply
may provide such evidence, such as when estimation methods consistently in similar
the good or service can be used, consumed, circumstances. Some of the estimation
sold for an amount that is greater than methods are:
scrap value or held in a way that generates > Adjusted market assessment approach
economic benefits. > Expected cost plus a margin approach
The promise to transfer the good or service
*
Residual approach (only in limited
>
is distinct within the context of the contract: circumstances).
The promise to transfer the good or service is
• Step 5: Recognise revenue when (or as) the
separately identifiable from other promises in
entity satisfies a performance obligation
the contract.
• Step 3: Determine the transaction price – Revenue is required to be recognised when (i.e.
at a point in time) or as (i.e. over a period of time)
Determination of transaction price is done the entity satisfies a performance obligation by
by considering all amounts to which an entity transferring the control of a promised good or
expects to be entitled in exchange for transferring service to the customer.
promised goods or services excluding amounts
collected on behalf of third parties (for example, – A performance obligation is satisfied over time if
some sales taxes). Additionally, the consideration either:
may include fixed amounts, variable amounts, or * Customer simultaneously receives and
both. consumes the benefits as the entity performs
• Step 4: Allocating the transaction price to * Customer controls the asset as the entity
performance obligation creates or enhances it
– The objective of allocating transaction price * The entity’s performance does not create an
is for an entity to allocate transaction price to asset with an alternative use and there is right
each performance obligation in an amount that to payment for performance to date.
depicts expected entitlement for transferring the
– If a performance obligation is not satisfied
promised goods or services
over time, an entity satisfies the performance
– The stand-alone selling price is the price at obligation at a point in time.
which an entity would sell a promised good or
– Measurement of revenue is dependent upon the
service separately to a customer. Entities should
determination of the transaction price allocated
allocate the transaction price in proportion to the
to that performance obligation.
69
Other principles
• Contract costs
– Incremental costs of obtaining a contract with a • IFRS 15, Revenue from Contracts with
customer are recognised as an asset, if they are Customers provides that all types of penalties
expected to be recovered which may be levied in the performance of a
contract should be considered in the nature of
Costs incurred to fulfil a contract are generally
–
variable consideration for recognising revenue.
recognised as an expense, however, in certain
Ind AS 115 excludes penalties from the list of
cases, they may be recognised as an asset.
variable consideration. Ind AS 115 has been
• Presentation amended to provide that penalties are required
– When either party to a contract has performed, to be accounted for as per the substance of
depending on the relationship between the the contract. Where the penalty is inherent in
entity’s performance and the customer’s determination of transaction price, it would
payment, a contract asset or a contract liability is form part of variable consideration, otherwise
presented in the balance sheet the same would not be considered for
Any unconditional rights to consideration are
–
determining the consideration.
separately presented as a receivable. • Ind AS 115 requires an entity to present
• Disclosures separately the amount of excise duty included
in the revenue recognised in the statement of
– The objective of the revenue disclosures is to
profit and loss. There is no such requirement in
enable users to understand the nature, amount,
IFRS 15.
timing and uncertainty of revenue and cash flows
arising from contracts with customers. • Additional disclosures as compared to IFRS
15 are prescribed. An entity is required to
Guidance from ITFG clarifications present reconciliation of the amount of revenue

recognised in the statement of profit and loss
with the contracted price showing separately
Timing of revenue recognition each of the adjustments made to the contract
Ind AS 115 provides a control-based approach to be price specifying the nature and amount of each
applied to all transactions at the contract inception. An such adjustment separately.
entity needs to evaluate whether it transfers control of • Additional guidance has been given in Ind AS
the good or service over-time or at a point in time for 115 to explain the accounting treatment in
the purposes of recognising revenue. case of transfers of control of a product to a
Revenue is recognised… customer with an unconditional right of return.
At a Over-time
point if specific
in time criteria are
when the met
customer
obtains
control
Ind AS 115 provides that revenue is recognised over-

time when any of the following criteria are met:
a. Customer simultaneously receives and consumes
the benefits provided as the entity performs
b. Entity’s performance creates or enhances an asset
that the customer controls
c. Entity’s performance does not create an asset with
an alternative use to it and it has an enforceable
right to payment for performance completed to
date.
1. Indian Accounting Standards (Ind AS): An overview (Revised 2019)

issued by ICAI.
If none of the above criteria are met, then control of Further, ITFG clarified that basis the above evaluation
the good or service transfers at a point in time. of criteria, if entity concludes that the performance
In the above context, ITFG considered an issue obligation of the entity under its contract with a
relating to a shipping entity involved in transportation customer is satisfied over time, then the entity is
of petroleum products from one port to other. required to determine an appropriate method of
measuring progress on the basis of the relevant
The contracts with customers state that the contract
requirements and guidance contained in Ind AS 115.
would not be terminated once the entity takes delivery
(ITFG 19, Issue 2)
of goods from the customers at the port and sails
to the designated port of destination. The following First-time adopter of Ind AS transitional
issues in respect of performance obligations under the options under Ind AS 115
contract were considered by the ITFG:
For existing Ind AS users Ind AS 115 provides
i. Whether the performance obligation under the two methods of accounting for transition - the
above contract is satisfied over time or at a point in retrospective method (with or without one or more of
time four practical expedients) and the cumulative effect
ii. In case the performance obligation under the above method (simplified transition method).
contract is satisfied over time, whether the extent In a situation where an entity (ABC Ltd.) complying
of satisfaction of performance obligation could be with Ind AS for the first time from 1 April 2018 is
measured on the basis of number of days the vessel required to comply with Ind AS 115, ITFG clarified
has sailed. that a first-time adopter does not have the choice of
Whether the performance obligation is satisfied applying the simplified transition method.
over time or at a point in time Please refer to the Chapter 9, First-time adoption of
ITFG clarified that in the given case, the entity Indian Accounting Standards for more details on the
would need to evaluate its performance obligation to above issue (ITFG 19, Issue 3)
determine if it satisfies any of the requisite criterion.
Accounting treatment of deferred tax
For evaluating criteria (a), in the given case an
adjustments recognised in equity on first-
entity may not be able to readily identify whether a
customer simultaneously receives and consumes the time adoption of Ind AS in accordance
benefits from its performance. The entity is required with Ind AS 101, First-time adoption of
to evaluate whether another entity would need to Indian Accounting Standards at the time
substantially re-perform the work carried out by the of transition to Ind AS 115/116, Leases
entity to date. If that work would not need to be Please refer to the chapter 9, First-time adoption of
substantially re-performed, then revenue would be Ind AS for more details on the above issue (ITFG 23,
recognised over time. Issue 2)
Considering the nature of performance obligation of
the entity, it would not be meeting criterion (b) as Applicability of Ind AS 115 to distribution
it would not be able to create or enhance an asset of gifts
that the customer controls as the asset is created or Revenue is accounted for in accordance with Ind AS
enhanced. 115, only in case the counterparty to the contract
In the given case, for evaluation of criterion (c), an is a customer. Further, a contract should create
entity should consider whether the performance enforceable rights and obligations.
obligation creates an alternative use to it. Additionally, In case the conditions regarding a legally enforceable
in determining whether it has an enforceable right to ‘contract’ and ‘customer’ are not met, the transaction
payment for performance completed to date requires would not fall within the scope of Ind AS 115.
consideration of the detailed requirements and Please refer to the chapter 4, Tangible and intangible
guidance provided in Ind AS 115. assets for more details on the above issue (ITFG 22,
Measurement of progress towards complete Issue 4)
satisfaction of a performance obligation
Expected Credit Loss (ECL) on the amount
Ind AS 115 specifies the following two types of
methods for measuring progress based on the nature
due in the course of business from
of the goods or services that the entity promised to government
transfer to the customer: Please refer to the chapter 3, Financial instruments
• Input method for more details on the above issue (EAC opinion
published in the October 2018 edition of the Journal
• Output method. ‘The Chartered Accountant)
71
Refer to educational material on Ind AS 115, for the following issues/topics:

Issue
Topic
number
1 Guidance on difference between the terms ‘revenue’ vis-à-vis ‘income’
2 Applicability of Ind AS 115 to real estate developers
3 Applicability of Ind AS 115 to revenue from the extraction of mineral ore
Applicability of Ind AS 20 to export incentive received by a company registered as an export-
4 oriented unit
5 Guidance on identification of customers in transactions involving multiple parties
Guidance on non-monetary exchanges between a print media advertisement for an electronic
6
media advertisement
7 Applicability of Ind AS 115 to non-monetary exchanges without commercial substance
8 Applicability of Ind AS 115 to non-monetary exchanges with commercial substance

Applicability of Ind AS 115 to contracts involving non-monetary exchange for dissimilar goods or
9
services
Guidance on identifying the contract in situations where a customer has liquidity issues and
10
collection is not considered probable
Guidance on identifying the contract and recognising revenue in situations where a customer
11 (with little experience in a highly competitive industry) pays a non-refundable deposit at
inception of the contract and enters into a long-term financing agreement
12 Guidance on identifying the contract in situations of non-refundable deposit
13 Guidance on identifying the contract in situations of oral contract
14 Guidance on combination of contracts in situation to treat two contracts as a single contract
15 Guidance on contract modifications and accounting for change in prospective consideration

Guidance in contract modifications in different situations of change in period, costs and
16
consideration
17 Identifying performance obligations in a contract to build a house
18 Identifying performance obligations in a contract subject to approval of designing and tooling
19 Identifying performance obligations in a contract involving licence to use entity’s name
20 Identifying performance obligations in contract of a series of distinct goods
21 Determining the transaction price in case of collection of Goods and Services Tax (GST)
22 Determining the transaction price for financial statements vis-à-vis sales for GST purpose
23 Adjustment of revenue in case of allowance of probable discount
24 Determining the transaction price in case of retrospective reduction in price
25 Determining the transaction price in case of a financing component
26 Determining the transaction price when fees received to provide a loan commitment
27 Allocating the transaction price to performance obligations
28 Allocating the transaction price to sales incentives (cash and non-cash)
29 Allocating the transaction price to performance obligations in case of a discount
30 Allocating the transaction price to performance obligations and treatment of incentive
31 Accounting treatment of reward points
32 Allocating the transaction price in situations of separately identifiable performance obligations
33 Transfer of control in situations of raising an invoice or transfer of legal title
Recognising revenue when performance obligation is satisfied (dispatch and installation of
34
goods)
35 Recognising revenue when performance obligation is satisfied over time
Recognising revenue in situations of non-refundable upfront fees and sales based monthly
36
royalty income
Recognising revenue in situation of collection based on achievement of sales target by
37
customer
Recognising revenue as and when entity satisfies each performance obligation (unused
38
contracted call minutes in relation to telecommunication entity)
Recognising revenue as and when entity satisfies each performance obligation (broadband data
39
services)
Recognising revenue as and when entity satisfies each performance obligation (sale contract
40
based on prices linked to organised market)
Recognising revenue when entity satisfies each performance obligation (measurement of the
41
outcome of the performance obligation)
42 Recognising revenue in situations of one-time upfront charges
Recognising revenue in situations of transfer of control of goods (when a transporter is involved
43
and delivery terms are Cost, Insurance and Freight (CIF))
44 Recognising revenue in contract of payroll processing for a year with monthly payment
Recognising revenue by use of input method based on costs incurred to measure progress of
45
performance obligation
46 Guidance on whether a ‘contract asset’ is a ‘financial instrument’
47 Right to return in case of manufacturer and seller of garments to retailers
48 Guidance on bill-and-hold arrangements
49 Guidance on retention money on long term contracts (engineering and construction)
50 Guidance on an entity providing goods or services as a principal or acting as an agent

Guidance on accounting for repurchase agreements in which an entity enters into a contract
with a customer for the sale of an equipment and the contract includes:
51 • Situation 1: A call option that gives an entity a right to repurchase the equipment
• Situation 2: A put option that creates an obligation for the entity to repurchase the equipment
at the customers request.2
2. This issue has been analysed in light of Ind AS 115 and erstwhile Ind AS 17, Leases. Ind AS 17 has been superseded by Ind AS 116, Leases with effect
from 1 April 2019. Accordingly, users should revisit this issue in light of guidance provided under Ind AS 116.
73
Issue
Topic
number
52 Guidance for an Asset Management Company (AMC) in situation of variable consideration
53 Guidance in situations where manufacturer enters into a consignment agreement with a retailer
Information of contract to be included in disclosure of the transaction price allocated to the
54
remaining performance obligations as per requirements of Ind AS 115
Guidance on whether disaggregated revenue disclosure always would be at the same level as
55
its segment disclosures
56 Guidance on presentation of advance from customer
Guidance on treatment of cost of obtaining contracts in situations of discretionary annual bonus
57
to employees and other costs
Guidance on differential sales commission to employees based on their designations to be
58
treated as costs of obtaining contracts
59 Guidance on training expenses to be treated as cost of fulfilling contracts
60 Guidance on transition requirements under modified retrospective approach
61 Guidance on difference in accounting for revenue on transition to Ind AS 115

Guidance on software license to be treated as a distinct performance obligation or bundled with
62
implementation services
Guidance on software licence to be treated as a distinct performance obligation or bundled with
63
customisation services in certain scenarios
64 Revenue recognition in case of a Software-as-a-Service (SaaS) provider
Guidance on identification of licence as a distinct performance obligation from that of the
65
hosting contract in different situations
66 Guidance on whether SaaS software and other services are distinct performance obligations
67 Guidance on whether anti-virus software and updates be distinct performance obligations
68 Guidance on accounting for sales commission to obtain a contract
69 Guidance on tooling cost incurred in fulfilling a contract with customer
70 Identification of contract in case of a real estate industry
71 Identifying performance obligation in real estate entity

72 Identifying performance obligation in situation of mall management and leasing services
73 Guidance on separate performance obligations in case of real estate industry
Measurement of transaction price in case of revenue recognised over a period by a real estate
74
developer
75 Determination of significant financing components in contract for construction of a building
76 Revenue recognition in case of real estate developer in certain scenarios
77 Measuring progress of revenue by a real estate developer
78 Revenue recognition in situation of sale of multi-storied apartment building in stages
75
7. Leases
Summary
• Ind AS 116, Leases
Ind AS 116 sets out the principles for the following:

• Recognition, measurement, presentation and disclosure of leases
• Faithful representation of the transactions by lessees and lessors.
Key principles
• Ind AS 116 applies to leases of Property, Plant and – Lessors apply a dual model and classify leases as
Equipment (PPE) and other assets, with only limited either finance or operating leases.
exclusions. Lessee accounting
• A contract is, or contains, a lease if the contract • Ind AS 116 requires the following accounting
conveys the right to control the use of an identified treatment in the books of the lessee, on the
asset for a period of time in exchange for commencement of the lease:
consideration.
– A lessee recognises a Right-Of-Use (ROU) asset
Accounting model representing its right to use the underlying asset
• There are different accounting models for lessees and a lease liability representing its obligation to
and lessors as described below: make lease payments.
– Lessees apply a single on-balance sheet – A lessee measures the ROU asset at cost less
lease accounting model, unless they use the accumulated depreciation and accumulated
recognition exemptions for short-term leases impairment losses.
and leases of low-value assets.
Lessor accounting
• A lessor is required to classify each of its leases
(as either an operating or a finance lease) at the
• With regard to the subsequent measurement
inception date and is reassessed only if there is a
of leases in the books of the lessee, IFRS 16,
lease modification. The classification depends on
Leases, provides that if lessee applies fair value
whether substantially all of the risks and rewards
model in IAS 40, Investment Property, to its
incidental to ownership of the leased asset have
investment property, then it should apply that
been transferred from the lessor to the lessee.
fair value model to the ROU assets that meet
• Under a finance lease, a lessor derecognises the definition of investment property. Since Ind
the leased asset and recognises a finance lease AS 40, Investment Property, does not allow the
receivable. use of fair value model, this guidance has not
• Under an operating lease, the lessor treats the lease been included in Ind AS 116.
as an executory contract and recognises the lease • IFRS 16 requires classification of cash
payments as income over the lease term. The lessor payments for interest portion of lease liability
recognises the leased asset in its balance sheet. applying requirements of IAS 7, Statement of
Cash Flows. IAS 7 provides option of treating
Sale-and-leaseback transactions
interest paid as operating or financing activity.
• In a sale-and-leaseback transaction, the seller-lessee However, Ind AS 7, Statement of Cash Flows
first determines if the buyer-lessor obtains control of requires interest paid to be treated as financing
the asset based (i.e. whether transfer of asset is a activity only. Accordingly, the related guidance
sale of that asset). has been modified in Ind AS 116 to specify
• If the transaction does not qualify for sale that cash payments for interest portion of
accounting (i.e. transfer of asset is not a sale), then lease liability would be classified as financing
it is accounted for as a financing transaction. activities applying Ind AS 7.
Sub-lease transactions
• In a sub-lease transaction, the intermediate lessor
accounts for the head lease and the sub-lease as
two separate contracts.
• An intermediate lessor classifies a sub-lease with
reference to the ROU asset arising from the head
lease.
1. Indian Accounting Standards (Ind AS): An overview (Revised 2019)

published by the ICAI
77
Guidance from ITFG clarifications rights and obligations existing between the lessee
and the lessor beyond that term then there is no
contract beyond the non-cancellable period. (ITFG
Ind AS 116 requires a lessee to recognise a ROU asset 21, Issue 1 and ITFG 22, Issue 1)
in its books subject to certain exemptions provided in
the lease standard. These exemptions include short-
term leases. For the purpose of accounting for a lease In determining whether the lease is a short-term,
in the books of a lessee, the determination of the the enforceable rights of the lessee only are
lease term is an important consideration and would considered.
be based on facts and circumstances of the lease
agreement.
Determination of the lease term
Lease agreement does not provide purchase
The ITFG has clarified that in determining the lease option to the lessee
term (and consequently whether a lease is a short-
term lease), only the enforceable rights of the lessee In a situation, PQR Ltd. (the lessee) leased an office
to renew or extend the lease beyond the non- building from ABC Ltd. (the lessor) by means of an
cancellable period are taken into consideration. For agreement for a period of one year in the year 2005.
example, Other facts of the case are as follows:
• In case a lease agreement grants a lessee a right • The contract has been renewed every year for a
to renew or extend the lease beyond the non- further period of one year at each renewal date.
cancellable period without the consent of the lessor: • In accordance with past practice, it is likely that
In such a case, the period covered by the lessee’s the contract would be renewed for another one
option to renew or extend the lease is included in year at the expiry of its current term. However, the
the lease term if the lessee is reasonably certain to lease agreement does not provide PQR Ltd. with a
exercise that option. purchase option in respect of the leased asset (i.e.
• In case a lease agreement, in which the lessee the office building).
can renew or extend the lease beyond the non- The issue under consideration was whether PQR Ltd.
cancellable period only with the consent of the could avail the recognition exemption for short-term
lessor: In such a case if there are no enforceable leases in accordance with Ind AS 116.
Lease renewed for one year at each renewal date since 2005
Lessee PQR Ltd. Lessor ABC Ltd.
Mutual consent of both lessor and lessee required for renewal upon expiry
Accordingly, ITFG clarified that a lease agreement A lease with above characteristics would be
qualifies as a short-term lease in accordance with Ind considered as a short-term lease even if there is a
AS 116, in case it (i.e. the lease agreement including past practice of the lease being renewed upon expiry
any addendum thereto or a side agreement) has all of of the lease term (with the mutual consent of both the
the following characteristics: lessor and the lessee).
• It is for a period of 12 months or less Hence, in the given scenario, ITFG clarified that as the
lease agreement qualifies as a short-term lease, PQR
• It does not grant a renewal or extension option to
Ltd. could avail the recognition exemption for short-
the lessee
term leases as given in Ind AS 116. (ITFG 21, Issue 1)
• It does not grant a purchase option to the lessee.
Lease agreement with different options • X has no tenancy or right or interest in the land
In another case, an entity X is in the business of • As per the past practice followed by Y in respect of
power generation and transmission and has a licence its other similar leases, it is likely that the contract
for 30 years. Following are three scenarios related to would be renewed for another ten years at the
various lease agreements entered into by it: expiry of its current term
Scenario 1: Lease could be terminated by giving • X is reasonably certain to continue the above lease
one month’s prior notice till the validity of transmission licence, i.e. 30 years
During the year 2015, X (lessee) entered into a lease since shifting of transmission lines would affect its
arrangement with another entity Y (lessor) (which is a business adversely
government-owned railway operator) for an overhead
• In the past, Y has given notice to lessees to shift
line facility across the railway track for a period of 10
transmission lines from railway land only in a few
years. Other facts of the case are as follows:
rare and unusual cases.
• X paid ‘way leave’ charge to Y for the right of way in
advance for the entire period of 10 years
Lease term is 10 years
Lessee X Lessor Y
Payment of way leave charge
The ITFG clarified that in determining the lease term, decision) are likely to be significantly less than the
the lessee (i.e. X in this case) is required to make cost involved in relocation.
an assessment if, at lease commencement, there is
• In case the premature termination by X would result
an economic incentive to not exercise the option to
in Y forfeiting a significant part of the advance lease
terminate the lease prematurely.
rental payment, this would be an additional factor
X would make this assessment by considering all providing economic incentive to X to not terminate
relevant facts and circumstances including any the lease prematurely.
expected changes in facts and circumstances during
Further, in the given situation, Y is a government-
the 10 years period.
owned entity. While its agreement with X gives it
In the current scenario, however, the following factors a right to terminate the lease at any time, it seems
prima facie suggest that at the commencement that this right is meant to be exercised only in
date, X is not likely to have an economic incentive to exceptional circumstances. At lease commencement,
exercise the termination option: there seems to be no economic incentive for Y to
• X expects to operate the transmission line for 30 terminate the lease prematurely. In case another
years and therefore, needs the right of way for a entity approaches Y for the right of way, it seems that
period of 30 years. it can provide the right of way at some distance from
location of transmission line of X. Y does not need to
• In case X wishes to relocate the transmission line
terminate its existing arrangement with X to provide
so that it crosses over the railway track at a different
right of way to another party.
location, in all likelihood, it would still have to obtain
the right of way from Y. The above factors, all, prima facie suggest that at
lease commencement, it is reasonably certain that the
• It seems possible that X may not be able to
termination option would not be exercised. However,
have a complete transmission line without
as mentioned earlier, the final determination of the
crossing over the railway track. Even where this
issue would have to be made by X on the basis of
is technically possible, the alternative route may
its detailed and in-depth knowledge of the facts and
involve a considerable increase in the length of
circumstances of the case. In case X concludes that it
the transmission line and may therefore involve
is reasonably certain at lease commencement that the
considerable additional cost. Prima facie, any
termination option would not be exercised, the lease
savings to X due to lower lease rentals (which are
term would be 10 years and, consequently, the lease
likely to be the primary drivers behind any relocation
would not qualify as a ‘short term lease’.
79
Scenario 22: Agreement for 12 months but no • X should not transfer or sublet the rights granted by
renewal or extension or purchase option to the Z and the benefit of the facility should be restricted
lessee only (i.e. mutual consent required) to it only.
A part of the transmission line also passes through • Since the year 2015, the contract has been renewed
private land held by Z. During the year 2015, X (lessee) every year for a further period of one year at a time.
entered into a lease agreement with Z (lessor) for a X is reasonably certain to continue the above lease till
period of 12 months for overhead facility. the validity of transmission licence, i.e. 30 years since
The following are some of the principal terms of shifting of transmission lines would affect its business
agreement: adversely.
• The lease can be renewed or cancelled with the As per the past practice, it is likely that the contract
mutual consent of both the parties. will be renewed for another one year at the expiry of
• Either party is at liberty to put an end to the its current term.
arrangement by giving one month’s prior period The lease agreement does not provide any purchase
notice in writing. In the event of such a notice option in respect of the leased asset to the lessee.
neither party should have any claim for any
compensation.
Lease term is 12 months
Lessee X has transmission

Lessee X Lessor Z
licence valid for 30 years
In the given situation, the ITFG clarified that the lease one year. Other facts are as follows:
agreement is for a period of 12 months and qualifies • The lease can be renewed for a further period of one
as a short-term lease. This is because the agreement year with the mutual consent of both the parties
does not grant a renewal or extension or purchase
option to X (i.e. the renewal of lease requires mutual • There is no penalty if the lessee and the lessor
consent of both parties and is not at the option of X do not agree. Since 2016, the contract has been
only). renewed every year for a further period of one year
at a time
Scenario 32: Agreement for 12 months but no
renewal, extension or purchase option to the • As per the past practice, it is likely that the contract
lessee only (i.e. mutual consent required) will be renewed for another one year at the expiry of
its current term.
In the year 2016, X enters into a lease agreement with
a warehouse for an initial non-cancellable period of
Initial lease period – One year
Lessee X
Lessor is a warehouse
Further renewable one year with mutual consent-No penalty
The ITFG has clarified that in this scenario as well, the lease agreement is for a period of one year i.e.12
months. (ITFG 22, Issue 1)
2. A similar issue related to renewal of lease requiring mutual consent of lessor and lessee and not just at the option of lessee has been clarified in ITFG
clarification bulletin 21 (Issue 1).
Accounting treatment of rent equalisation liability of the following two options would be applied:
ABC Ltd. (the lessee), had several long-term lease Option I: ROU asset is measured as if Ind AS 116
contracts for lease of office buildings, cars, etc. and had been applied since the commencement date,
had classified them as operating leases under Ind AS but discounted using the lessee’s incremental
17, Leases. Under Ind AS 17, the related lease rentals borrowing rate at the date of initial application. The
were recognised on a straight-line basis over the lease accounting would be as follows:
term of the respective leases taking into consideration – The difference as at the date of initial application
the 10 per cent escalation in lease rentals every year. between the ROU asset (together with lease
Therefore, ABC Ltd. recognised a rent equalisation equalisation liability) and lease liability would
liability in its balance sheet as on 31 March 2019. be recognised in retained earnings (or other
Ind AS 116 provides two optional approaches to a component of equity, as appropriate)
lessee for transition as follows:
– Comparatives would not be restated
• Full retrospective approach (no practical expedient)
– A third balance sheet would not be presented at
• Modified retrospective approach (with practical the beginning of the preceding period (i.e. 1 April
expedient). 2018).
The accounting treatment of rent equalisation liability Option II: ROU asset is measured at an amount
appearing in the balance sheet of ABC Ltd. when it equal to the lease liability: The accounting would be
applies Ind AS 116 is explained as below: as follows:
• Application of full retrospective approach – Consider rent equalisation liability as accrued
Under this approach, the lessee applies Ind AS lease payments and the amount of ROU would
116 retrospectively in accordance with Ind AS be determined by deducting the said liability
8, Accounting Policies, Changes in Accounting from the amount of lease liability
Estimates and Errors. – Comparatives would not be restated
The accounting treatment of transition from Ind AS – A third balance sheet would not be presented at
17 to Ind AS 116 would be as follows: the beginning of the preceding period (i.e. 1 April
– For each lease, the amount of the lease liability 2018). (ITFG 21, Issue 2)
and the related ROU asset as at the beginning Non-refundable lease premium amount equal to
of the preceding period (i.e.1 April 2018) would market value
be determined as if Ind AS 116 had always been XYZ Ltd. (a manufacturing entity and a lessee)
applied. acquired a plot of land several years back on a 99
– The difference between the ROU asset (together years lease from Industrial Development Corporation
with lease equalisation liability) and lease liability (ID Corp) (the lessor) of the State Government for its
would be recognised in retained earnings (or business purposes. An upfront non-refundable lease
other component of equity, as appropriate). premium was paid at the time of execution of lease
– The comparative amounts presented in the deed (equal to market value of the land at that time).
financial statements for the year ended 31 March Additionally, the lessee would pay a nominal lease rent
2020 would be restated. on an annual basis over the entire 99 years period (i.e.
the lease term).
Additionally, in accordance with the requirements
of Ind AS 1, Presentation of Financial Statements, However, XYZ Ltd. could transfer the leased land to a
if the retrospective application of Ind AS 116 has third party after prior consent of the ID Corp.
a material effect on the information in the balance The lease deed does not have any specific clause on
sheet at the beginning of the preceding period (i.e., renewability upon completion of abovesaid lease term
1 April 2018), a third balance sheet as at 1 April of 99 years. Also, the website of the ID Corp mentions
2018 would also need to be presented. lease would be renewable after the expiry of 99 years
• Application of modified retrospective approach but not clear if any further lease premium would need
to be paid upon completion of 99 years of lease to
Under the modified retrospective approach, either renew the lease.
Lessee XYZ Ltd. Lessor ID Corp
Lease term is 99 years
81
In this situation, ITFG considered the following issues: Accounting for foreign exchange differences
a. Upfront payment equal to the present value of relating to lease liability
payments over the lease term In accordance with Ind AS 101 a first-time adopter is
ITFG deliberated on whether the transaction permitted to continue with its previous GAAP policy
described is a lease within the meaning of Ind AS adopted for accounting for exchange differences
116 specifically when the upfront payment made arising from translation of Long-Term Foreign Currency
by the lessee accounts to almost all of the present Monetary Items (LTFCMI) recognised in its financial
value of the payments to be made over the lease statements for the period ending immediately before
term. the beginning of the first Ind AS financial reporting
period. (Paragraph D13AA of Appendix D to Ind AS
Considering the definition under Ind AS 116, it was
101)
clarified that for a contract (or a part of a contract) to
qualify as a lease, exchange of consideration for the In a situation an entity, (applying the requirements
ROU of the underlying asset is essential. However, of Ind AS 116), recognised a lease liability and a
the timing or pattern of flow of such consideration ROU asset as at 1 April 2019 in respect of a long-
is not relevant in determining whether or not an term lease. This lease was entered into before the
arrangement is a lease. beginning of its first Ind AS financial reporting period
and was classified as an operating lease under the
In the present situation, the lease deed executed
previous GAAP (i.e. under AS 17). The lease payments
between the entity and the ID Corp creates
are denominated in a foreign currency.
enforceable rights and obligations between the
two parties and thus, constitutes a contract. This The issue under consideration was with regard to
contract conveys the ROU of a specified parcel of accounting of foreign exchange differences relating
land (the underlying asset) to the entity for 99 years to lease liability recognised by the entity. The ITFG
in exchange for upfront payment of lease premium deliberated if such foreign exchange differences
and annual payment of lease rent (consideration). would be covered by the exemption provided under
paragraph D13AA of Ind AS 101 or these should be
Accordingly, in the current situation, the ITFG
recognised in the statement of profit and loss.
clarified that the lease deed qualifies as a lease
within the meaning of Ind AS 116, even though The ITFG clarified that the exemption provided by
almost all of the consideration has been paid paragraph D13AA of Ind AS 101 is available only
upfront. in respect of LTFCMI recognised in the financial
statements for the period ending immediately before
b. Accounting treatment of the lease in the books
the beginning of the first Ind AS financial reporting
of the lessee
period as per the previous GAAP.
The accounting treatment of the lease in the books
Additionally, Ind AS 101 specifically provides that an
of lessee in accordance with Ind AS 116, when it
entity should not apply the exemptions contained in
was classified as a finance lease under Ind AS 17
Appendices C-D by analogy to other items.
would be as follows:
Accordingly, ITFG clarified that foreign exchange
• Lease liability: The amount of lease liability
differences relating to the lease liability recognised by
immediately upon transition to Ind AS 116 would
the entity should be charged to the statement of profit
be similar regardless of whether the entity
and loss (ITFG 21, Issue 5).
applies full retrospective approach or modified
retrospective to account for the transition.
• ROU asset: The amount of ROU asset In situations where lease liability is denominated
immediately upon transition to Ind AS 116 would in foreign currency and would be considered as
be similar regardless of whether the entity a monetary item. This liability would need to be
applies full retrospective approach or modified translated at the closing exchange rate at each
retrospective to account for the transition. reporting date as per Ind AS 21, The Effects of
• Lease term: If the lease term was correctly Changes in Foreign Exchange Rates. However,
determined by the lessee under Ind AS 17, the the ROU asset would not be restated. This would
same assessment of lease term would continue potentially create volatility in the statement of
under Ind AS 116. Further, a leasehold land is a profit and loss.
depreciable asset even if the lease term is very
long unless the title transfers to the lessee at
the end of the lease term or the lessee has a
purchase option that is reasonably certain to be
exercised. (ITFG 21, Issue 3)
Lessor accounting for lease rental income in case in accordance with Ind AS 116 as follows:
of on operating lease • Y Ltd. is required to recognise operating lease
In respect of accounting for operating leases by a rentals from the office building given on lease on a
lessor, Ind AS 17 did not require or permit scheduled straight-line basis over the lease term, even though
lease rental increases to be recognised on a straight- the lease rentals are structured to increase in line
line basis over the lease term if lease rentals were with expected general inflation to compensate for
structured to increase in line with expected general its expected inflationary cost increases.
inflation to compensate for the lessor’s expected
• The resultant change in manner of recognition
inflationary cost increases. Instead, Ind AS 17 required
of operating lease rentals by Y Ltd. represents a
such increases to be recognised in the respective
change in an accounting policy which would need to
period of increase. This was a significant difference
be accounted for as per Ind AS 8 in the absence of
(a carve-out) from its corresponding international
specific transitional provisions in Ind AS 116 dealing
standard IAS 17, Leases.
with the change. (ITFG 22, Issue 2)
However, it is important to note there is no such
Accounting of operating leases of a subsidiary not
carve-out in Ind AS 116. Thus, Ind AS 116 requires
capitalised by a first-time adopter parent
operating lease rentals to be recognised on a straight-
line basis (or on another systematic basis if such Please refer to the Chapter 9, First-time adoption of
other basis is more representative of the pattern in Ind AS for more details on the above issue (ITFG 21,
which benefit from the use of the underlying asset is Issue 4)
diminished). Accounting for mining lease rights in accordance
An entity Y Ltd. (lessor) entered into a lease with Ind AS
agreement to provide on lease an office building to The accounting for mining for extraction of lime stone
another entity X Ltd. (lessee) for a period of five years or similar such resources is excluded from the scope
beginning 1 April 2017. of Ind AS 116.
• The lease rental for each subsequent year was to Please refer to the Chapter 4, Tangible and intangible
increase by 10 per cent over the lease rental for the assets for more details on the above issue. (ITFG 22,
immediately preceding year Issue 3)
• The scheduled 10 per cent annual increase in lease Accounting treatment of deferred tax adjustments
rentals was in line with expected general inflation to recognised in equity on first-time adoption of Ind
compensate for Y Ltd.’s expected inflationary cost AS in accordance with Ind AS 101, at the time of
increases. transition to Ind AS 115/Ind AS 116
Y Ltd. did not recognise the lease rental income on a Please refer to the Chapter 9, First-time adoption of
straight-line basis. Ind AS for more details on the above issue. (ITFG 23,
Issue 2)
The ITFG considered and clarified the accounting of
the rental income of the operating lease by the lessor,
83
Refer to educational material on Ind AS 116 for the following issues/topics:

Issue
Topic
number
1 Guidance on applicability and exclusion of certain transactions from the scope of Ind AS 116
Applicability of Ind AS 116 to contract where grantor does not control prices in case of a certain
2
public to private service concession arrangement
Applicability of Ind AS 116 to a contract where grantor controls the right-to-use of any leased
3
infrastructure that operator constructs
Applicability of Ind AS 116 to different scenarios based on assessment whether the contract
4
conveys the right to control the use of an identified asset
Applicability of recognition exemption for ‘short term leases’ as per Ind AS 116
5
Guidance on whether the classes of underlying assets for the purpose of Ind AS 116 would be
6
similar to those as specified in Ind AS 16 or Ind AS 38
7 Guidance on criterion of an identified asset (the capacity portion used in a gas storage reservoir)
8 Guidance on criterion of an identified asset (the capacity portion used in a warehouse facility)
Guidance on criterion of an identified asset (the capacity portion used in the pipeline) in
9
situations of ‘right of first refusal’
10 Guidance on arrangement containing a lease (explicit or implicit identification of an asset)
11 Guidance on substantive rights in different scenarios
12 Assessment of a contract meeting the definition of lease
13 Assessment of substantive substitution rights

Assessment of right to obtain substantially all of the economic benefits from the solar power
14
plant during the period of arrangement
15 Assessment of right to direct the use of the asset (air conditioning plant)
Assessment of right to direct the use of asset (solar power plant) when customer designed the
16
asset
17 Assessment of right to direct the use of asset when supplier has protective rights
Assessment of whether customer obtains substantially all of the economic benefits from the
18
use of the asset when there is a cap on the mileage of a vehicle (leased asset)
Guidance on identified asset (storage capacity leased by a parent and subsidiary separately) and
19
whether an arrangement would be a lease in respective SFS and the CFS
20 Assessment of right to control the use of an asset (aircraft) in different scenarios
21 Assessment of separate lease components in a contract in different scenarios
Guidance on an arrangement containing a lease under Ind AS 116 vis a vis Appendix C of Ind AS
22
17
Assessment of whether an arrangement is a lease where no enforceable rights and obligations
23
of parties nor exchange of consideration exists
24 Guidance on accounting of a sale and lease back transaction
25 Assessment of applicability of sale and leaseback transaction in different scenarios
26 Assessment of lease term for assessing ROU asset and lease liability in different scenarios
27 Assessment of lease term in case of termination option of the lessee

28 Assessment of lease term in case of cancellable leases in different scenarios
29 Guidance on determination of lease term in case of sub-lease
30 Assessment of lease term in case of residual value guarantee
31 Assessment of lease term in case of perpetual lease
Assessment of lease term in contracts with a term of 12 months or less
32
33 Guidance on reassessment of lease term in certain scenarios
Guidance on when to recognise ROU asset and lease liability (inception date vs commence-
34
ment date)
35 Assessment as to whether an underlying asset of a lease is of low value
36 Guidance on certain instances of leases of low value assets
37 Guidance on short term lease exemption

Guidance on measurement of lease payments and lease incentive in case of recognition
38
exemption
Guidance on initial measurement of lease liability where lease payments in substance are fixed
39
lease payments
Assessment of fixed or variable lease payments for calculating lease liability in different
40
scenarios
Guidance on calculation of lease liability and ROU asset in case of variable lease payments not
41
dependent on an index or a rate
Guidance on measurement of lease liability in case of variable payments made at the end of
42
each year linked to an index-Consumer Price Index (CPI)
Guidance on lease payments for calculation of ROU asset in certain scenarios in case of lease
43
of an asset (aircraft)
44 Guidance on cost to be included as part of initial direct costs
Guidance on allocation of consideration for rent of portion of a building to various components
45
such as property taxes, etc.
Guidance on discount rate (interest rate implicit vs incremental borrowing rate) to be used for
46
measuring the lease liability
Guidance on combining contracts as a single contract and accounting for lease liability as at the
47
commencement date
48 Guidance on contract manufacturing
49 Guidance on payment of GST as part of consideration and its treatment

Guidance on measurement of ROU asset and lease liability in case of initial direct costs and
50
lease incentives
51 Guidance on fair valuation of security deposit
52 Guidance on accounting of interest-free security deposit
53 Guidance on security deposit paid in tranches

Guidance on measurement of ROU asset and lease liability over the lease term when lessee is
54
reasonably certain to exercise purchase option at the end of lease
85
Issue
Topic
number
Guidance on subsequent measurement of ROU asset when the underlying asset belongs to a
55
class of asset for which an entity has elected the revaluation model under Ind AS 16
56 Guidance on impairment of ROU asset
57 Guidance on lease payments in foreign currency
58 Guidance on variable lease payments dependent on an index
Guidance on whether the interest on lease liability and depreciation on ROU asset could be
59
included in PPE or inventories
60 Guidance on reassessment in lease liability due to change in lease term
61 Guidance on when lease modification is not considered as a separate lease
62 Guidance on lease modification when considered as a separate lease
Guidance on lease modification in case where reduction in lease term leading to a change in
63
terms of the lease
64 Guidance on lease modification in a situation of change in consideration
65 Guidance on initial direct costs in a lease modification
66 Guidance on accounting by lessor (recognition and measurement in case of finance lease)

Guidance on accounting by lessor in case of operating lease receipts when annual escalations
67
reflect potential increase in general inflation index over the period of lease agreement
68 Guidance on accounting for lease incentives paid by the lessor
69 Guidance on accounting by the intermediate lessor in the certain scenarios
70 Guidance on lessor’s accounting for lease modifications in finance leases
71 Guidance on accounting by lessor for lease modifications in operating leases

Guidance on presentation and disclosure by lessee (whether to classify ROU assets and lease
72
liability as current/non-current in case of short-term leases and others)
Guidance on disclosure by lessee in a situation where short-term lease payments are expected
73
to increase in the following year
Guidance on disclosure by lessee in case of depreciation charge for ROU assets as a separate
74
line item in the statement of profit and loss
Guidance on presentation of variable lease payments which are not included in measurement of
75
lease liabilities in the statement of profit and loss by a lessee
Guidance on presentation and classification of a lease of building (that does not qualify as an
76 investment property) in the balance sheet where a lessee elects not to present ROU asset in a
separate line item
Guidance on presentation and disclosure by lessee (classification of lease payments in the
77
statement of cash flows)
78 Guidance on presentation and disclosure by lessee of a gain/loss on termination of lease
79 Guidance on presentation and disclosure by lessee of lease liability in segment reporting
Guidance on presentation and disclosure by lessor (whether an intermediate lessor permitted

80 to offset the remaining lease liability for the head lease and the lease receivable from the
sublease)
Guidance on presentation by lessor of income relating to variable lease payments in respect of

81
finance lease in the statement of profit and loss
Guidance on presentation of payments made directly to relevant authority (by the lessee) by the
82
lessor in its statement of profit and loss
83 Guidance on transitional provisions under all three transition approaches specified in Ind AS 116
Guidance on when an entity transitions to Ind AS 116, applying fully retrospective (whether por-
84 tion of operating lease cost (which is required to be capitalised) could be capitalised in building
cost retrospectively)
Guidance on calculation of lease liability at transitional date when an entity applies modified
85
retrospective approach
87
8. Effects of changes
in foreign exchange
rates
Summary
• Ind AS 21, The Effects of Changes in Foreign Exchange Rates
A ‘foreign currency transaction’ is a transaction that is denominated or requires settlement in a

currency other than an entity’s functional currency (i.e. in a foreign currency). Before applying this
definition and the guidance on foreign currency transactions, an entity first considers whether
there is a foreign currency or other embedded derivative that requires separation.
Key principles
General principles Functional currency
Ind AS 21 should be applied in: • The entity measures its assets, liabilities, income
• Accounting for transactions and balances in foreign and expenses in its functional currency, which is
currencies, except for those derivative transactions the currency of the primary economic environment
and balances that are within the scope of Ind AS in which it operates. An entity’s functional currency
109, Financial Instruments reflects the underlying transactions, events and
conditions that are relevant to it. Accordingly, once
• Translating the results and balance sheet of determined, the functional currency is not changed
foreign operations that are included in the financial unless there is a change in those underlying
statements of the entity by consolidation or the transactions, events and conditions.
equity method and
• Transactions that are not denominated in an
• Translating an entity’s results and balance sheet into entity’s functional currency are foreign currency
a presentation currency. transactions.
Recognition
Initial recognition
• A foreign currency transaction should be recorded
in the functional currency, by applying to the foreign
currency amount the spot exchange rate between
the functional currency and the foreign currency at
the date of the transaction.
Subsequent measurement
• At the end of each reporting period:
– Foreign currency monetary items should be
translated using the closing rate
– Non-monetary items that are measured in terms
of historical cost in a foreign currency should be
translated using the exchange rate at the date of
the transaction and
– Non-monetary items that are measured at fair
value in a foreign currency should be translated
using the exchange rates at the date when the
fair value was measured.
Presentation currency Significant differences from IFRS1
• The entity may present its financial statements
in a currency other than its functional currency • Ind AS 101, read with Ind AS 21, provides
(presentation currency). The entity that translates companies with an option to continue the
its financial statements into a presentation currency policy adopted as per previous GAAP/AS in
other than its functional currency uses the same accounting for exchange differences arising
method as for translating the financial statements of from translation of long-term foreign currency
a foreign operation. monetary items recognised in the financial
statements for the period ending immediately
Disposal or partial disposal of a foreign before the beginning of the first Ind AS financial
operation reporting period.
• If an entity disposes of its entire interest in a foreign • When there is a change in functional currency
operation or loses control over a foreign subsidiary, of either the reporting entity or a significant
or retains neither joint control nor significant foreign operation, IAS 21, The Effects of
influence over an associate or joint arrangement Changes in Foreign Exchange Rates, requires
as a result of partial disposal, then the cumulative disclosure of that fact and the reason for the
amount of the exchange differences relating change in functional currency. Ind AS 21 requires
to that foreign operation, recognised in Other an additional disclosure of the date of change in
Comprehensive Income (OCI) and accumulated functional currency.
in the separate component of equity, should be
reclassified from equity to the statement of profit
and loss (as a reclassification adjustment) when the
gain or loss on disposal is recognised.
• A partial disposal of a foreign subsidiary without the
loss of control leads to proportionate reclassification
of the cumulative exchange differences from OCI to
Non-Controlling Interest (NCI).
Supplementary financial information

• An entity may present supplementary financial
information in a currency other than its presentation
currency if certain disclosures are made.

issued by ICAI.
89
Practical implications arising out of ITFG Additionally, the auditor of such an entity (whose
clarifications financial statements are prepared in a presentation
currency which is different from its functional
Determination of functional currency currency) would be required to give an auditor’s report
Often situations arise where a company may have on financial statements prepared in the presentation
two or more distinct business with different functional currency. (ITFG 7, Issue 2)
currencies. The accounting principles in Ind AS 21 Disclosure of foreign exchange differences
provide that functional currency is the currency of the separately from other fair value changes
primary economic environment in which the entity
Generally, Ind AS 109 requires a gain or loss on
operates.
a financial asset that is measured at fair value to
be recognised in profit or loss2. In the case of a
Functional currency needs to be identified financial asset denominated in a foreign currency and
at the entity level, considering the economic measured at Fair Value Through Profit or Loss (FVTPL),
environment in which the entity operates, and not the fair value is determined in the following two steps:
at the level of a business or a division. a. Firstly, the fair value is determined in the relevant
foreign currency
Ind AS 21 provides additional guidance with respect b. Next, it is translated into the functional currency in
to factors which an entity should consider while accordance with the requirements of Ind AS 21.
determining its functional currency. These factors Thus, as explained above, the change in fair value of
include the following: such a financial asset during a period arises due to
a. Currency that influences sales prices for goods following two factors:
and services and is of a country whose competitive a. Change in fair value expressed in terms of foreign
forces and regulations determine the sales prices of currency
its goods and services b. Change in exchange rate.
b. Currency that influences labour, material and other In a scenario discussed at ITFG, an entity, P Ltd. holds
costs of providing goods or services an investment in debentures3 denominated in a foreign
c. Currency in which funds from financing activities currency. These debentures are measured at FVTPL
are generated and in accordance with Ind AS 109, and the functional
d. Currency in which receipts from operating activities currency of P Ltd. is INR.
are usually retained. (ITFG 3, Issue 3)
Determination of presentation currency for CFS
Entities within a group may have different functional
currencies. Ind AS 21 requires each entity to determine
its functional currency and translate foreign currency
items into functional currency and report effects of
such translation in the financial statements. Ind AS 21 P Ltd Foreign currency
also permits an entity to use a presentation currency (Functional debentures
for reporting its financial statements that differs from currency: INR) (measured at
its functional currency. FVTPL)
Ind AS 21 provides specific guidance on translating the
results and balance sheet of an entity into a different 2. The exceptions to this general principle are as follows:
presentation currency. a. It is a part of hedging relationship
b. It is an investment in an equity instrument and the entity has elected
to present gains and losses on that investment in OCI
If an entity is statutorily required to present c. It is a financial liability designated as at FVTPL and the entity is
its financial statements in a currency which required to present the effects of changes in the liability’s credit risk
is different from its functional currency, then in OCI
it may do so by choosing the other currency d. It is a financial asset measured at Fair Value through Other
as its presentation currency and applying the Comprehensive Income (FVOCI) and the entity is required to
recognise some changes in fair value in OCI.
translation procedures as given in Ind AS 21.
3. This investment is not designated as a hedging instrument in a cash flow
hedge of an exposure to changes in foreign currency rates. Accordingly,
ITFG was of the view that it would not be covered within the exceptions
to the general principle enunciated in Ind AS 109 but would be measured
at FVTPL.
ITFG considered the issue whether the foreign Further, Ind AS 109 does not contain any requirement
exchange difference is required to be presented for separation of change in fair value of a foreign-
separately from other fair value changes in the currency denominated financial asset measured at
statement of profit and loss. FVTPL into the two constituent parts (i.e. change in
fair value expressed in terms of foreign currency and
change in exchange rate).
Ind AS 21 specifically excludes financial
instruments measured at FVTPL from its Accordingly, in the given case, ITFG clarified that P Ltd
requirement of disclosure of the amount of the is not required to present change in fair value of the
amount of exchange differences recognised in investment in debentures on account of change in
profit or loss. relevant foreign exchange rate separately from other
changes in the fair value of the investment.
(ITFG 20, Issue 1)
91
9. First-time adoption
of Ind AS
Summary
• Ind AS 101, First-time Adoption of Indian Accounting Standards
The 2013 Act mandates preparation of financial statements of specified companies in accordance
with Ind AS. For this purpose, the Ministry of Corporate Affairs (MCA) had laid down a road
map which provided guidance for adoption of Ind AS by the specified companies in a phased
manner. Ind AS 101 provides principles for transition and disclosures to be made in the financial
statements by a first-time adopter.
Key principles
• Ind AS 101 provides a suitable starting point for Accounting policies
entities that are transitioning to Ind AS. Ind AS 101
• An entity is required to use the same accounting
is applied by an entity in its first Ind AS financial
policies in its opening Ind AS balance sheet and
statements and each interim financial report, if
throughout all periods presented in its first Ind AS
any, that it presents in accordance with Ind AS 34,
financial statements.
Interim Financial Reporting.
• Accounting policies are required to be chosen
• The date of transition is the beginning of the earliest
from Ind AS effective at the end of its first Ind
comparative period presented on the basis of
AS reporting period, unless there is an explicit
Ind AS. At least one year of comparatives is also
exemption or option provided in Ind AS 101.
presented together with the opening balance sheet,
which is prepared at the date of transition to Ind AS. • An entity is required to take the following steps in its
opening Ind AS balance sheet:
– Recognise all assets and liabilities whose opening Ind AS balance sheet should comply with
recognition is required by Ind AS each Ind AS:
– Not recognise items as assets or liabilities if Ind – Prohibits retrospective application of some
AS do not permit such recognition specific aspects of an Ind AS
– Reclassify items that it recognised in accordance – Grants exemptions from some specific
with previous GAAP as one type of asset, liability requirements of an Ind AS.
or component of equity, but are a different type Explanation of transition to Ind AS
of asset, liability or component of equity in
accordance with Ind AS, and • An entity is required to explain how the transition
from previous GAAP to Ind AS affected its reported
– Apply Ind AS in measuring all recognised assets balance sheet, financial performance and cash
and liabilities. flows.
• The accounting policies in the opening Ind AS Disclosures
balance sheet may differ from those that an entity
used for the same date under previous GAAP. The • Detailed disclosures on the first-time adoption of
resulting adjustments arising from events and Ind AS including reconciliations of equity and profit
transactions before the date of transition to Ind AS or loss from previous GAAP to Ind AS are required
are generally recognised in retained earnings. in the annual financial statements as well as some
disclosures in its interim financial statement.
• Ind AS 101 establishes the following two categories
of exceptions to the principle that an entity’s
• Definition of previous GAAP • Foreign currency translation on long-term

IFRS 1, First-time Adoption of International monetary items
Financial Reporting Standards defines previous Paragraph D13AA of Appendix D to Ind AS 101
GAAP as the basis of accounting that a first-time provides that a first-time adopter may continue
adopter used immediately before adopting IFRS. the previous GAAP policy adopted for accounting
Ind AS 101 defines previous GAAP as the basis of for exchange differences arising from translation
accounting that a first-time adopter used for its of long- term foreign currency monetary items
reporting requirement in India immediately before recognised in the financial statements for the
adopting Ind AS. The change made it mandatory period ending immediately before the beginning
for Indian entities to consider the financial of the first Ind AS financial reporting period.
statements prepared in accordance with the Consequently, Ind AS 21 also provides that it does
notified Accounting Standards as was applicable not apply to long-term foreign currency monetary
to them as previous GAAP when they transition to items for which an entity has availed of the
Ind AS. exemption in paragraph D13AA of Appendix D to
Ind AS 101.
• Deemed cost for PPE/intangible assets/
investment property/investments in IFRS 1 does not include a similar exemption for
subsidiaries, associates and joint ventures long-term foreign currency monetary items.
IFRS 1 provides that on the date of transition the • Adjustment in goodwill

carrying amount for items of Property, Plant and IFRS 1 requires a first-time adopter to exclude
Equipment (PPE), intangible assets, investment from its opening balance sheet, any item
property, or investments in subsidiaries, recognised in accordance with previous GAAP
associates and joint ventures (as presented in that does not qualify for recognition as an asset
the separate financial statements), should be or liability under IFRS. The first-time adopter
measured by either applying the relevant Ind AS shall account for the resulting change in retained
retrospectively or at their fair value. earnings as at the transition date except in certain
Paragraph D7AA of Ind AS 101 provides an specific instances where it requires adjustment in
additional option to measure these items on goodwill. In such specific instances where IFRS 1
the date of transition at their carrying amount allows an adjustment in goodwill, under Ind AS 101
in accordance with previous GAAP and use this this amount may be adjusted in capital reserve to
amount as a measure of their deemed cost. the extent it does not exceed the balance available
in capital reserve.

published by the ICAI
93
Significant differences arising out of Significant differences from IFRS

the requirements of 2013 Act
• Investment property
• An entity may be required to comply with Paragraph D7(a) of IFRS 1 provides an option
the accounting, presentation and disclosure between ‘fair value at the date of transition to
requirements prescribed in a court approved IFRS and ‘previous GAAP revalued amount’.
scheme relating to a merger or amalgamation A first-time adopter may exercise either of the
transaction. The requirements of Ind AS 101 may option for accounting its investment property.
stand modified to this extent. However, this option has not been provided
under Ind AS 101, as Ind AS 40 permits only
the cost model.
• Service concession arrangements relating
to toll roads
Paragraph D22 of Ind AS 101 permits a first-
time adopter to continue the amortisation
policy adopted under previous GAAP for
intangible assets arising from ‘toll-road’
service concession arrangements that were
recognised in the financial statements before
the beginning of the first Ind AS financial
reporting period. Therefore, entities that have
adopted a revenue based amortisation policy
for such intangible assets under previous
GAAP are permitted to continue applying such
policy for toll road intangible assets recognised
prior to the Ind AS implementation date.
Guidance from ITFG clarifications foreign currency items to the cost of the related
PPE. At the time of transition to Ind AS if such an
entity decides to avail the deemed cost exemption
I. Clarifications with respect to the application of under paragraph D7AA of Ind AS 101, but does not
the deemed cost exemption elect to continue to capitalise foreign exchange
differences (also refer section II below), it would
As stated above, Ind AS 101 permits an entity
still be required to carry forward the entire previous
to measure items of PPE, investment property,
GAAP carrying amount for all of its PPE and would
intangible assets and investments in subsidiaries/
not be permitted to reverse the impact of paragraph
associates/joint ventures on the date of transition
46/46A of AS 11 from the deemed cost of PPE.
at either their fair value or their carrying amount
(ITFG 7, Issue 3)
in accordance with previous GAAP and use this
amount as a measure of their deemed cost. Subsequent to issuing the above clarification in
bulletin 7, the ITFG clarified (refer paragraph I (c)
The application of this optional exemption gives
below) that the deemed cost of an asset, being its
rise to several accounting issues, especially when
previous GAAP carrying amount, may be adjusted
considering the interaction of this exemption in
only to the extent of consequential adjustments
Ind AS 101 with the requirements of other Ind AS.
arising from the application of other Ind AS (ITFG 12,
These issues are further discussed below.
Issue 10).
a. Applicability of deemed cost exemption
c. Consequential adjustments to deemed cost,
Paragraph D7AA of Ind AS 101, provides an option being the previous GAAP carrying amount of
to a first-time adopter at the date of transition assets and liabilities
to continue with the carrying value of all PPE
An entity is required to recognise, classify and
(intangible assets or investment property) measured
measure assets and liabilities in its opening Ind AS
as per previous GAAP, and use it as its deemed cost
balance sheet in accordance with Ind AS.
without making any further adjustments based on
application of other Ind AS. Based on the above guidance, and subject to any
specific exemption/exception in Ind AS 101, all
Alternatively, Ind AS 101 also permits a first-time
assets and liabilities are required to be recognised in
adopter to elect to measure an item of PPE at the
accordance with the principles of Ind AS 101.
date of transition to Ind AS at its fair value and use
that fair value as its deemed cost on transition. This However, there may be situations where no
option may be applied selectively to some items of exemption/exception has been provided for an item
PPE. of asset and/or liability, and the application of Ind
AS principles to such an item has a corresponding
impact on another item of asset and/or liability
An entity is not permitted to continue with the
which is measured at its previous GAAP carrying
previous GAAP carrying value as deemed cost
amount at the transition date as permitted by Ind AS
on a selective basis for some of the items of PPE
101.
and use fair value as deemed cost approach for
the remaining items. (ITFG 5, Issue 3) In such a situation, the adjustment to the assets/
liabilities measured at deemed cost is only
consequential in nature and arises due to the
b. Reversal of the effects of paragraph 46/46A of application of the transition requirements of Ind
AS 11 under previous GAAP carrying amount of AS 101 to another item. Therefore, the previous
PPE on transition to Ind AS GAAP carrying amount may be adjusted only to the
An entity that would avail of deemed cost extent of consequential adjustments. Except such
exemption of paragraph D7AA (as mentioned in consequential adjustments, no further adjustments
above issue) would be required to carry forward should be made to the deemed cost (being the
the entire previous GAAP carrying amount for all of previous GAAP carrying amount) due to the
its PPE on transition to Ind AS. Ind AS 101 does not application of other Ind AS. (ITFG 12, Issue 10).
permit any further adjustments to the deemed cost
of PPE. This clarification may result in additional
adjustments being made to the deemed cost of
Under previous GAAP, an entity may have availed
PPE for items such as certain borrowing costs,
of the option under paragraph 46/46A of AS 11, The
hedging gains/losses, etc.
Effects of Changes in Foreign Exchange Rates to
capitalise foreign exchange differences on long-term
95
This clarification is more general in nature, although though the PPE is measured at its deemed cost
clarifications have been provided in the past on specific (being previous GAAP carrying amount). (ITFG 5,
consequential adjustments – please refer paragraph I Issue 5)
(d) and (e) below: ii. Fair value as deemed cost: The entity may elect
d. Processing fees on loans to measure its PPE at fair value and use that as
An entity may have incurred processing fees on its deemed cost on the date of transition to Ind
a loan obtained before transition to Ind AS and AS in accordance with principles of Ind AS 101.
capitalised these as part of the relevant item of PPE Considering the principles in Ind AS 113, fair
in accordance with the previous GAAP. On transition value of the asset is the exit price that would be
to Ind AS, an entity may elect to apply the deemed received to sell the asset in an orderly transaction.
cost exemption and continue with the previous As fair value is a market-based measurement
GAAP carrying value for such PPE. and not an entity specific measurement, it is
independent of the government grant received
However, the loan is required to be measured at on the asset. Consequently, no adjustment with
amortised cost (in accordance with Ind AS 109) and regard to government grant should be made to
its carrying amount is to be restated to its amortised the fair value of the PPE, being the deemed cost
cost in accordance with Ind AS 109 as at the date of on the date of transition to Ind AS. However, the
transition. entity is required to recognise the asset related
As a consequence, in order to restate the carrying government grant outstanding on the transition
amount of loan, the deemed cost of the PPE, being date as deferred income in accordance with
its previous GAAP carrying amount at the date of the requirements of Ind AS 20. The resultant
transition, should be reduced by the amount of adjustments should therefore be made in
processing cost (net of cumulative depreciation retained earnings or if appropriate, another
impact). category of equity at the date of transition to Ind
This would be in the nature of consequential AS. (ITFG 12, Issue 2)
adjustment to enable an adjustment to the carrying Please refer chapter 10, Other topics-Accounting for
amount of loan as required by Ind AS. (ITFG 5, Issue Government Grants and Disclosure of Government
4) Assistance for more details on amended Ind AS 20
e. Government grants for purchase of a fixed asset (ITFG 17, Issue 1)
An entity may have received a government grant f. Capital spares

related to an asset, prior to the date of transition An entity that has elected to continue with the
to Ind AS. As permitted under previous GAAP, the carrying value under previous GAAP as the deemed
amount of grant received may have been deducted cost for all of its PPE on transition to Ind AS, may
from the carrying amount of the related asset. have capital spares that were recognised as
Certain issues may arise based on whether an entity inventory under previous GAAP but are eligible for
elects to measure the related asset at its previous capitalisation under Ind AS. On transition to Ind AS
GAAP carrying amount or at fair value as its deemed such capital spares should be recognised as a part
cost on transition. Those issues are as follows: of PPE if they meet the criteria for capitalisation
under Ind AS 16. Ind AS 16 should be applied
i. Carrying value as deemed cost: On transition to retrospectively to measure the amount that will
Ind AS, the entity may avail of the deemed cost be recognised for such spare parts on the date of
exemption to continue with the carrying amount transition to Ind AS. Depreciation on these spare
of PPE in accordance with the previous GAAP. parts should begin from the date when they are
The government grant outstanding on the available for use.
transition date is required to be recognised
as deferred income in accordance with the The exemption to continue with the carrying value
requirements of Ind AS 20. Therefore, to of PPE under previous GAAP as the deemed cost
recognise the amount of unamortised deferred would not apply to capital spares that were not
income as at the date of the transition in recognised as PPE under previous GAAP. (ITFG 3,
accordance with Ind AS 101, a consequential Issue 9 and ITFG 5, Issue 6)
adjustment should be made to the carrying
amount of PPE (net of cumulative depreciation
impact) and retained earnings respectively, even
g. Capital work in progress In this case, accumulated depreciation and

provision for impairment under previous GAAP
Capital work-in-progress is considered to be in have no relevance, and can not be carried forward
the nature of PPE under construction. or reversed under Ind AS. However, the impairment
loss for the period between the deemed cost
determination date (date of revaluation under
The optional exemption under paragraph D7AA
previous GAAP) and the transition date (when Ind
of Ind AS 101, to continue with the carrying value
AS accounting and depreciation policies are applied
under previous GAAP as deemed cost under Ind
to the asset to arrive at its cost on date of transition
AS, is also available with regards to capital work in
under Ind AS) may be reversed if permitted under
progress. (ITFG 3, Issue 11)
Ind AS 36.
h. Capitalisation of an item of PPE not falling under
However, where an entity has not availed of the
the definition of an asset
deemed cost exemption and has opted to apply Ind
The deemed cost exemption under paragraph D7AA AS 16 retrospectively in accordance with Ind AS 101,
of Ind AS 101 cannot be availed for an item that did then impairment loss could be reversed if permitted
not meet the definition of a tangible asset under by Ind AS 36. (ITFG 8, Issue 5)
previous GAAP (or PPE under Ind AS) and was
k. Applicability of deemed cost exemption on
incorrectly capitalised under previous GAAP.
assets classified as held for sale
The incorrect capitalisation would be considered Under previous GAAP ‘assets held for sale’ in
as an error under Ind AS 101 and disclosed in the accordance with AS 10, Property, Plant and
net worth reconciliation. (ITFG 8, Issue 4) Equipment, may be stated at lower of their net
book value and net realisable value and presented
separately from other fixed assets. On transition
i. Revalued amount of PPE considered as deemed to Ind AS, if these assets are found not to fulfil
cost the criteria for being classified as ‘held for sale’ in
accordance with Ind AS 105, Non-current assets
An entity that has revalued its PPE in the past held for Sale and Discontinued Operations, then
may, at the date of transition to Ind AS, elect to such assets should be reclassified as PPE.
continue with the revised carrying value of its PPE
under previous GAAP and use that as its deemed However, the entity could avail the deemed cost
cost under Ind AS 101. If such an entity elects to exemption for such assets since the exemption
apply the cost model (i.e. to carry PPE at cost less applies to all PPE recognised in the financial
accumulated depreciation and impairment losses) statements at the date of transition to Ind AS,
for subsequent measurement of its PPE under Ind including those that were presented/disclosed
AS 16, it should not carry forward the revaluation separately. (ITFG 10, Issue 4)
reserve (created under previous GAAP) under Ind l. Deemed cost of an investment in a subsidiary
AS. On transition date, a first-time adopter can
determine cost of its investment in a subsidiary,
After transition, the entity would no longer be associate or joint venture recognised in SFS by
applying the revaluation model under Ind AS using any of the following methods:
16. Additionally, deferred tax would need to be
• Cost determined in accordance with Ind AS 27
recognised on such asset to the extent of the
(i.e. retrospective application of Ind AS 27)
difference between its carrying value in the
financial statements and the tax base. (ITFG 8, • Fair value at the entity’s date of transition to Ind
Issue 7) AS
• Previous GAAP carrying amount.
j. Reversal of impairment provision Accordingly, if an entity chooses to measure its
If an entity elects to apply the deemed cost investment at fair value at the date of transition then
exemption under Ind AS 101 and measure its PPE at fair value is deemed to be cost of such investment
its previous GAAP revaluation amount on transition, for the entity and, therefore, it should carry its
the revalued amounts of PPE as per previous GAAP, investment at that amount (i.e. fair value at the date
is considered as cost under Ind AS. of transition) after the date of transition. (ITFG 3,
Issue 12)
97
m. Investment in debentures of a subsidiary o. Measurement of investment in subsidiaries,

company joint ventures and associates at the end of the
Ind AS 27 requires an entity to account for its first Ind AS financial reporting period
investments in subsidiaries, joint ventures and When an entity prepares SFS, Ind AS 27 requires
associates either at cost, or in accordance with Ind it to account for its investments in subsidiaries,
AS 109 (i.e. at fair value) in its SFS. Further, if an joint ventures and associates either at cost or in
entity elects a cost based measurement for such accordance with Ind AS 109.
investments, Ind AS 101 permits the investment to If an entity has elected to measure a particular
be measured at its deemed cost, being its fair value category of investment (e.g. its investments in
or its previous GAAP carrying amount on the date of its subsidiaries) at deemed cost on the date of
transition to Ind AS. transition, it is required to carry such investment at
The guidance in Ind AS 27 and Ind AS 101 stated cost in its first Ind AS financial statements prepared
above, is applicable only to those investments in as at the end of the reporting period. However, for
a subsidiary, associate or joint venture that would investments made in other categories where it
meet the definition of an ‘equity’ instrument (from has not selected the deemed cost exemption (e.g.
the issuer’s perspective) under Ind AS 32. investments in associates or joint ventures), the
Therefore, for example, if an entity invests in company would have an option to account for those
debentures issued by its subsidiary, which are investments either at cost or in accordance with Ind
classified as a financial liability by the subsidiary, it AS 109. (ITFG 11, Issue 4)
would have to classify the investment as a financial
asset and measure this in accordance with Ind AS Once an entity chooses the method of
109. The deemed cost exemption in Ind AS 101 accounting (i.e. deemed cost and cost-based
would not apply to such an investment. (ITFG 7, measurement or measurement in accordance
Issue 8) with Ind AS 109) for a particular category of
investment, it is required to continue with the
(Please refer Chapter 10, Other topics- Separate
same accounting policy for that category of
Financial Statements for more details on
investment.
investments in debentures of a subsidiary)
n. Accounting for interest-free loan provided by
holding entity in its SFS II. Clarifications with respect to application of the
exemption to continue with the accounting
On transition to Ind AS, an entity that has advanced
policy under para 46A of AS 11
an interest-free loan to its subsidiary, is required
to recognise the difference between the present Under previous GAAP an entity was permitted by
value of the loan amount and its carrying amount as paragraph 46/46A of AS 11 to capitalise foreign
per previous GAAP as an addition to its investment exchange gains or losses on long-term foreign
in the subsidiary in its SFS. If the entity elects to currency monetary items. If selected, this option
measure its investment in the subsidiary at its permitted such exchange gains/losses to be either
previous GAAP carrying amount, being deemed capitalised into the cost of a related item of PPE, or
cost, in its SFS, in accordance with Ind AS 101, then accumulated in a reserve named Foreign Currency
the difference between the carrying amount of the Monetary Item Translation Difference Account
loan as per previous GAAP and its present value, (FCMITDA).
would be considered a consequential adjustment (Please refer Chapter 5, Income taxes for deferred
(due to application of Ind AS 109 to the loan) taxes on capitalised exchange differences. (ITFG 8,
and should be added to the deemed cost of its Issue 8). Also please refer Chapter 10, Other topics-
investment in the subsidiary. (ITFG 10, Issue 1) Earnings Per Share for consideration of amounts
This is consistent, in principle, with the clarifications debited to FCMITDA for computation of basic EPS
on consequential adjustments to deemed cost of (ITFG 10, Issue 5)
tangible and intangible assets. Paragraph D13AA of Ind AS 101, permits a first-time
(Please refer paragraphs I (c), (d) and (e) above). adopter to continue the accounting policy adopted
under previous GAAP for exchange differences c. Amortisation of FCMITDA on transition to Ind AS
arising from translation of long-term foreign Ind AS 109 provides guidance on the measurement
currency monetary items recognised in the financial of financial liabilities classified into the amortised
statements for the period ending immediately cost category and requires the application of the
before the beginning of the first Ind AS financial Effective Interest Rate (EIR) method to measure
reporting period. amortised cost. The application of this method may
The application of this exemption in Ind AS 101 gives result in a change in the carrying amount of a long-
rise to several practical implementation issues, term foreign currency liability on transition to Ind AS,
which are highlighted below. as compared to previous GAAP.
a. Applicability of exemption under paragraph If an entity applies the exemption in paragraph
D13AA of Ind AS 101 D13AA of Ind AS 101 and continues to accumulate
The option (under Ind AS 101) to continue with foreign exchange gains or losses on translation of
the accounting policy under paragraph 46/46A of such an item in FCMITDA, the balance in FCMITDA
AS 11, is available for only those long-term foreign should be revised retrospectively on the basis of the
currency loans that were taken/drawn down before amortised cost of the liability (as determined under
the beginning of the first Ind AS reporting period i.e. Ind AS 109 on the date of transition). The revised
1 April 2017 for a company falling within phase 2 of balance of FCMITDA should be amortised over the
the Ind AS adoption road map. (ITFG 1, Issue 3) and balance period of that long-term liability through the
(ITFG 7, Issue 1) statement of profit and loss. (ITFG 2, Issues 1 and 6)
b. Exemption under paragraph D13AA of Ind AS d. Exemption under paragraph D13AA on change
101 vis-a-vis borrowing costs under Ind AS 23 in functional currency
In case of a first-time adopter of Ind AS which would When the functional currency of a company
present its first Ind AS financial statements for the changes from INR to any other currency (e.g. USD),
financial year 2018-19, ITFG considered and clarified then any loans taken in the new functional currency
on exchange differences that qualify as borrowing (USD) would not be considered as long-term foreign
costs as per paragraph 6(e) of Ind AS 23, Borrowing currency monetary items under previous GAAP
Costs. In the given scenario, the relevant entity ( i.e. paragraph 46A of AS 11)
was exercising the option provided in paragraph Therefore, an entity cannot continue to recognise
46/46A of AS 11 and intended to continue to follow the exchange differences arising from those loans,
the same accounting policy in accordance with in the cost of fixed assets under paragraph D13AA
paragraph D13AA of Ind AS 101. of Ind AS 101. (ITFG 1, Issue 4)
e. Accounting policy for exchange differences to
A first-time adopter of Ind AS can continue to long-term forward exchange contracts
apply an accounting policy based on para 46A of
Companies that availed of the option to apply
AS 11 upon transition to Ind AS. When a company
paragraph 46/46A of AS 11 under previous GAAP
applies paragraph 46A of AS 11 then it does not
may have also capitalised foreign exchange
apply AS 16, Borrowing Costs to those exchange
differences on forward exchange contracts (covered
differences relating to long-term foreign currency
by paragraph 36 of AS 11) acquired to hedge long-
monetary items that otherwise qualify as being in
term foreign currency loans. This was permitted in
the nature of adjustments to interest cost within
accordance with the clarification issued by ICAI in
the meaning of paragraph 4(e) of AS 16.
its Frequently Asked Questions (FAQs) on the AS 11
notification.
Therefore, ITFG clarified that a company which However, the exemption in paragraph D13AA of Ind
wishes to continue to avail of the exemption provided AS 101 relates only to foreign exchange differences
by paragraph D13AA of Ind AS 101 would not be on long-term foreign currency monetary items
permitted to apply paragraph 6 (e) of Ind AS 23 to recognised in the financial statements prior to the
that part of exchange differences on such long-term first Ind AS financial reporting period and would
foreign currency monetary items. (ITFG 18, Issue1). not apply to long-term forward exchange contracts.
(ITFG 7, Issue 4)
99
a. Revenue-based amortisation for toll roads

Long-term forward exchange contracts would The ITFG clarified that in harmonisation of the
meet the definition of a derivative and are within Companies (Accounts) Rules, 2014, Ind AS 38 and
the scope of Ind AS 109. These derivatives Ind AS 101, the principles of Ind AS 38 should be
would have to be recognised at FVTPL unless followed for all intangible assets related to service
hedge accounting principles apply and these concession arrangements including toll roads once
are designated in a qualifying cash flow hedge Ind AS is applicable to an entity.
relationship under Ind AS 109.
Accordingly, revenue-based amortisation would,
generally, not apply to such intangible assets,
f. Application of hedge accounting principles except in accordance with paragraph D22 of Ind
where an entity avails an option under para 46A AS 101, which provides a specific exemption for
of AS 11 toll road intangibles recognised in the financial
statements before the beginning of the first Ind AS
On transition to Ind AS, an entity may continue to
reporting period. (ITFG 3, Issue 13)
capitalise foreign exchange differences arising on
translation of long-term foreign currency loans into b. Application of exemption to toll roads under
the cost of a related asset, in accordance with the construction
exemption in Ind AS 101. The entity may have also Another practical issue is with reference to
entered into derivative transactions (e.g. forward applicability of this exemption to toll roads under
contracts or cross currency swaps) to hedge the construction/development. The exemption applies
cash flows on the long-term foreign currency loan. only to intangible assets arising from toll-road
However, the entity would not be permitted to apply concession arrangements recognised in the
hedge accounting under Ind AS to such derivatives. financial statements before the beginning of first
This is because the entity is considered to have Ind AS reporting period.
no corresponding foreign exchange exposure An entity can not avail of the exemption if the
that affects profit or loss, since it capitalises the construction of the toll road is in progress on the
exchange differences. (ITFG 3, Issue 10) date of transition to Ind AS. This is because the
Also refer Chapter 9, Financial instruments. (ITFG 3, intangible asset in relation to toll road would not
Issue 10 and ITFG 13, Issue 8) have been recognised prior to the beginning of the
first Ind AS reporting period. (ITFG 7, Issue 9)
III. Clarifications with respect to application of the
exemption for service concession arrangements
Paragraph D22 of Ind AS 101 specifically permits
an entity to continue with its amortisation policy
adopted under previous GAAP for intangible assets
arising from service concession arrangements
in respect of toll roads. This, read with paragraph
7AA of Ind AS 38, permits an entity to continue
with revenue based amortisation for such
intangible assets (related to toll roads) recognised
in the financial statements for the period ending
immediately before the beginning of the first Ind AS
reporting period. This method of amortisation is not
permitted for intangible assets related to toll roads
that are recognised subsequently.
IV. Other clarifications • Financial instruments classified at amortised

The following are other significant application issues cost: The carrying amount of the instrument
arising from the implementation of the guidance in Ind should be computed on the date of transition
AS 101: to Ind AS, based on the previous GAAP carrying
amount at the date of business combination
a. Retrospective application of Ind AS 109 to (under previous GAAP) and the effective
financial instruments acquired in past business interest rate as on that date (determined after
combinations considering the amount and timing of expected
Ind AS 101 provides entities transitioning to settlement of such financial instrument). (ITFG
Ind AS with an option to not apply Ind AS 103, 12, Issue 9)
retrospectively to business combinations that b. Date of transition for presentation of opening
occurred before the date of transition to Ind AS. balance sheet
Where an entity acquires another entity in a scheme As per Ind AS 101, an entity is required to prepare
of amalgamation approved under the provisions and present an opening Ind AS balance sheet at the
of the 2013 Act, prior to its date of transition to Ind date of transition to Ind AS and this is the starting
AS and avails of the option to not restate its past point for its accounting.
business combinations, it considers the previous
GAAP carrying amounts of assets acquired and For example, the balance sheet of an entity with
liabilities assumed to be their deemed cost on the transition date as 1 April 2016 would be prepared as
date of transition to Ind AS. on date of transition to Ind AS i.e. the beginning of
business on 1 April 2016 (or, equivalently, close of
On the other hand, while preparing its opening business on 31 March 2016). (ITFG 8, Issue 3)
Ind AS balance sheet, Ind AS 101 requires an
entity to apply the criteria in Ind AS 109 to classify
financial instruments on the basis of the facts and ITFG clarified that on the date of transition to Ind
circumstances that exist at the date of transition AS, an entity would prepare its balance sheet as
to Ind AS. The resulting classifications are applied on the start of that day.
retrospectively.
c. Determination of date for assessing functional
While Ind AS 101 does not specifically provide currency
any transitional relief for financial instruments, it Ind AS 101 provides for certain exceptions and
also does not specify the accounting treatment exemptions from retrospective application of other
if an entity elects not to restate its past business Ind AS. However, there is no specific guidance
combinations, giving rise to an application issue. regarding the date of assessment for determination
of functional currency by an entity, i.e., whether
this would be assessed as on the date of transition
In this scenario, the previous GAAP carrying
to Ind AS or retrospectively. In accordance with
amounts of financial instruments acquired as part of
principles in Ind AS 101, since neither any exception
the business combination would be their deemed
nor any exemption has been provided, an entity
cost at the date of the business combination. The
would be required to assess its functional currency
fair value or amortised cost (as required by Ind
retrospectively. (ITFG 1, Issue 5)
AS 109) of such financial instruments should be
determined from the date of business combination d. Premium on redemption of financial liabilities
and not from the date of origination by the acquiree Companies may have adjusted redemption
company. Accordingly, the financial instruments premiums and/or other transaction costs incurred
would be measured in the following manner: on financial liabilities (as defined in Ind AS 109)
• Financial instruments classified as Fair Value issued before transition to Ind AS against the
Through Profit or Loss (FVTPL)/Fair Value securities premium account under previous GAAP.
Through Other Comprehensive Income (FVOCI): However, this is not permitted in Ind AS 109, which
Measured at their fair value on the date of requires such redemption premium and transaction
transition to Ind AS. costs to be adjusted in the EIR of the financial
liability.
101
Accordingly, ICAI clarified that the difference Although Ind AS 20 requires that the benefit of a
between the carrying amount of the financial liability government loan at a below-market rate of interest
(as per previous GAAP) on the date of transition and is treated as a government grant, such benefit
its amortised cost as on that date, computed as per (based on a retrospective restatement of the
the EIR method specified in Ind AS 109, should be loan amount at its fair value on initial recognition
adjusted by crediting the capital reserve account under Ind AS 109) would not be recognised for a
and the corresponding debit would be to the government loan existing at the date of transition,
relevant account which was credited earlier. (FAQ since Ind AS 101 does not permit such retrospective
dated 7 April 2017 issued by the ASB of ICAI). restatement.
A first-time adopter is required to use its previous
Companies that have previously adjusted GAAP carrying amount of government loan as the
the entire redemption premium against the Ind AS carrying amount on the date of transition.
securities premium account and recognised the It should apply the requirements of Ind AS 20
full repayable amount of the liability would be and Ind AS 109, prospectively to government
required to reverse the unamortised premium loans existing at the date of transition to Ind AS,
expense on transition to Ind AS. This would unless the necessary information needed to apply
subsequently be recognised as an interest the requirements of Ind AS 109 and Ind AS 20
expense through the statement of profit and retrospectively, has been obtained at the time of
loss over the remaining period until redemption. initially accounting for that loan. On prospective
This could have a significant impact on the application of Ind AS 109, the EIR of the loan
determination of future profits under Ind AS. should be computed by comparing the carrying
amount of the loan at the date of transition with the
amount and timing of expected repayment to the
e. Depreciation on first-time adoption government.
An entity, being a first-time adopter of Ind AS is Another important related issue is whether this
required by Ind AS 101 to measure its PPE on the exemption would apply to the deferment of a liability
date of transition either by retrospectively applying payable to government based on an agreement, i.e.
Ind AS 16 or at deemed cost (being either fair value liability similar to sales tax deferment for 10 years.
or previous GAAP carrying amount at the date of Often in such deferral schemes (e.g. where the
transition). amount of sales tax collected by an entity from its
If the entity elects to measure its PPE by customers is retained by the entity and is required
retrospective application of Ind AS 16, it is not to be repaid after a specified number of years) are
permitted to re-estimate its depreciation, unless its similar in nature to an interest-free loan. Hence, Ind
estimate of depreciation in the previous GAAP was AS 109 and Ind AS 20 should also be prospectively
in error. applied to such balances (e.g. deferred sales tax
liabilities) outstanding at the date of transition. (ITFG
However, when an entity has not estimated the
12, Issue 7).
useful life of its assets, but has depreciated its
assets as per the minimum requirements of law
(at the rates prescribed under Schedule XIV to the Entities are, therefore, not required to remeasure
Companies Act, 1956), then it would be required their deferred sales tax liabilities outstanding at
to re-compute the depreciation by assessing the the date of transition.
useful life of the asset in accordance with Ind AS 16.
(ITFG 3, Issue 14) g. . Business combination accounting in case of
acquisitions by first-time adopter
f. Accounting treatment of government loans at a
below-market rate of interest In the year 2009, an entity A Ltd. formed a
subsidiary B Ltd. by subscribing to 60 per cent of
Ind AS 101 requires a first-time adopter to apply
its share capital. Additionally, A Ltd. acquired 25 per
the requirements in Ind AS 109 and Ind AS 20
cent of share capital of B Ltd. during the month of
prospectively to government loans existing at the
October 2015. Subsequently, in the Financial Year
date of transition to Ind AS. Therefore, the carrying
(FY) 2017-18, A Ltd. transitioned to Ind AS with its
amount of government loan, under previous GAAP,
date of transition as 1 April 2017.
would continue to be recognised at the date of
transition to Ind AS.
Year 2009 Year 2015
Subscribed Additional
A Ltd. 60 per cent B Ltd. A Ltd. B Ltd.
25 per cent
As formation of B Ltd. was not a business h. First-time adopter of Ind AS - Transitional

combination, the following issues were raised: options under Ind AS 115
• Whether the option available to a first-time Under Ind AS transitional provisions could be found
adopter of Ind AS, to restate, or not restate, past at two places:
business combinations as per Ind AS 103 be The transitional provision contained in Ind AS 101 are
available in respect of B Ltd applicable to first-time adopter of Ind AS. A first-time
• Whether A Ltd. could account for the difference adopter does not apply the transitional requirements
between the consideration paid for the additional of individual standards unless specifically required
25 per cent shares in B Ltd. and the amount to do so. The transitional requirements of individual
of reduction in Non-Controlling Interests (NCI), standards are available to entities that already apply
directly in equity. Ind AS.
In this case, ITFG clarified that, requirements of Ind
AS 110 in respect of consolidation apply not only Ind AS 101 Individual standards
to those subsidiaries that were acquired by way
of business combinations but also those entities
In this regard, ITFG considered a situation where an
which were formed by the parent itself and have
entity (ABC Ltd.) complying with Ind AS for the first
been its subsidiaries ab initio.
time from 1 April 2018 is required to comply with Ind
Accordingly, Ind AS 110 would apply to changes in a AS 115 and whether a first-time adopter of Ind AS
parent’s ownership interest without loss of control could apply simplified transition method under Ind
of any subsidiary (acquired or formed by the parent). AS 115.
However, Ind AS 101 specifically prohibits
retrospective application of a certain requirement For existing Ind AS users Ind AS 115 provides
of Ind AS 110 (i.e. changes in a parent’s ownership following two methods of accounting at transition
interest in a subsidiary that do not result in the to Ind AS 115:
parent losing control of the subsidiary to be
accounted for as equity transactions). • The retrospective method (with or without
one or more of four practical expedients)
Consequently, ITFG clarified if case A Ltd. does not
restate its past business combinations, then the • The cumulative effect method (simplified
accounting treatment of purchase of the additional transition method).
interest in B Ltd. by A Ltd. in accordance with However, Ind AS 101 contains specific provisions
previous GAAP would continue (i.e., no adjustments dealing with the application of transitional
to the same would be made) while transitioning to provisions of Ind AS 115 by a first-time adopter.
Ind AS. (ITFG 19 Issue 1) A first-time adopter could apply the transitional
provisions contained in Ind AS 115 only to
the extent required or allowed to do so under
Appendices B-D of Ind AS 101. Appendix B-D
allows a first-time adopter to apply only the full
retrospective adoption method (with practical
expedients) given in Ind AS 115.
103
Therefore, ITFG clarified that a first-time adopter Ind AS for the first time when it prepares its financial
does not have the choice of applying the simplified statements for the accounting period beginning on 1
transition method. (ITFG 19, Issue 3) April 2019.
i. Accounting of operating leases of a subsidiary In the year 2014, A Ltd. acquired an Indian company
not capitalised by a first-time adopter parent as its subsidiary. The acquisition qualifies as a
An entity A Ltd. is a first-time adopter of Ind AS. Its business combination as per Ind AS 103.
date of transition is 1 April 2018 and it would apply
Acquired in 2014
A Ltd. Subsidiary
(parent) Business combination (which was lessee)
At the date of its acquisition, the acquired

subsidiary was a lessee in certain operating leases
which were not capitalised in the CFS prepared by Scenario I: The business
A in accordance with previous GAAP2. combination is restated
As a first-time adopter of Ind AS, A Ltd. is required
to apply Ind AS 101 in preparing its first Ind AS A Ltd. would need to account for the business
financial statements which would include, inter combination retrospectively from the acquisition date.
alia, an opening Ind AS balance sheet as at the Accordingly, it would be required to apply Ind AS 116 to
date of transition to Ind AS. acquired leases as if each of those leases were a new
lease at the acquisition date. However, an acquirer
In accordance with Ind AS 101, the general is exempted from recognition of Right-Of-Use (ROU)
requirement is retrospective application of the assets and lease liability in the following two cases:
standards in force at the end of an entity’s first Ind
• Leases for which the lease term (as defined in Ind
AS reporting period. However, there are certain
AS 116) ends within 12 months of the acquisition
optional exemptions from, and some mandatory
date or
exceptions to this general requirement.
• Leases for which the underlying asset is of low
value.
Accordingly, A Ltd. being a first-time adopter could,
A Ltd. would measure the lease liability in respect of
apply the transitional provisions contained in Ind AS
a lease at the acquisition date in accordance with Ind
116 only to the extent required or allowed to do so
AS 116. This would include measuring the lease liability
under Ind AS 101 requirements as follows:
at the present value of the lease payments that are
• Exemption from restating past business not paid at that date. The lease payments should be
combinations discounted using the interest rate implicit in the lease,
For business combinations that occurred before if that rate could be readily determined. If that rate
the date of transition, entities have the following cannot be readily determined, the lessee should use
choices: the lessee’s incremental borrowing rate.
– Restate all business combinations Further, ITFG has clarified that the incremental
borrowing rate would be determined with reference
– Restate all business combinations after a
to the acquisition date which represents the
particular date or
commencement date within the meaning of Ind
– Do not restate any of the business combinations. AS 116 in respect of leases acquired in a business
• Exemption from retrospective application of Ind combination.
AS 116
Ind AS 101 contains certain practical expedients 2. Ind AS 116 has superseded Ind AS 17 and is applicable for annual
in relation to Ind AS 116. Therefore, A Ltd. could reporting periods beginning on or after 1 April 2019
have taken the above choices and it would result in
following scenarios:
ITFG considered a situation where an Entity X at

Scenario 2: The business the time of first-time adoption of Ind AS, made
combination is not restated adjustments resulting from recognition of Deferred
Tax Asset (DTA) and Deferred Tax Liability (DTL)
directly in equity as required by the Ind AS 101.
In case the business combination is not restated, the
accounting treatment of the acquired leases in the first Subsequently, similar deferred tax adjustments
Ind AS CFS would be as follows: were made directly in equity at the time of initial
application of Ind AS 115 and Ind AS 116.
• Does not avail Ind AS 101 exemption: In case A
Ltd. does not select to avail of the exemption In the financial year 2019-20, Entity X decided to
provided by Ind AS 101 in respect of leases, it opt for the lower tax rate the Ordinance 2019. As a
would measure the lease liability and ROU asset result, DTA and DTL, to the extent unrealised/not
in respect of the acquired leases at the date settled, would be required to be remeasured.
of transition to Ind AS by applying Ind AS 116 The issue under consideration is whether entity X
retrospectively from the acquisition date. This Ltd. should recognise the resultant differences in
implies, inter-alia that the lease payments would amount of DTA and DTL arising from change in tax
be discounted using the interest rate implicit in the rates directly in equity.
lease, if that rate can be readily determined. If that The ITFG deliberated the intended meaning of terms
rate cannot be readily determined, the lessee’s ‘directly in equity’ and ‘transaction or event’ as
incremental borrowing rate determined with envisaged in Ind AS 12. Consequently, the emerging
reference to the acquisition date would be used. view was that the words ‘directly in equity’ relate to
• Avails Ind AS 101 exemption: In case A Ltd. selects the base transaction/event and the term ‘transaction
to avail of the exemption provided by Ind AS 101 or event’ refers to the source which gave rise to the
in respect of leases, it would measure the lease deferred tax implication.
liability and ROU asset in respect of the acquired The ITFG considered following examples with
leases at the date of transition to Ind AS by applying respect to the term ‘directly in equity’:
requirements of Ind AS 101. This implies, inter
alia, that the incremental borrowing rate to be • An entity at the time of first-time adoption of Ind
applied for measuring the lease liability would be AS restates a previous business combination.
determined with reference to the date of transition This was earlier accounted under previous
to Ind AS. (ITFG 21, Issue 4) GAAP on book value basis. As a result, the
entity recalculates the depreciation charge for
j. Accounting treatment of deferred tax items of PPE acquired as a part of the business
adjustments recognised in equity on first-time combination on the basis of fair value for the
adoption of Ind AS in accordance with Ind AS previous periods from the date of business
101, at the time of transition to Ind AS 115 and combination to the date of transition to Ind ASs
Ind AS 116 and adjusted the resultant increase (or decrease)
The principle laid down in Ind AS 12 for accounting in retained earnings (in cumulative depreciation)
of current and deferred tax effects is as follows: as on the date of transition to Ind AS. ITFG
Accounting for the current and deferred tax effects clarified that, in doing so, the entity, in effect,
of a transaction or other event is consistent with the restated the depreciation charge in profit or loss
accounting for the transaction or the event itself. for each of the previous periods from the date of
business combination to the date of transition to
Accordingly, an entity is required to account for tax Ind AS. (Had the entity presented comparative
consequences of transactions and other events in information for all such previous periods, the
the same way that it accounts for the transaction increased (or decreased) depreciation for a
and other events themselves. Thus, for transactions period would have reflected in statement of
and other events recognised in the statement of profit and loss for that period). Accordingly, it
profit and loss, any related tax effects are also was highlighted that the cumulative adjustment
recognised outside the statement of profit and to retained earnings at the date of transition to
loss (i.e. either in Other Comprehensive Income Ind AS is not an adjustment ‘directly in equity’.
(OCI) or directly in equity, any related tax effects are
also recognised either in OCI or directly in equity
respectively.
105
• An entity at the time of first-time adoption of

Ind AS remeasures certain equity investments
at Fair Value through Other Comprehensive
Income (FVOCI). Under previous GAAP, the
investments were measured at cost less
diminution (other than temporary in nature). The
resultant increase/decrease in carrying value of
investments were adjusted under an appropriate
equity head (e.g. OCI) on the date of transition
to Ind AS. ITFG clarified that in doing this, the
entity in effect, reflected the fair value changes
in OCI for each of the previous periods up to
the date of transition.(Had the entity presented
comparative information for all such previous
periods, the increase(or decrease) in the fair
value for a period would be reflected in OCI for
that period.). Accordingly, it was highlighted
that the cumulative adjustment to equity at the
date of transition to Ind AS is not a transaction
or event recognised ‘directly in equity’ and the
remeasurement of deferred tax on such item is
required to be recognised in OCI.
• An entity at the time of first-time adoption of Ind
AS adjusts the unamortised balance of costs of
issue of equity shares in an appropriate equity
head on the date of transition to Ind AS. The
adjustment was made in accordance with Ind
AS 32, Financial Instruments: Presentation
that ‘transaction costs of an equity transaction
shall be accounted for as a deduction from
equity’. Accordingly, ITFG clarified that were the
entity an existing adopter of Ind AS at the time
of issuance of the equity share, it would still
have adjusted the issue costs directly in equity.
Hence, it was highlighted that the adjustment
to equity at the date of transition to Ind AS is an
adjustment ‘directly in equity’. Additionally, the
remeasurement of deferred tax on such item is
required to be recognised directly in equity.
The ITFG clarified that entity is required to
determine (using the current accounting polices) the
underlying items (source transaction/events) with
respect to which deferred taxes were recognised
by it at the time of first-time adoption of Ind AS or at
the time of transition to Ind AS 115 or Ind AS 116.
Accordingly, ITFG concluded that depending on
the nature of an underlying item, the change in the
amount of the related deferred tax asset or deferred
tax liability resulting from the remeasurement of the
same at lower tax rates introduced by the Ordinance
2019 should be recognised in statement of profit
and loss, OCI or directly in equity. (ITFG 23, Issue 2)
107

Issue
Topic
number
1 Guidance on explicit and unreserved statement of compliance with Ind AS
2 Guidance on date of transition to Ind AS
Guidance on use of fair values as the deemed cost of fixed assets (whether this would be a
3
change in accounting policy)
Guidance on whether use of fair values as deemed cost and use of revaluation model in first
4
annual Ind AS financial statements would be a change in change in accounting policy
Few examples of the items that an entity may need to recognise, derecognise, remeasure,
5
reclassify on the date of transition
Guidance on cumulative translation differences and accumulated exchange differences
6
(prospective and retrospective options) (Similar to the ITFG 7, Issue 3)
Guidance on cumulative translation differences and accumulated exchange differences in case of
7
continuing with option exercised as per para 46/46A of AS 11 (Similar to ITFG 2, Issues 1 and 6)
Guidance on cumulative translation differences and accumulated exchange differences in case
8
option exercised as per Para 46/46A of AS 11 discontinued and apply Ind AS 21
Guidance on treatment of adjustment of foreign exchange fluctuation already capitalised to PPE
9 under previous GAAP on discontinuation of existing policy of capitalising exchange fluctuation on
long term foreign currency monetary items to fixed assets (Similar to ITFG 1, Issue 3)
Guidance on consolidation on transition to Ind AS with respect to an entity not a subsidiary/
10
associate/JV under previous GAAP
Guidance on restatement of past business combinations under Ind AS financials of holding and
11
subsidiary company
Guidance on retrospective adjustment of allocation of losses to NCI (whether required or
12
permitted)
Guidance on adjustment to goodwill arising on business combination on first-time adoption in
13
case an entity elects not to restate past business combination
Guidance on share-based payment transactions at the date of transition (treatment of vested and
14
unvested stock options)
15 Guidance on application of deemed cost on selective basis (Similar to ITFG 5, Issue 3)
Guidance on whether entities in a group could use different basis of arriving at deemed cost for
16
PPE in their respective SFS
Guidance on whether use of carrying value for PPE and fair value for intangible assets as deemed
17
cost permitted
Guidance on whether to use original cost or net book value (for the purpose of deemed cost) and
18
impact on future depreciation
Guidance on allocation of cost to component based on fair value when component wise breakup
19
of historical cost not available
Guidance on acceptable time gap for validity of revaluation under previous GAAP from the date of
20
transition
Guidance on acceptable time gap for validity of fair valuation under certain events from the date of
21
transition
Guidance on recognition of intangible assets (not recognised under previous GAAP) under Ind AS
22
on fair value basis on first-time adoption
23 Guidance on treatment of compound financial instruments on the date of transition

24 Guidance on previous GAAP for consolidation of foreign entity on transition to Ind AS
Guidance on restatement of past business combinations at a date prior to transition and
25
availability of deemed cost exemption for PPE
26 Guidance on first-time adoption exemptions for business combinations
Guidance on treatment of goodwill in CFS in case of step acquisition under previous GAAP
27
when past business are combinations are not restated and cases where restated
Guidance on significant accounting steps required for an entity which opted not to restate
28
business combinations
29 Guidance on significant implications of restating past business combinations
Guidance on accounting for change of classification of an entity from an associate to a
30
subsidiary in case past business combinations are not restated
Guidance on accounting for the change of classification of a subsidiary entity to an associate in
31
case past business combinations are not restated
Guidance on whether carrying amount of investments in a business combination transactions
32
would be adjusted
33 Guidance on sale of stake prior to date of transition (whether or not leading to loss of control)
Guidance on continuation of an adjustment of change in estimate (made in accordance with
34
previous GAAP) on transition date
Guidance on when an estimate was not required to be made as per previous GAAP on the tran-
35
sition date but required under Ind AS
Guidance on revision of estimates made under previous GAAP (in situations when no evidence
36
to suggest that original estimate was in error)
Guidance on derecognition of financial assets and liabilities (treatment of securitised loan assets
37
on transition)
Guidance on continuing hedge accounting on transition (when hedge transaction in previous
38
GAAP was a hedging instrument which is a written option)
39 Guidance on exemptions from the presentation and disclosure requirements in other Ind AS
40 Guidance on comparatives as per Ind AS in first Ind AS financial statements
41 Guidance on errors as per previous GAAP (rectification under Ind AS)
42 Guidance on explanation of change in accounting policies in first Ind AS financials
43 Guidance on disclosure with respect to deemed cost on transition date

Guidance on change in accounting policy post transition to Ind AS (after presenting its first
44 Ind AS interim financial statements but before presenting its first annual Ind AS financial
statements)
Guidance on disclosure requirements for the first interim financial reports prepared as per Ind
45
AS
46 Guidance on reconciliation from previous GAAP to Ind AS
Guidance on presentation of reconciliations with its previous GAAP SFS (where an entity did not
47
prepare CFS as per the previous GAAP)
48 Guidance on minimum reconciliations to be given as per Ind AS 101
109
10. Other topics
Summary
• Ind AS 1, Presentation of Financial Statements
• Ind AS 7, Statement of Cash Flows
• Ind AS 8, Accounting Policies, Changes in Accounting Estimates and Errors
• Ind AS 20, Accounting for Government Grants and Disclosure of Government Assistance
• Ind AS 23, Borrowing Costs
• Ind AS 24, Related Party Disclosures
• Ind AS 27, Separate Financial Statements
• Ind AS 33, Earnings per Share
• Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets
• Ind AS 108, Operating Segments
• Applicability of Ind AS
• Other opinions by EAC
• Other EMs
Presentation of Financial Statements

Financial statements are required to present fairly the financial position, financial performance
and cash flows of an entity. Fair presentation requires the faithful representation of the effects
of transactions, other events and conditions in accordance with the definitions and recognition
criteria for assets, liabilities, income and expenses set out by standards.
Key principles
• Ind AS 1 prescribes the basis for presentation of • A liability that is payable on demand because certain
general purpose financial statements1 to ensure conditions are breached is not classified as current
comparability both with the entity’s financial if the lender has agreed, after the reporting date but
statements of previous periods and with the before the financial statements are authorised for
financial statements of other entities. It sets out issue, not to demand repayment.
overall requirements for the presentation of both
Consolidated Financial Statements (CFS) and Schedule III to the Companies Act, 2013
Standalone Financial Statements (SFS), guidelines (2013 Act)
for their structure and their content. • On 1 October 2018, Ministry of Corporate Affairs
• Entities are required to prepare financial statements (MCA) through its notification has amended
on a going concern basis unless management Schedule III to the 2013 Act. The Schedule III to
intends to either liquidate the entity or to cease the 2013 Act provides general instructions for
trading, or has no realistic alternative but to do so. preparation of financial statements of a company
under both Accounting Standards (AS) and Ind AS
• The standard requires specific disclosures in the
Currently, Schedule III is divided into three divisions
balance sheet, the statement of profit and loss, or
as follows:
the statement of changes in equity and requires
additional disclosures (wherever required) to be – Division I: This is applicable to a company
made either in those statements or in the notes. whose financial statements are prepared in
accordance with AS.
• A statement of changes in equity (and related notes)
reconciles opening to closing amounts for each – Division II: This is applicable to a company
component of equity. whose financial statements are prepared in
accordance with Ind AS (other than Non-Banking
• All owner-related changes in equity are presented in
Financial Companies (NBFCs)2).
the statement of changes in equity separately from
non-owner changes in equity. – Division III: This is applicable only to NBFCs
which are required to prepare financial
• Generally, the entity presents its balance sheet
statements in accordance with Ind AS.
classified between current and non-current assets
and liabilities.
• An asset is classified as current if it is expected to
be realised in the normal operating cycle or within
12 months, it is held for trading or is cash or a cash
1. For entities operating in sectors such as banking, insurance, electricity,
equivalent.
etc., specific formats for presentation of financial statements may be
• A liability is classified as current if it is expected to prescribed, accordingly Ind AS 1 may not be applicable to that extent.
be settled in the normal operating cycle, it is due 2. NBFC means a NBFC as defined in Section 45-I(f) of the Reserve Bank
within 12 months, or there are no unconditional of India Act, 1934 and includes housing finance companies, merchant
banking companies, micro finance companies, mutual benefit companies,
rights to defer its settlement for at least 12 months.
venture capital fund companies, stock broker or sub-broker companies,
nidhi companies, chit companies, securitisation and reconstruction
companies, mortgage guarantee companies, pension fund companies,
asset management companies and core investment companies.
111
ICAI Guidance Note

i. ICAI Revised Guidance Note on Division II-Ind
AS Schedule III to the 2013 Act (GN) (Revised in
• IAS 1, Presentation of Financial Statements,
July 2019)
requires that in case of a loan liability, if any
The ICAI on 3 July 2019 issued a revised
• condition of the loan agreement which was
GN to provide guidance in the preparation classified as non-current is breached on the
and presentation of financial statements in reporting date, such loan liability should be
accordance with Ind AS Schedule III, for entities classified as current, even if the breach is
adopting Ind AS. The disclosure requirements rectified after the balance sheet date. However,
under Ind AS including Ind AS 115, Revenue Ind AS 1 clarifies that where there is a breach
from Contracts with Customers and Ind AS 116, of a material provision of a long-term loan
Leases the 2013 Act, other pronouncements arrangement on or before the end of the
of the ICAI, other statutes, etc., would be in reporting period with the effect that the liability
addition to the guidance provided in this GN. becomes payable on demand on the reporting
ii. ICAI Guidance Note on Division III-Ind AS date, the entity does not classify the liability as
Schedule III to the 2013 Act for NBFCs current, if the lender agreed, after the reporting
period and before the approval of the financial
• The ICAI on 5 November 2019 issued a statements for issue, not to demand payment
GN to provide guidance in the preparation as a consequence of the breach.
and presentation of financial statements
in accordance with Ind AS Schedule III, • With regard to presentation of statement of
for NBFC adopting Ind AS. The disclosure profit and loss, IAS 1 allows either the single
requirements under Ind AS, the 2013 Act, other statement approach or to follow the two
pronouncements of the ICAI, other statutes, etc., statement approach. Ind AS 1 allows only the
would be in addition to the guidance provided single statement approach with profit or loss
in this GN. Further, where any Act, Regulation, and other comprehensive income presented in
guidelines or circulars issued by the relevant two sections.
regulators from time to time requires specific • IAS 1 requires an entity to present an analysis
disclosures to be made in the standalone of expenses recognised in profit or loss using
financial statements of an NBFC, the said a classification based on either their nature
disclosures need to be made in addition to those or their function within the entity whichever
required under this Schedule. provides information that is reliable and more
relevant. Ind AS 1 requires only nature-wise
classification of expenses in the statement of
profit and loss.

issued by ICAI
Guidance from ITFG clarifications However, applying the same analogy in respect of
operating profit disclosure may not be appropriate
since certain items which are credited to the
Presentation and classification statement of profit and loss may not form part of
Presentation of operating profit as a separate line operating profit measure. As a result giving a separate
item not permitted line item for disclosure of the operating profit may
not be appropriate and would result in change in the
Division II of Ind AS based Schedule III requires
format of statement of profit and loss as prescribed by
disclosure of aggregate of ‘revenue from operations’
Division II of Schedule III.
and ‘other income’ on face of the statement of profit
and loss. Revenue from operations is to be separately Moreover, Division II of Schedule III and Ind AS 1
disclosed in the notes, showing revenue from: require classification of expense by nature and not
by function. The operating profit measure sub-total
• Sale of products (including excise duty)
may result in a more appropriate presentation of
• Sale of services and performance for entities classifying expenses by
• Other operating revenues. function, but such a classification of expenses by
The aggregate of ‘other income’ is to be disclosed function is not permitted. Therefore, a company would
on face of the statement of profit and loss. In not be able to present an operating profit measure
accordance with the Note 5 of general instructions for sub-total as part of the statement of profit and loss.
the preparation of statement of profit and loss ‘other However, the entity may provide such additional
income’ is required to be classified as: information in the financial statements. (ITFG 13, Issue
5)
• Interest income
Classification of interest related to delay in
• Dividend Income and payment of taxes
• Other non-operating income (net of expenses In accordance with Note 4 of the general instructions
directly attributable to such income). for the preparation of the statement of profit and loss,
Division II of Schedule III does not define the term Division II of Schedule III to the 2013 Act, the finance
‘other operating revenue’. Additionally, it does not costs are classified as below:
specifically require disclosure of ‘operating profit’. a. Interest
The ICAI issued a GN and according to the GN, ‘other b. Dividend on redeemable preference shares
operating revenue’ would include revenue arising c. Exchange differences regarded as an adjustment to
from a company’s operating activities, i.e., either its borrowing costs
principal or ancillary revenue- generating activities, but
which is not revenue arising from sale of products or d. Other borrowing costs (specify nature).
rendering of services. ITFG considered an issue related to payment of taxes
levied by a local authority. Interest was levied at a
variable rate ranging from one per cent to three per
Accordingly, an entity should decide classification cent per month depending upon the length of period
of an income based on the facts of each case of delay.
and detailed understanding of the company’s The above issue was considered from the perspective
activities. of classification of interest levied due to delay in
payment of taxes in the statement of profit and loss
i.e. whether it would form part of finance cost or
In addition, Schedule III to the 2013 Act sets out the would be classified as part of ‘other expenses’.
minimum requirements for disclosure in the financial In this case, local taxes not paid by due date represent
statements including notes. It states that line items, interest bearing liabilities. Therefore, it was clarified
sub-line items and sub-totals shall be presented as that the entity would need to evaluate whether
an addition or substitution on the face of the financial the interest payable for delay in payment of taxes
statements when such presentation is relevant to the is compensatory in nature for time value of money
understanding of the company’s financial position or or penal in nature. Thus, judgement is required to
performance or to cater to industry/sector-specific be exercised based on the evaluation of facts and
disclosure requirements, apart from, when required circumstances of each case.
for compliance with amendments to the 2013 Act or
Ind AS.
The GN illustrates certain financial measures e.g.
Earnings before Interest, Tax, Depreciation and
Amortisation (EBITDA) as an additional line item on
the face of the statement of profit and loss.
113
On the basis of evaluation, if an entity concluded In accordance with Ind AS 1, presentation of true
that interest was compensatory in nature then and fair view requires the faithful representation
such interest would be required to be included of the effects of transaction, other events and
in finance cost. On the other hand, if interest on conditions in accordance with the definitions and
delayed payment of taxes was penal in nature, recognition criteria for assets, liabilities, income
then it would be classified as ‘other expenses’. and expenses set out in the Framework.
(ITFG 17, Issue 8)
(Please refer chapter 5, Income Taxes for a discussion ITFG clarified that in order to achieve fair presentation,
on the treatment of income tax related interest and appropriate accounting treatment would be to
penalties under Ind AS vis-à-vis IFRS (ITFG 16 Issue 2)) recognise contractual obligation for payment of
Classification of security deposits accepted by interest as well as the waiver thereof. Thus, Entity A
utility companies as current liabilities would be required to recognise interest as an expense
and the waiver thereof as an item of income. Further,
In one of the earlier ITFG clarifications, which was
the same would also require to be disclosed as related
subsequently withdrawn, items such as security
party transactions. (ITFG 22, Issue 7)
deposits accepted by utility entities were required
to be classified as ‘current liabilities’ since the
entities do not have the unconditional right to defer
their repayment for a period of 12 months after the
reporting date. This is regardless of whether an entity
expects to settle such deposits within this time frame.
This view was consistent with the view provided in
Opinions by EAC
the Education Material on Ind AS 1 issued by the Ind Classification of consumer deposit
AS committee of ICAI. However, previously, under repayable in full anytime at the time of
the Revised Schedule VI to the Companies Act, 1956, surrender of the connection by the entity
companies were permitted in specific cases based engaged in supply of liquid petroleum gas
on commercial practice (such as in the case of utility (LPG) to customers in cylinders4
companies) to classify security deposits collected as
Deposits to be considered as financial
non-current. Therefore, entities that have followed
liability
a different practice prior to Ind AS implementation
would need to evaluate presentation of such deposits. If in accordance with an agreement, a
customer could surrender the connection
Presentation and accounting treatment of waiver
anytime and an entity is obliged to repay
of interest on the loan taken
the full deposit amount, then there is a
The ITFG considered an issue related to the contractual obligation to deliver cash in
accounting treatment of interest on the loan for the terms of guidance contained in Ind AS 32,
year 2018-19. Financial Instruments irrespective of the type
An entity A has an outstanding loan as at the year of customers. Accordingly, such deposits
end 2018-19 in its Ind AS financial statements. The should be classified as financial liability by
outstanding loan (repayable on demand and not the company.
related to a qualifying assets) was taken from one of Classification as current/non-current
its directors during the year 2015-16. In previous years,
In accordance with guidance contained
the interest was charged and paid to the directors.
in Ind AS 1, if an entity does not have an
However, in respect of interest on the loan for the
unconditional right to defer the settlement of
year, 2018-19, a waiver was obtained from the director
a liability beyond 12 months then the same
without amendment of the loan agreement.
should be classified as current liability.
ITFG noted that entity A is contractually obligated to
Further, General Instructions for Preparation
pay interest on the loan obtained from the director but
of Balance Sheet Under Division II - Ind AS
the same has been waived off in the current year.
Schedule III to the 2013 Act provides similar
definition of the current liability.
4. EAC Opinion published in the October 2019 edition of the Journal ‘The
Chartered Accountant’
In this case, the company is required to refund Disclosure of impairment loss on long-term
the deposits as and when the connection is investments as an exceptional item6
surrendered by the customer and do not have an The EAC deliberated the topic of disclosure of
unconditional right to defer such settlement. The impairment loss on long-term equity investments
EAC clarified that such deposits received from in the joint venture and the associate as an
customers should be classified as current liability. exceptional item on the face of the statement of
Additionally, for better presentation and profit and loss.
disclosure, it was suggested that the company In the given situation, the investments in the joint
disclose the amount expected to be recovered or venture and associate are accounted for at cost
settled after more than 12 months for each asset in the SFS of the entity in accordance with Ind
and liability. AS 27. Accordingly, these are outside the scope
Disclosure of government grants5 of Ind AS 109, and their impairment would be in
Grant of funds is a government grant accordance with Ind AS 36.
It was clarified that the government grants (being Further, EAC clarified that Ind AS 36 does not
receipts from a source other than shareholders) deal with presentation of impairment loss in
should not be recognised in equity. Rather, it the statement of profit and loss rather merely
should be recognised in statement of profit requires, inter alia, disclosure of the line item(s)
and loss in appropriate periods. Further, Ind of the statement of profit and loss in which the
AS 20, Accounting for Government Grants and impairment losses are included. On the other
Disclosure of Government Assistance requires hand, though, Ind AS 1 requires, inter alia,
all government grants to be recognised in the presentation of impairment losses (including
statement of profit and loss on a systematic basis reversals of impairment losses or impairment
over the periods in which the entity recognises as gains) determined in accordance with Section
expenses the related costs for which the grant is 5.5 of Ind AS 109 as a line item, it does not
intended to compensate. Ind AS 20 is based on specify a similar requirement for presentation of
the income approach. impairment losses determined in accordance with
Ind AS 36.
Accordingly, the unamortised portion of the grant
represents unfulfilled obligation which is expected Additionally, Division II to the 2013 Act does not
to result in outflow of resources in future (even specify impairment loss either as a separate line
though the same may not be refundable in future) item in the statement of profit and loss or as part
and thus it meets the definition liability. of any other line item.
Therefore, it was clarified that the government Hence, EAC clarified that only if the impairment
grant should be classified and presented under loss on long-term investments is material, it
the head ‘non-current liabilities’ and ‘current should be disclosed separately. It quoted that an
liabilities’ in the balance sheet in accordance item in Ind AS 1 para 98(a) represents impairment
with the requirements of the Schedule III to the of inventories and property, plant and equipment
2013 Act as well as Ind AS 1.(The requirements and also reversals of such write-downs. These
of classification as current/non-current liability of items are examples only. The EAC mentioned that
both the Schedule III to the 2013 Act as well as impairment of long-term investments should also
Ind AS 1 are similar). be disclosed, if material, as required by Ind AS 1
para 98.
Additionally, the above classification and
presentation would be continued till the same Further, in the given situation, assuming that
is recognised in the statement of profit and loss impairment loss is both material and expected
on a systematic basis over the periods in which not to occur regularly, the long-term equity
the company would recognise as expenses investments could be presented on the face of
the related costs which are intended to be the statement of profit and loss as below:
compensated by the grant. • Exceptional item or
• Part of exceptional items (if there is any other
exceptional item) with disclosure of individual
items in the notes to accounts.
5. EAC Opinion published in the September 2019 edition of the Journal 6. EAC Opinion published in the September 2018 edition of the Journal
‘The Chartered Accountant’ ‘The Chartered Accountant’
115

Issue
Topic
number
1 Guidance on format for the presentation of the general purpose financial statements
2 Guidance on whether it is acceptable to disclose information required by Ind AS 1 in
management/directors’ report forming part of annual report without making such disclosures in
the financial statements
3 Guidance on disclosure of non-compliance with selective Ind AS
4 Guidance on disclosure by an entity making an explicit and unreserved statement of compliance
with Ind ASs in a situation when auditor’s report contains a qualification
5 Guidance on offsetting of revenue against expenses when an entity is acting as an agent
6 Guidance on offsetting of certain inter-company reimbursements, sale of assets and service
arrangements
7 Guidance on whether it is appropriate to conclude that restatement of comparative amounts is
impracticable on the basis of undue costs involved
8 Guidance on whether an entity can adopt different levels of rounding off for different
disclosures that are made in the financial statements
9 Guidance on ‘Cash and Cash Equivalent’ having a similar definition as per Ind AS 1 and Ind AS 7,
10 Guidance on mandatory classification in the balance sheet of assets and liabilities as current/
non-current
11 Guidance on basis for classification of assets as current/non-current
12 Guidance on classification of inventory and trade receivables as current/non-current
13 Guidance on classification of construction work-in-progress as current/non-current
14 Guidance on classification of an asset/liability as current/non-current where an entity has

different operating cycles for different types of businesses
15 Guidance on disclosure requirements of receivables to be realised before 12 months and after
twelve months of the reporting period
16 Guidance on classification of a loan given to subsidiary by a holding company that is recoverable
on demand as current/non-current in the books of the holding company as well as in the books
of the subsidiary
17 Guidance on classification of various deposits as current/non-current such as electricity deposit,
tender deposit, earnest money deposit, sales tax, excise deposit paid under dispute
18 Guidance on classification as current/non-current of certain items such as receivables, advance
to suppliers, income tax receivables, insurance spares
19 Guidance on classification as current/non-current for derivative assets/liabilities
20 Guidance on classification as current/non-current of security deposit received by a gas agency in

the books of the gas agency
(Refer EAC Opinion published in October 2019)
21 Guidance on classification as current/non-current for ‘income received in advance’ by an entity
22 Guidance on classification as current/non-current in relation to sales tax deferrals
23 Guidance on classification as current/non-current with respect to provision for warranty
24 Guidance on classification as current/non-current of borrowing from banks (roll-over of loan)
25 Guidance on classification as current/non-current with respect to breach of non-financial

covenant of a loan liability which becomes repayable on demand before the reporting period
26 Guidance on classification as current/non-current with respect to breach of covenant on bank
loan (quarterly/annually)
27 Guidance on classification as current/non-current with respect to breach of covenant
(promoters’ minimum contribution) on bank loan on grant of grace period
28 Guidance on classification as current/non-current with respect to an expected breach of
covenant in the next 12 months from reporting date
29 Guidance on disclosure requirements by an entity in case shares in the entity are held by the
entity or by its subsidiaries or associates
30 Guidance on disclosure of the share of the profit or loss of associates and joint ventures
accounted for using the equity method
31 Guidance on presentation of investment income in the statement of profit and loss in case of
entities whose principal activity is not investment
32 Guidance on disclosure of ‘material’ exceptional items
117

Information about the cash flows of an entity is useful in providing users of financial statements
with a basis to assess the ability of the entity to generate cash and cash equivalents and the
needs of the entity to utilise those cash flows.
Key principles
• Ind AS 7 requires an entity to provide information • The effect of exchange rate changes on cash and
about historical changes in its cash and cash cash equivalents held or due in a foreign currency
equivalents in a statement of cash flows1 which is reported in the statement of cash flows in order
classifies cash flows during the period into those to reconcile cash and cash equivalents at the
from operating, investing and financing activities. beginning and the end of the period.
• Cash comprises cash on hand and demand • An entity is required to disclose the components
deposits. Cash equivalents are short-term highly of cash and cash equivalents and present a
liquid investments that are readily convertible to reconciliation of the amounts in its statement of
known amounts of cash and which are subject to an cash flows with equivalent items reported in the
insignificant risk of changes in value. balance sheet.
• Cash and cash equivalents for the purposes of the • Additionally, it is required to disclose, together
statement of cash flows include certain short-term with a commentary by management, the amount
investments and in some cases, bank overdrafts. of significant cash and cash equivalents which are
• The statement of cash flows presents cash flows restricted for specific purposes.
during the period, classified by operating, investing • An entity is required to provide disclosures that
and financing activities. enable users of financial statements to evaluate
• The entity presents its cash flows in the manner changes in liabilities arising from financing activities,
most appropriate to its business. including both changes arising from cash flows and
non-cash changes.
• Taxes paid are separately disclosed and classified
as operating activities unless it is practicable to • Accordingly, an entity is required to disclose the
identify them with, and therefore, classify them as, following changes in liabilities arising from financing
financing or investing activities. activities:
• Cash flows from operating activities may be – Changes from financing cash flows,
presented under either the direct method or the – Changes arising from obtaining or losing control
indirect method.2 of subsidiaries or other businesses,
• Generally, all financing and investing cash flows are – The effect of changes in foreign exchange rates,
reported gross. Cash flows are offset only in limited – Changes in fair values and
circumstances.
– Other changes.
• Foreign currency cash flows are translated at the
exchange rates at the date of the cash flows (or The above disclosures also apply to changes in
using averages when appropriate). financial assets (for example, assets that hedge
liabilities arising from financing activities) if cash
• Unrealised gains and losses arising from changes in flows from those financial assets were, or future
foreign currency exchange rates are not cash lows. cash flows will be included in cash flows from
financing activities.
1. The 2013 Act defines the term ‘financial statements’ to include cash 2. In case of listed entities, the Securities and Exchange Board of India
flow statement for the financial year. Therefore, preparation of cash flow (Listing Obligations and Disclosure Requirements) Regulations, 2015
statements is mandatory under the 2013 Act. However, its preparation require the use of the indirect method in preparing the cash flow
would be in accordance with the requirements of this standard. statement. Additionally, SEBI has mandated disclosure of cash flow
Additionally, in case of a one person company, small company and dormant statement on a half yearly basis for all listed entities for financial results
company, financial statements may not include the cash flow statement. from 1 April 2019.
• Investment must be highly liquid: Generally, the

Significant differences from IFRS3 units of a money market mutual fund that are
traded in an active market or that can be put back
• In case of entities other than financial entities, by the holder at any time to the fund at their Net
IAS 7, Statement of Cash Flows gives an option Asset Value (NAV) could meet the condition of the
to classify the interest paid and interest and investment being highly liquid.
dividends received as item of operating cash
• Amount that would be realised from the investment
flows. Ind AS 7 does not provide such an option
must be known, with no more than an insignificant
and requires these items to be classified as
risk of change in value of the investment: This
item of financing activity and investing activity,
condition requires that the amount of cash that
respectively.
would be received should be known at the time of
• IAS 7 gives an option to classify the dividend initial investment as well as the purpose of holding
paid as an item of operating activity. However, the instrument should be clear from its terms and
Ind AS 7 requires it to be classified as a part of conditions. Additionally, an entity would have to
financing activity. ensure that the investment is subject to insignificant
risk of changes in value for it to be classified as cash
equivalent.
issued by ICAI. The units of money-market funds would not be able to
meet the last condition as their value keeps changing
Guidance from ITFG clarifications primarily due to changes in interest rates. Therefore,
ITFG clarified that the amount of cash that would be
received from redemption or sale of the units could
Classification of investments made in be known at the time of the initial investment and
units of money-market mutual funds as the value of such units could be subject to a more
cash equivalents insignificant risk of change during the period of their
holding.
Ind AS 7 prescribes the following three cumulative
conditions, which are to be met for an investment to However, there could be situations wherein this last
be classified as a ‘cash equivalent’: condition could be met for instance, units of money-
market mutual funds have been acquired for a very
i. The investment must be for meeting short-term
brief period before the end of tenure of a mutual fund
cash commitments
and the maturity amounts of the mutual funds are
ii. It must be highly liquid, i.e. readily convertible to pre-determined and known. In such a case, it could
cash be argued that the redemption amount of the units is
iii. The amount that would be realised from the known and subject only to an insignificant change in
investment must be known, with no more than value. (ITFG 16, Issue 4)
an insignificant risk of change in value of the
investment.
An assessment of the above mentioned three
cumulative conditions is required to classify
investment in units of money-market mutual funds4 as
cash equivalents under Ind AS. The assessment is as
follows:
• Investment must be for meeting short-term cash
commitments: Whether an investment has been
held for meeting short-term cash commitments
depends on the management’s intent which could
be evidenced from documentary sources such as
investment policy, investment manuals, etc. It could
also be corroborated by the actual experience of
buying and selling those investments. However,
such investments should be held only as a means
of settling liabilities, and not as an investment or
for any other purposes. Therefore, this condition
requires an assessment of facts and circumstances
of each case.
4. Those investing in money-market instruments such as treasury bills,

certificates of deposit and commercial paper.
119

Issue
Topic
number
1 Guidance on scope and exemptions of Ind AS 7
2 Guidance on periodicity of preparation of statement of cash flow
3 Guidance on when an item qualifies to be a cash equivalent
4 Guidance on whether demand deposits should be included in cash
5 Guidance on meaning and treatment of term deposits
6 Guidance on what constitutes a cash inflow/outflow as per Ind AS 7
7 Guidance on the difference between bank overdraft and cash credit
8 Guidance and examples of cash flows arising from taxes on income and whether the same
should be separately disclosed under cash flows from investing or financing activities
9 Guidance on examples of cash flows which can be reported on a net basis
10 Guidance on the preferred method to report cash flows from operating activities
11 Guidance on translation and treatment of cash flows denominated in a foreign currency
12 Guidance on classification of interest and dividend paid and presentation of lease payments
under finance lease and acquisition of a fixed asset on deferred payment basis
13 Guidance and examples of cash and cash equivalent balances held by the entity that are not
available for use
14 Illustrative examples where reconciliation statement is required to be disclosed between the
amounts in the statement of cash flows with the equivalent items reported in the balance sheet
15 Guidance on reporting of sale proceeds from a sale and leaseback transaction
16 Guidance on classification of debt securities purchased at a discount/premium
17 Guidance on presentation of cash flows arising out of payments for manufacture or acquisition
of assets held for rental to others and subsequently held for sale in the ordinary course of
business
18 Guidance on whether comparative figures are required to be presented in the statement of
cash flows
19 Guidance on classification of purchase and sale of securities in the statement of cash flows
20 Guidance on classification of cash receipts and payments arising out of future contracts,
forward contracts, option contracts and swap contracts
21 Guidance on treatment of interest income in the statement of cash flows from bond over the
period of bond by an entity which is not in the business of dealing in securities
22 Guidance and examples on disclosure of non-cash transactions in the financial statements
23 Guidance on meaning of ‘contributed equity’ used in the definition of financing activities
24 Guidance on meaning of the term ‘Financial Institution’
121
Accounting Policies, Changes in

Accounting Estimates and Errors
This standard is intended to enhance the relevance and reliability of an entity’s financial
statements, and the comparability of those financial statements over time and with the financial
statements of other entities.
Key principles
• Ind AS 8 prescribes the criteria for selecting and • A change in depreciation method used by an entity
changing accounting policies, together with the should reflect the pattern in which the asset’s future
accounting treatment and disclosure of changes economic benefits are expected to be consumed by
in accounting policies, changes in accounting the entity. A change in depreciation method would
estimates and corrections of errors. be accounted for as a change in an accounting
• Accounting policies are the specific principles, estimate of the entity.
bases, conventions, rules and practices applied • The effect of change in an accounting estimate is
by an entity in preparing and presenting financial required to be recognised prospectively by including
statements. it in profit or loss in the period of the change, if it
• Ind AS 8 prescribes a two-step approach in selection affects that period only or the period of the change
and application of the accounting policies – when an and future periods, where it affects both.
Ind AS specifically covers a particular issue then an • Prior period errors are omissions from, and
accounting policy is determined by applying the Ind misstatements in, an entity’s financial statements
AS and in the absence of an Ind AS, an entity applies for one or more prior periods.
judgement based on the hierarchy of accounting • Errors include the effects of mathematical mistakes,
literature. mistakes in applying accounting policies, oversights
• An entity is required to select and apply the or misinterpretations of facts, and fraud.
accounting policies consistently for similar • When it is impracticable to determine either the
transactions, other events and conditions, period specific effects or the cumulative effect
unless an Ind AS specifically requires or permits of the error, Ind AS 8 requires to correct material
categorisation of items for which different policies prior period errors retrospectively in the first set of
may be appropriate. If an Ind AS requires or permits financial statements approved for issue after their
such categorisation, an appropriate accounting discovery by:
policy should be selected and applied consistently
to each category. – Restating the comparative amounts for the prior
period(s) presented in which the error occurred
• An entity is permitted to change an accounting or
policy only if the change is required by an Ind AS or
results in the financial statements providing reliable – If the error occurred before the earliest prior
and more relevant information. period presented, restating the opening balances
of assets, liabilities and equity for the earliest
• In case an entity has not applied a new Ind AS prior period presented.
that has been issued but is not yet effective, it is
required to disclose this fact along with known • Omissions or misstatements of items are material if
or reasonably estimable information relevant to they could, individually or collectively, influence the
assessing the possible impact that application of economic decisions that users make on the basis of
the new Ind AS will have on the entity’s financial the financial statements.
statements in the period of initial application.
• Materiality depends on the size and nature of the

omission or misstatement judged in the surrounding In a situation, where a parent and a subsidiary
circumstances. The size or nature of the item, or have adopted different methods of depreciation,
a combination of both, could be the determining a subsidiary can have a different method of
factor. estimating depreciation for its PPE, if its expected
• If the classification and presentation of items in the pattern of consumption is different. The method
financial statements is changed, then the entity once selected in the SFS of the subsidiary should
should restate the comparatives unless this is not be changed while preparing the CFS. (ITFG 11,
impracticable. Issue 6)
• Disclosure is required for judgements that have a
significant impact on the financial statements and
for key sources of estimation uncertainty. However, it is important to note that in cases, where
the carrying value (as of the date of transition) as per
previous Indian GAAP has been considered as the
Significant differences from IFRS1 deemed cost of the PPE, in those cases, the written
down value of the assets of the subsidiary may
• IAS 8, Accounting Policies, Changes in continue to be different in the SFS of the subsidiary
Accounting Estimates and Errors provides and the CFS of the parent.
that IFRS are accompanied by guidance to
assist entities in applying their requirements. Financial guarantee by parent for a loan
Guidance that is an integral part of IFRS is taken by its subsidiary that is repaid
mandatory. Guidance that is not an integral earlier than the scheduled term
part of IFRS does not contain requirements
For further discussion on the above topic, please refer
for financial statements. Ind AS 8, relevant
chapter 3, Financial instruments. (ITFG 16, Issue 7)
paragraph has been modified by not including
the text given in the context of the guidance Accounting of non-monetary asset grant
forming non-integral part of the Ind AS as such
For further discussion on the above topic, please refer
guidance has not been given in the Ind AS.
chapter 10, Other topics - Accounting for Government
Grants and Disclosure of Government Assistance.
(ITFG 17, Issue 1 (ii))
issued by ICAI Demerger of business divisions between
unrelated companies within the same
Guidance from ITFG clarifications group
For further discussion on the above topic, please
Disclosure of impact of new standard not refer chapter 10, Other topics - Separate Financial
yet effective Statements. (ITFG 20, Issue 4)
In a situation where an entity has not applied a new Measurement of current tax and DTA or
Ind AS that has been issued but is not yet effective,
Ind AS 8 requires the disclosure of the fact that the
DTL to give effect to lower tax rate in
issued Ind AS (not yet effective) has not been applied. accordance with the Ordinance 2019
Additionally, disclosure is required of known or For further discussion on the above topic, please refer
reasonably estimable information relevant to assess chapter 7, Leases. (ITFG 23, Issue 1)
the possible impact that application of the new Ind AS
is likely to have on an entity’s financial statements in
the period of initial application. (ITFG 8, Issue 2)
Uniform accounting policies vs uniform
accounting estimates
Under Ind AS, the method of depreciation is treated
as an accounting estimate, alignment of method of
depreciation for CFS is not necessary, i.e. the method
of depreciation as applied by the subsidiary in the
SFS can continue to be applied in the CFS, even in
cases where such method is different from that of the
parent.
123

Issue
Topic
number
1 Guidance on selection and application of accounting policies
2 Examples of changes in accounting policies
3 Guidance on determination of whether a change in inventory cost formula is change in
accounting policy or a change in accounting estimate
4 Guidance on changes in accounting policies with respect to reclassification of an item from PPE
to investment property
5 Guidance on changes in accounting policies with respect to change in functional currency
6 Guidance on application of change in accounting policy retrospectively and the exceptions
7 Guidance on change in accounting policy of subsequent measurement of PPE from revaluation

model to cost model
8 Guidance on voluntarily change of one or more accounting policies with the examples
9 Guidance on changes in accounting policies based on pronouncement of IASB/other standard

setting body
10 Guidance on accounting for income tax effects of retrospective application of changes in
accounting policies
11 Guidance on requirement to present a third balance sheet as at the beginning of the preceding
period
12 Guidance on requirement to present third balance sheet in condensed interim financial
statements when there is a change in accounting policy
13 Guidance on disclosure requirements when accounting policy is changed voluntarily
14 Guidance on disclosure requirements for new or revised Ind AS which have been notified by the
MCA but are not yet effective.
15 Examples of changes in accounting estimates
16 Guidance on accounting for change in accounting estimates
17 Guidance on whether change in the depreciation method for an item of PPE a change in
accounting policy or a change in accounting estimate
18 Guidance on whether a parent entity needs to align the depreciation method(s) applied by its
subsidiaries in their SFS with its own depreciation method(s) in the CFS
19 Guidance on disclosures to be made in respect of changes in accounting estimates
20 Guidance on correction of material prior period errors
21 Guidance on disclosure requirements for correction of prior period errors
22 Guidance on correction of an error with respect to reclassification of liabilities from non-current

to current in the comparative amount
23 Guidance on correction of an error with respect to reclassification of expenses from finance
cost to other expenses in the comparative
24 Guidance on correction of material error with respect to omission of recognition of expenses
and liability
25 Guidance on correction of an error with respect to recognition of an expenses instead of

capitalisation under Ind AS 38, Intangible Assets
26 Guidance on correction of an error with respect to recognition of goodwill under business
combination
27 Guidance on correction of an error detected during interim reporting period but restating the
comparatives in the annual financial statements on materiality grounds
28 Guidance on correction of an error which is immaterial based on annual financial statements but
material on the basis of interim financial statements
29 Guidance on impracticable in context to accounting estimates and exception to retrospective
application of accounting policies
30 Guidance on application of hindsight view while applying a change in an accounting policy
retrospectively or correcting a prior period error
31 Example of changes in the presentation or classification of items envisaged in Ind AS 1
125
Accounting for Government Grants and

Disclosure of Government Assistance1
This standard is required to be applied in accounting for, and in the disclosure of, government
grants and in the disclosure of other forms of government assistance.
Key principles
• Ind AS 20 is applied in accounting for and in incurred or for the purpose of giving immediate
the disclosure of government grants and in the financial support to the entity with no future related
disclosure of other forms of government assistance. costs shall be recognised in profit or loss of the
• Government grants, including non-monetary period in which it becomes receivable.
grants at fair value, are not recognised until there Presentation of government grant related
is reasonable assurance that the entity will comply
to assets
with the conditions attached to them and the grants
will be received. • Government grants related to assets, including
non-monetary grants at fair value, are presented
• A forgivable loan from government is treated as
in the balance sheet either by setting up the grant
a government grant when there is reasonable
as deferred income or by deducting the grant in
assurance that the entity will meet the terms for
arriving at the carrying amount of the asset (net
forgiveness of the loan.
presentation).
• The benefit of a government loan at a below-market
• There are two methods of presentation of the
rate of interest is treated as a government grant.
government grants related to assets as follows:
• In case of a government grant which is in the form
– One method recognises the grant as deferred
of transfer of a non-monetary asset (such as land
income that is recognised in profit or loss on a
or other resources), both the grant and asset are
systematic basis over the useful life of the asset.
accounted for at fair value of the non-monetary
asset. There is an alternate method for accounting – Another method is to deduct the grant in
for such non-monetary grants i.e. an entity may calculating the carrying value of the asset.
record both the asset and the grant at a nominal Thus, the grant would be recognised in the
amount rather than at fair value.2 statement of profit and loss over the useful life
of a depreciable asset as a reduced depreciation
Recognition of government grant expense.
• Government grants shall be recognised in profit or
Presentation of government grant related
loss on a systematic basis over the periods in which
the entity recognises as expenses the related costs to income
for which the grants are intended to compensate. • Grants related to income are presented as part of
• A government grant that becomes receivable profit or loss, either separately or under a general
as compensation for expenses or losses already heading such as ‘other income’ or alternatively, they
are deducted in reporting the related expenses.
1. MCA amended Ind AS 20 on 20 September 2018 and the amendments are 2. MCA notification dated 20 September 2018.
effective retrospectively from 1 April 2018
Repayment of government grants A government entity may have received contributions

• A government grant that becomes repayable is to be from the government in the nature of promoter’s
accounted for as a change in accounting estimate. contribution, such contributions would be recognised
in capital reserve and treated as a part of shareholders’
• Repayment of a grant related to income shall be funds in accordance with AS 12.
applied first against any unamortised deferred credit
At the time of transition to Ind AS, for determining
recognised in respect of the grant. To the extent that
the relevant accounting treatment for such grants
the repayment exceeds any such deferred credit, or
received, it is important to ascertain whether the
when no deferred credit exists, the repayment is to
government has 100 per cent shareholding in the
be recognised immediately in profit or loss.
entity. The entity should first determine whether
• Repayment of a grant related to an asset is to be the payment received was a government grant or
recognised by increasing the carrying amount of a shareholder’s contribution. Consequently, the
the asset or reducing the deferred income balance accounting treatment that should be applied in the
by the amount repayable. The cumulative additional two scenarios is as follows:
depreciation that would have been recognised in
• In case, the entity concludes that the contribution is
profit or loss to date in the absence of the grant is to
in the nature of a government grant, then it would
be recognised immediately in profit or loss.
apply the principles of Ind AS 20 retrospectively, as
• Further, the amendment envisages that required by Ind AS 101. Ind AS 20 requires all grants
circumstances giving rise to repayment of a grant to be recognised as income on a systematic basis
related to an asset may require consideration of a over the periods in which the entity recognises as
possible impairment in the new carrying amount of expenses the related costs for which the grants are
the asset. intended to compensate.
• Appendix A of Ind AS 20 prescribes that government
assistance to entities meets the definition of
government grants in Ind AS 20, even if there are Unlike AS 12, Ind AS 20 requires the grant to be
no conditions specifically relating to the operating classified either as a capital or an income grant
activities of the entity other than the requirement and does not permit recognition of government
to operate in certain regions or industry sectors. It, grants in the nature of promoter’s contribution
in addition provides that such grants shall not be directly in shareholders’ funds.
credited directly to shareholders’ interests.
Significant differences from IFRS3 • In case it concludes that the contribution is in the
nature of ‘shareholder contribution’, then Ind AS
• MCA amended Ind AS 20 and the amendments 20 would not apply, since it specifically scopes out
are effective retrospectively from 1 April participation by the government in the ownership
2018. Consequently, there are no significant of an entity. Thus, in accordance with Ind AS 101,
differences in Ind AS 20 as compared with IAS the entity is required to reclassify the contribution
20, Accounting for Government Grants and received, from capital reserve to an appropriate
Disclosure of Government Assistance. category under ‘other equity’ at the date of
transition.
The above principles would also apply for contributions
3. Indian Accounting Standards (Ind AS): An Overview (Revised 2019) received by an entity subsequent to the Ind AS
issued by ICAI transition date. (ITFG 9, Issue 3)
Guidance from ITFG clarifications Subsequent to the issue of the above clarification,
MCA has revised Ind AS 20 as well as made
consequential amendments to certain other Ind AS
Accounting for grants (e.g. Ind AS 12, Ind AS 16, Ind AS 40, etc.) and the
Accounting treatment for grants in the nature of amendments are effective from 1 April 2018. Going
promoters’ contribution forward, the principles for presentation of government
Accounting Standard (AS) 12, Accounting for grants related to assets as well as those related to
Government Grants, requires grants received repayment of government grants are to be applied as
with respect to an entity’s total investment or per the amended Ind AS 20.
total capital outlay, for which no repayment was
ordinarily expected (i.e. grants in the nature of
promoter’s contribution), to be credited directly to the
shareholders’ funds.
127
Accounting of non-monetary asset grant recognising government grant and the related asset
As explained above Ind AS 20 has been recently at fair value.
amended. It now provides an entity with a choice As Ind AS 20 has been amended recently,
for accounting of government grants in the form of therefore, an issue may arise whether for the
non-monetary assets. Accordingly, an entity can either financial year 2018-19, X Ltd. is required or
present the non-monetary asset and grant at fair value permitted to change its accounting policy relating to
or record both asset and grant at a nominal amount. government grant.
In a scenario, X Ltd., a government company4 in In accordance with Ind AS 8, an entity would change
which 100 per cent of its paid-up capital is held by the an accounting policy only if the change:
Government of India, received certain land in the year 1. Is required by an Ind AS or
2008 from the government to construct and operate a
2. Results in the financial statements providing reliable
Mass Rapid Transit System (MRTS) in a metropolitan
and more relevant information about the effects
city. The land was received free of cost subject to
of transactions, other events or conditions on the
compliance with specified terms and conditions. In
entity’s financial position, financial performance or
accordance with the then applicable AS 12, the land
cash flows.
was recorded at a nominal value of INR1.
Following is the accounting of land under Ind AS:
i. X Ltd. is a first-time adopter of Ind AS and its first Due to the amendment of Ind AS 20, entities
Ind AS reporting period is financial year 2018-19 are not required to change the accounting policy
relating to the grant in preparing its financial
X Ltd. has a choice of recognising the grant and statements for the previous financial year.
the asset (i.e. land in this case), initially either at fair However, the entity is permitted to change its
value or at a nominal amount. accounting policy voluntarily.
Ind AS 101 further states the following with respect
to opening Ind AS balance sheet:
1. An entity is required to prepare and present an Ind AS 8 lays down following two requirements that
opening Ind AS balance sheet at the date of must be complied with in order to make a voluntary
transition to Ind AS. change in an accounting policy:
2. An entity is required to use the same accounting 1. The information resulting from application of the
policies in its opening Ind AS balance sheet changed (i.e. the new) accounting policy must be
and throughout all periods presented in its first reliable.
Ind AS financial statements. Those accounting 2. The changed accounting policy must result in
policies would comply with each Ind AS effective ‘more relevant’ information being presented in the
at the end of its first Ind AS reporting period. financial statements.
Generally, those accounting policies are applied
on a retrospective basis. Whether a changed accounting policy results in
reliable and more relevant financial information is a
Accordingly, X Ltd. is required to apply the amended matter of assessment based on the particular facts
Ind AS 20 for all periods presented in its financial and circumstances of each case.
statements for the financial year 2018-19, including
in preparing its opening Ind AS balance sheet as at 1 In order to ensure that such an assessment is made
April 2017. judiciously (a voluntary change in an accounting policy
does not effectively become a matter of free choice),
Additionally, under Ind AS 101, there is no mandatory Ind AS 8 further requires an entity making a voluntary
exception or voluntary exemption from retrospective change in an accounting policy to disclose, inter alia,
application of Ind AS 20. Consequently, X Ltd. is the reasons why applying the new accounting policy
required to apply the requirements of Ind AS 20, provides reliable and more relevant information.
retrospectively at the date of transition to Ind AS (and
consequently in subsequent accounting periods). In accordance with the above, ITFG clarified that X
Ltd. could make a voluntary change in accounting
ii. X Ltd. is not a first time adopter of Ind AS and policy provided if such a change results in its financial
financial year 2018-19 is its second (or third) statements providing reliable and more relevant
reporting period under Ind AS information about the effects of transactions, other
As X Ltd. transitioned to Ind AS a few years back, events or conditions on its financial position, financial
therefore it is following an accounting policy of performance or cash flows. (ITFG 17, Issue 1)
4. It is pertinent to note here that Ind AS 20 specifically scopes out the participation by the government in the ownership of an entity. In this fact pattern, the
Government of India has 100 per cent shareholding in the entity, but it has been assumed that the land provided has been evaluated as not being in the nature
of owners’ contribution and hence, it is in the nature of a government grant as per Ind AS 20.
Further, it has also been assumed that the above arrangement has been evaluated as not being within the scope of Appendix D, Service Concession
Arrangements of Ind AS 115 or scope of Appendix A, Service Concession Arrangements of Ind AS 18 as the case may be.
Assistance/benefits under government

schemes In accordance with the guidance given in Ind
Exemption of custom duty on capital goods as AS 20, the ITFG clarified that the benefit of
government grant exemption from payment of taxes and duties
levied by the government is a government grant
An entity may have received grants in the nature
and should be accounted for as per the provisions
of exemption of custom duty on capital goods with
of Ind AS 20.5
certain conditions related to export of goods under
Export Promotion Capital Goods (EPCG) scheme of
Government of India.
Further, classification of a grant as related to an asset
or to income would require exercise of judgement
In accordance with the guidance provided in Ind and careful examination of the facts, objective and
AS 20, exemption of customs duty is considered conditions attached to the scheme. The purpose
as an assistance provided by the government of the grant and the costs for which the grant is
in return for compliance with certain conditions intended to compensate would also be required to be
relating to the operating activities of the entity ascertained carefully whether it is a grant related to
and could be reliably measured. an asset or grant related to an income and how is the
same to be accounted for. This issue has earlier been
clarified in the preceding scenario as issue 5 in ITFG
The accounting of such grants would be determined clarifications’ bulletin 1. (ITFG 17, Issue 3)
based on facts and circumstances of each case i.e. Classification of incentives receivable from
whether grants are related to assets or income. government as financial assets
Based on the evaluation of the facts and In case of incentives receivable from government on
circumstances, the accounting and presentation of the compliance with stipulated conditions (for example,
grant would be as below: sales tax refunds) whether these would fall within the
• Export of goods: If the grant received is to definition of financial instruments.
compensate the import cost of assets, and is ITFG clarified that when the government provides
subject to export obligation as prescribed in the incentives, it may not enter into a one to one
EPCG scheme, then the recognition of the grant agreement with each entity availing those benefits
would be linked to fulfilment of the associated with regard to the rights and obligations of the
export obligations and would be treated as grants scheme. Instead there is an understanding between
related to income and such a grant will be presented the government and the potential applicant/entity that
in statement of profit and loss, either separately on complying the stipulated conditions attached with
or under a general heading such as ‘other income’. the scheme, the entity would be granted benefits of
Alternatively, it may be deducted in reporting the the scheme. Once the entity has complied with the
related expenses. conditions attached to the scheme then it rightfully
• Compensates import cost of an asset: If the grant becomes entitled to the incentives attached to the
received is to compensate the import cost of the scheme. Thus, such an incentive receivable would
asset, and it can be reasonably concluded that fall within the definition of financial instruments and
conditions relating to export of goods are subsidiary accounted for as a financial asset in accordance with
conditions, then it is appropriate to treat such Ind AS 109. (ITFG 15, Issue 3)
grant as grants related to assets and present it as (Please refer chapter 3, Financial instruments for
deferred income by recognising such grants in profit further discussion on the topic.)
or loss over the life of the underlying asset (ITFG 11,
Issue 5). 5. Education Material on Ind AS 115, Revenue from Contracts with
Customers, issued by Ind AS Implementation Group of the ASB of the ICAI
Export benefits under a scheme of the in August 2018 has also given guidance on similar lines.
Government of India
The ITFG has considered and clarified on whether the
benefit received by an entity (which is a registered
unit in Special Economic Zone (SEZ)) is a government
grant or a government assistance other than
government grant under Ind AS 20. The benefit from
Opinion by EAC
the government may be in the form of exemption Disclosure of government grants
from payment of taxes and duties on import/export of For further discussion on the above topic,
goods upon fulfilment of certain conditions under a please refer chapter 10, Other topics -
scheme of the Government of India. Presentation of Financial Statements.
129
Borrowing Costs1
Borrowing costs that are directly attributable to the acquisition, construction or production of a
qualifying asset form part of the cost of that asset. Other borrowing costs are recognised as an
expense.
IAS 23, Borrowing Costs, does not provide

• An entity is required to capitalise borrowing costs
guidance as to how the adjustment on account of
that are directly attributable to the acquisition,
foreign exchange differences is to be determined.
construction or production of a ‘qualifying asset’ as
part of the cost of that asset. However, paragraph 6(e) of Ind AS 23, provides
guidance on treatment of exchange difference as
• A qualifying asset is an asset that necessarily takes
borrowings cost which is given below:
a substantial period of time to get ready for its
intended use or sale. i. The amount of exchange loss, restricted to the
extent the exchange loss does not exceed the
• Borrowing costs include interest expense calculated
difference between the cost of borrowing in
using the EIR method as described in Ind AS
functional currency and cost of borrowing in a
109, finance charges in respect of finance leases
foreign currency is treated as borrowing cost
recognised in accordance with Ind AS 172 and
and
exchange differences arising from foreign currency
borrowings to the extent that they are regarded as ii. Where there was an unrealised exchange
an adjustment to interest costs. loss which was treated as a borrowing cost
in an earlier period as mentioned in point (i)
• Borrowing costs are reduced by interest income
above and subsequently, there is a realised or
from the temporary investment of borrowings.
unrealised gain in respect of the settlement
• Capitalisation of borrowing costs would commence or translation of the same borrowing, the gain
when an entity meets all of the following conditions: should also be recognised as an adjustment
– Expenditure for the asset is being incurred to the borrowing cost to the extent of loss
previously recognised as borrowing cost.
– Borrowing costs are being incurred and
– Activities that are necessary to prepare the asset
for its intended use or sale are in progress.
• Capitalisation of borrowing costs is suspended
during the period in which active development of a
qualifying asset itself is suspended and altogether
ceased when substantially all the activities
necessary to prepare the qualifying asset for its
intended use or sale are complete.
1. MCA has amended Ind AS 23 on 30 March 2019. The amendment clarifies that in computing the capitalisation rate for funds borrowed generally, an entity
should exclude borrowing costs applicable to borrowings made specifically for obtaining a qualifying asset, only until the asset is ready for its intended use or
sale. Borrowings costs related to specific borrowings that remain outstanding after the related qualifying asset is ready for its intended use or for sale would
subsequently be considered as part of the general borrowing cost of the entity.
2. Ind AS 116, Leases supersedes Ind AS 17, Leases for annual reporting periods beginning on or after 1 April 2019.
3. Indian Accounting Standard (Ind AS): An overview (Revised 2019) issued by ICAI.
Guidance from ITFG clarifications Capitalisation of processing charges to the cost of

the qualifying asset
There can be instances where an entity borrows
Capitalisation of Dividend Distribution Tax (DDT)
specifically for a qualifying asset and processing
paid on a preference share dividend
charges are incurred on the loan. An issue can arise
An entity may have issued preference shares which whether such processing charges can be capitalised
are classified as financial liability in accordance with to a qualifying asset.
Ind AS 32, Financial Instruments: Presentation.
In accordance with the principles laid down in Ind AS
32, interest, dividends, losses and gains relating to a In accordance with the principles laid down
financial instrument or a component that is a financial in Ind AS 23, an entity is required to capitalise
liability is to be recognised as income or expense in borrowing costs that are directly attributable to
profit or loss. the acquisition, construction or production of a
qualifying asset as part of the cost of that asset.
Also, an entity is required to recognise other
The Guidance Note on Ind AS Schedule III borrowing costs as an expense in the period in
provides the guidance in respect of dividend which it incurs them.
on redeemable preference shares. It states
that ‘dividend on preferences shares, whether
redeemable or convertible, is of the nature Additionally, Ind AS 23 states that borrowing costs
of interest expense, only where there is no include interest expense calculated using the EIR
discretion of the issuer over the payment of such as described in Ind AS 109. Ind AS 109 defines EIR
dividends. In such case, the portion of dividend as method as the rate that exactly discounts estimated
determined by applying the EIR method should future cash payments or receipts through the
be presented as interest expense under ‘finance expected life of the financial asset or financial liability
cost’. Accordingly, the corresponding DDT on to the gross carrying amount of a financial asset or to
such portion of non-discretionary dividends the amortised cost of a financial liability.
should also be presented in the statement of Ind AS 109, inter alia, provides that in applying the EIR
profit and loss under interest expense.’ method, an entity identifies fees that are an integral
part of the EIR of a financial instrument. Fees that are
an integral part of the EIR of a financial instrument
Accordingly, in this scenario, if the requirements of Ind are treated as an adjustment to the EIR, unless the
AS 23 for capitalisation are met then the dividend on financial instrument is measured at fair value, with the
the preference shares that are classified as liability, in change in fair value being recognised in profit or loss.
accordance with the principles of Ind AS 32 would be In those cases, the fees are recognised as revenue or
treated as an interest and DDT paid thereon would be expense when the instrument is initially recognised.
treated as cost eligible for capitalisation. Thus, DDT is In addition, Ind AS 109 provides examples of fees that
in the nature of incremental cost that an entity incurs are an integral part of the EIR of a financial instrument.
in connection with obtaining the funds for a qualifying Origination fees paid on issuing financial liabilities
asset and hence, should be capitalised along with measured at amortised cost is an example of fees that
interest. is an integral part of EIR method.
Therefore, when an entity applies the EIR method, Therefore, the processing fee is required to be
then DDT paid on such preference dividend would included while calculating the EIR. Accordingly, the
form part of the EIR calculation to compute the processing charges to the extent amortised only up
effective interest expense to be capitalised along with to the period of capitalisation of the qualifying asset
the qualifying asset. (ITFG 13, Issue 1) would be capitalised. (ITFG 14, Issue 1)
131
Clarifications with respect to application of the The value of CWIP and timing of incurrence of
exemption to continue with the accounting policy the aforesaid expenditure should be determined
under para 46A of AS 11 from the perspective of PQR Ltd. and not from the
For further details on the exemption under paragraph perspective of ABC Ltd. Consequently, in separate
D13AA of Ind AS 101 vis-a-vis borrowing costs under and consolidated financial statements of PQR Ltd.,
Ind AS 23, please refer chapter 9, First-time adoption INR120,000 would represent the expenditure incurred
of Ind AS (ITFG 18, Issue 1) by PQR Ltd. on the CWIP and for purposes of applying
the requirements of Ind AS 23 relating to capitalisation
Application of capitalisation rate for assets
of borrowing costs.
acquired under business combination
Scenario II: ABC Ltd. is not merged into PQR Ltd.
ITFG considered a scenario where ABC company has
Capital Work in Progress (CWIP) of INR100,000 which Aquires
meets the definition of a ‘qualifying asset’ as per Ind PQR Ltd. 100% ABC Ltd.
AS 23 and capitalised corresponding borrowing cost
using capitalisation rate for general borrowings.
The issue raised to ITFG was what would be the
accounting treatment of borrowing cost in following
two situations:
i. ABC Ltd. merges with PQR Ltd., an independent
entity
ii. PQR Ltd. acquires 100 per cent shares and control Where PQR Ltd. acquires 100 per cent shares and
of ABC Ltd. but ABC Ltd. remains as a separate consequently control of ABC Ltd. which continues
legal entity which is consolidated by PQR Ltd. to remain in existence. PQR Ltd.’s consolidated
ITFG considered the issue and discussed the financial statements would include the CWIP as an
accounting of borrowing cost in two following asset but not in its separate financial statements. For
situations: the purpose of consolidated financial statements,
the determination of whether an asset meets the
Scenario I: ABC Ltd. is merged into PQR Ltd.
definition of a ‘qualifying asset’ and assessment of the
amount of expenditure incurred thereon would made
from the perspective of the group rather than from the
perspective of the subsidiary which owns or holds the
CWIP.
In the issue under consideration, the group has
incurred an expenditure of INR120,000 to acquire the
CWIP from a party outside the group. For the purpose
ABC Ltd. PQR Ltd. of applying the requirements of Ind AS 23 relating to
capitalisation of borrowing costs at the group level, it
Merged is determined that the CWIP meets the definition of
‘qualifying asset’ from the group’s perspective and
the amount of expenditure on the CWIP would be
considered to be INR120,000.
While the separate financial statements of PQR Ltd.
ITFG clarified that where ABC Ltd. is merged into PQR would include the investment in ABC Ltd. rather than
Ltd. and merger meets the definition of a ‘business individual assets and liabilities of ABC Ltd.
combination’ as per Ind AS 103, the CWIP would
appear as an asset in the separate (and consequently,
in the consolidated) financial statements of PQR Ltd. As investment is a financial asset SFS, borrowing
At the time of merger, PQR Ltd. needs to make a costs cannot be capitalised as part of carrying
fresh, independent assessment to evaluate whether amount as per the requirements of Ind AS 23
CWIP meets the definition of a qualifying asset from which specifically provides that financial assets
its perspective. are not qualifying assets. (ITFG 19, Issue 4)
In the given case, PQR Ltd made independent
assessment and asserted that the CWIP still meets
the definition of a qualifying asset and attributed an
amount of INR120,000 as a consideration towards
purchase of the CWIP as part of the purchase price.
133
Related Party Disclosures

The objective of this standard is to ensure that an entity’s financial statements contain the
disclosures necessary to draw attention to the possibility that its balance sheet and profit or loss
may have been affected by the existence of related parties and by transactions and outstanding
balances, including commitments, with such parties.
Key principles
• A related party is a person or an entity that is
related to the entity that is preparing its financial Significant differences from IFRS1
statements.
• In India, the accounting standards cannot
• Key Management Personnel (KMP) are those override legal/regulatory requirements and
persons that have authority and responsibility for therefore, disclosures which conflict with
planning, directing and controlling the activities of confidentiality requirements of statute/
the entity, directly or indirectly, including any director regulations would not be disclosed. For
(whether executive or otherwise) of that entity. example, banks are obliged by law to maintain
• KMP and their close family members are also confidentiality in respect of their customers’
parties related to the entity. transactions and this standard would not
override the obligation to preserve the
• Related party relationships include those involving
confidentiality of their customers’ dealings.
control (direct or indirect), joint control or significant
influence • In Ind AS 24, the ‘definition of close members
of the family of a person’ has been amended
• A related party transaction is a transfer of resources,
to include brother, sister, father and mother in
services or obligations between a reporting entity
the category of family members who may be
and a related party, regardless of whether a price is
expected to influence, or be influenced.
charged.
• Relationships between a parent and its subsidiaries
are required to be disclosed irrespective of whether
1. Indian Accounting Standards (Ind AS): An Overview (Revised 2019) issued
there have been transactions between them. by ICAI.
• Comprehensive disclosures of related party
transactions are required for each category of
related party relationships.
Guidance from ITFG clarifications S Ltd. is a public utility (being engaged in distribution
of electricity), but it is also a subsidiary of P Ltd. Thus,
there is a dual relationship between S Ltd. and P Ltd.
Disclosure of sitting fees paid to independent and as below:
non-executive directors i. A supplier and consumer
AS 18, Related Party Disclosures, does not include ii. Subsidiary and holding (which is a relationship
non- executive directors within the definition of covered within the related party relationships to
‘directors’. Ind AS 24 has brought independent and which the disclosure requirements of Ind AS 24
non-executive directors also within its scope by would apply).
including them in the definition of KMP.
Consumer of electircity
In accordance with Ind AS 24, KMP includes

all directors (executive or otherwise) of an
entity who have direct or indirect authority
and responsibility for planning, directing and P Ltd.
controlling the activities of the entity. It further S Ltd.
(Parent
requires entities to disclose the compensation of (WOS)
Company)
the KMP, including short-term employee benefits
in the financial statements of the entity.
In addition, Ind AS 19, Employee Benefits defines

Distributor of electricity
short-term employee benefits as those items that are
expected to be settled wholly before 12 months after ITFG clarified that the supply of electricity by S Ltd.
the end of the annual reporting period in which the to P Ltd. is a related party transaction that attracts
employees/directors render the related services and the disclosure requirements contained in Ind AS 24
includes wages, salaries, social security contributions, even though P Ltd. is charged the electricity tariffs
paid annual and sick-leaves, profit sharing and bonus determined by an independent rate-setting authority
and other non-monetary benefits. (i.e. the terms of supply to P Ltd. are at par with those
In the above context, independent directors and applicable to other consumers).
non- executive directors would be considered as
KMP under Ind AS and sitting fees paid to directors
Ind AS 24 does not exempt an entity from
will fall under the definition of ‘short-term employee
disclosing related party transactions merely
benefits’ in accordance with Ind AS 19. Thus, such
because they have been carried out at an arm’s
payments are required to be disclosed in the financial
length basis. (ITFG 17, Issue 6)
statements in accordance with Ind AS 24. (ITFG 11,
Issue 9)
Disclosure of related party transactions Disclosure of financial guarantee (without any fee)
In accordance with Ind AS 24, each parent, subsidiary given by a director
and fellow subsidiary in a ‘group’ is related to the Please refer chapter 3, Financial instruments for
other members of the group. further details on accounting of financial guarantee.
In a scenario, an entity S Ltd., a wholly owned (ITFG 13, Issue 2)
subsidiary (WOS) of another entity P Ltd., is the sole Presentation and accounting treatment of waiver
distributor of electricity to consumers in a specified of interest on the loan taken
geographical area. A manufacturing facility of P For further discussion on the above topic, please refer
Ltd. was located in the same geographical area. chapter 10, Other topics - Presentation of Financial
Consequently, P Ltd. is also a consumer of electricity Statements (ITFG 22, Issue 7)
supplied by S Ltd.
The issue considered was whether the above
transaction is required to be disclosed as a related
party transaction as per Ind AS 24 in the financial
statements of S Ltd.
In this case, P Ltd. is a related party of S Ltd. from the
perspective of financial statements of S Ltd.
135
Separate Financial Statements

This standard does not mandate which entities prepare separate financial statements. It applies
when an entity prepares separate financial statements that comply with Ind AS.
• IAS 27, Separate Financial Statements, allows

• Separate Financial Statements (SFS) are financial
the entities to use the equity method to
statements presented by a parent (i.e., an investor
account for investment in subsidiaries, joint
with control of a subsidiary) or an investor with joint
ventures and associates in their SFS. This
control of, or significant influence over, an investee,
option is not permitted in Ind AS 27. It only
in which the investments are accounted for using
allows cost model or Ind AS 109. The reason
the equity method1.
for not allowing equity method is that it is not
• When an entity prepares SFS, it is required to a measurement basis like cost and fair value
account for its investments in subsidiaries, joint but is a manner of consolidation and therefore,
ventures and associates either at cost, or in would lead to inconsistent accounting
accordance with Ind AS 109. The entity is required conceptually.
to apply the same accounting for each category of
investments.
1. In accordance with Ind AS 28, under the equity method, on initial
• When investments accounted for at cost, are recognition, the investment in an associate or a joint venture is recognised
classified as held for sale (or included in a disposal at cost and the carrying amount is increased or decreased to recognise
group that is classified as held for sale), then these the investor’s share of the profit or loss of the investee after the date of
are required to be accounted for in accordance with acquisition.
Ind AS 105, Non-current Assets Held for Sale and Ind AS 28 also provides that the investor’s share of the investee’s profit
or loss is recognised in the investor’s profit or loss. Distributions received
Discontinued Operations.
from an investee reduce the carrying amount of the investment.
• The measurement of investments accounted for in 2. Indian Accounting Standards (Ind AS): An Overview (Revised 2019) issued
accordance with Ind AS 109 is not changed when by ICAI
these are classified as held for sale.
Guidance from ITFG clarifications AS 101 provides an exemption to measure the cost
of such an investment at either the cost determined
in accordance with Ind AS 27 or at a ‘deemed cost’
Accounting of profit share from Limited Liability based on its fair value at the date of transition to Ind
Partnerships (LLPs) AS or its previous GAAP carrying amount.
An entity may have a joint control over an LLP, which
is assessed as a joint venture. The entity should
account for its investment in the joint venture in its Above requirements of Ind AS 27 and the
SFS in accordance with Ind AS 27, i.e. either at cost exemption in Ind AS 101 would only apply to
or in accordance with Ind AS 109. Therefore, an those investments in a subsidiary, which meets
adjustment of profit share from LLP to the carrying the definition of an equity instruments under
amount of the investment in LLP in its SFS is not Ind AS 32 (from the issuer, i.e. the subsidiary’s
permitted. Accounting of return on investment (i.e. perspective).
profit share from LLP) would depend on the terms
of contract between the entity and LLP. The share in
profit in LLP should be recognised as an income in the Hence, if the debentures are classified as a financial
statement of profit and loss as and when the right to liability by the subsidiary, the holding company would
receive its profit share is established. (ITFG 5, Issue 8) have to classify its investment as a financial asset and
account for it under Ind AS 109. (ITFG 7, Issue 8)
Deemed cost of an investment in a subsidiary
Measurement of investment in subsidiaries, joint
ventures and associates at the end of the first Ind
An entity may elect to apply the deemed cost AS financial reporting period
exemption on transition to Ind AS and accordingly Please refer chapter 9, First time Adoption of Ind AS
measure its investment in its subsidiary at its fair for further details on measurement of investment in
value on the date of transition. Ind AS 27 permits subsidiary, associates and joint ventures (ITFG 11,
such an entity to measure its investment in its Issue 4)
subsidiary at either its cost or in accordance with
Accounting by issuer of financial guarantee
Ind AS 109 (i.e. at fair value) in its SFS.
Please refer chapter 3, Financial instruments for
further details on accounting of financial guarantee by
An entity may have used fair value as the the issuer (ITFG 16, Issue 1)
measurement basis for the deemed cost on transition.
Demerger of business divisions between unrelated
Post transition, the entity would continue to carry its
companies within the same group
investment in the subsidiary at the transition date fair
value, which is deemed to be its cost under Ind AS. The ITFG considered a situation where a company
(ITFG 3, Issue 12) (X Ltd.) had invested in two operating companies
(A Ltd. and B Ltd.), such that both the companies
(Please refer chapter 9, First time Adoption of Ind AS
were its associates, but were not under common
for further details on deemed cost of an investment in
control within the meaning of Ind AS. X Ltd. carries
a subsidiary) (ITFG 3, Issue 12)
its investments in associates at cost in its separate
Investments in debentures of a subsidiary financial statements.
company
Parent companies may often invest in the debentures
of its subsidiary companies. Such investments may Continuing
be in addition to their investment in respective shares business
of subsidiary. Practical implications arise regarding
accounting of such investments under the provisions
of Ind AS 27 and the consequent exemptions in
A Ltd.
paragraph D15 of Ind AS 101 at the time of transition Demerged
to Ind AS. X ltd.
business
It is noteworthy that Ind AS 109 is not applicable to B Ltd.
interest in subsidiaries, associates and joint ventures
that are accounted for in accordance with Ind AS 110,
Ind AS 27 or Ind AS 28.
As explained earlier, Ind AS 27 permits an entity to
account for its investments in subsidiaries, associates
or joint ventures either at cost or in accordance with
Ind AS 109 in its SFS. In addition, paragraph D15 of Ind
137
As part of a proposed transaction, A Ltd. would In view of the above, ITFG drew analogy from:
demerge an identified business undertaking a. Paragraph 2(b) of Ind AS 103, which states that
(representing one or more business divisions), which Ind AS 103 does not apply to the acquisition of an
would vest in B Ltd. As a result, A Ltd. would continue asset or a group of assets that does not constitute
to survive as a separate legal entity with some of a business. In such cases, the cost of assets
its other business divisions. The consideration for purchased should be allocated to the individual
the demerger would be determined on the basis of identifiable assets and liabilities on the basis of their
the fair value of the underlying business, and would relative fair values at the date of purchase.
be issued in the form of fresh shares of B Ltd. to all
b. Principles of Ind AS 115, Revenue from Contracts
shareholders of A Ltd. (including to X Ltd.). The query
with Customers, which require use of standalone
related to the accounting treatment of a demerger
selling prices to allocate the transaction price
in the separate financial statements of X Ltd., which
to each performance obligation identified in a
measures investments in associates at cost.
customer contract.
The ITFG noted that the two principal issues to be
In accordance with the above, the carrying amount of
determined in the present case were:
X Ltd.’s investment in A Ltd. would be split between
a. What amount should be derecognised (to give the demerged business undertaking and business
accounting effect of the potential reduction in retained by A Ltd. on the basis of the relative fair
value of shares held in A Ltd. due to transfer of its values of the two. On demerger, the portion of
business division), and carrying amount allocated to the demerged business
b. What amount should be recognised (to give would be derecognised.
effect to the accounting treatment for the receipt Amount to be recognised
of additional shares of B Ltd. pursuant to the
In the current case, X Ltd. has adopted an accounting
demerger)?
policy of recognising investment in associates at
Amount to be derecognised ‘cost’. Since Ind AS 27does not define cost, the cost
Prior to demerger, X Ltd.’s investment in the shares of of additional shares in B Ltd. may be represented
A Ltd. represented its interest in both the demerged either by their fair value or by the (allocated) carrying
business undertaking as well as other businesses, amount of the investment in A Ltd., which is
whereas post demerger, it was represented only by derecognised by X Ltd.
its interest in businesses retained by A Ltd. Although a. Cost represented by fair value: Where the additional
X Ltd. did not pay any explicit consideration for the shares in B Ltd. represent a new or different
shares allotted to it in B Ltd. as part of the demerger investment acquired in exchange for a part of
scheme, there is an implicit cost associated with investment in A Ltd., they would be measured
them to the extent of reduction of its interest in A Ltd. initially at their fair value, with consequent
Currently Ind AS does not deal specifically with this recognition of gain or loss on derecognition of part
kind of issue, i.e. how the amount to be derecognised of investment in A Ltd.
should be determined. Thus, reference should be
However, in order to determine whether these
made to Ind AS 8.
additional shares in B Ltd. represent a new or
different investment acquired in exchange for a part
Ind AS 8, inter alia, states that in the absence of of investment in A Ltd., analogy may be drawn to Ind
an Ind AS that specifically applies to a transaction, AS 16, Property, Plant and Equipment and Ind AS 38,
event or condition, judgement should be applied Intangible Assets, with regard to determination of
in developing and applying an accounting policy cost of property, plant and equipment or of intangible
that provides relevant and reliable information assets acquired in exchange for a non-monetary
to the users of the financial statements. While asset. As per this, the additional shares in B Ltd. may
applying such judgement, entities should represent a new or a different investment acquired,
consider the requirements in Ind AS dealing in exchange for a part of investment in A Ltd., if the
with similar and related issues and guidelines demerger results in a more than insignificant4 change
prescribed in the Conceptual Framework3. in:
• The risks and rewards associated with the business
undertaking transferred from A Ltd. to B Ltd. or
those associated with the other businesses carried
3. The Conceptual Framework for Financial Reporting sets out the on by B Ltd. or A Ltd., and/or
fundamental concepts for financial reporting that guide the International
• In the extent of X Ltd.’s exposure to the aforesaid
Accounting Standards Board (IASB) in developing IFRS Standards. It helps
to ensure that the Standards are conceptually consistent and that similar
risks and rewards.
transactions are treated the same way, so as to provide useful information
for investors, lenders and other creditors.
4. What is considered significant or insignificant is a matter of judgement.
b. Cost representing the continuance of the pre- Accordingly, in the given facts of the case, it
existing investment: would be an appropriate view to take that the
In the present case, there is no ‘exchange’ of ‘cost’ of the additional shares is represented by
investments. X Ltd. continues to hold the same the amount derecognised by X Ltd. in respect of
number and proportion of equity shares in A Ltd. its investment in A Ltd. while accounting for the
after the demerger as it did before the demerger. demerger. (ITFG 20, Issue 4)

Issue
Topic
number
1. Guidance on requirement of measurement of investment in subsidiary by investment entity
Guidance on carrying of investments in subsidiaries at cost and investments in associates as
2.
financial assets at FVTPL
3. Guidance on recognition of impairment loss of investments in subsidiary accounted at cost
Guidance on election of different measurement technique by a parent entity for investments in
4..
more than one subsidiaries (at FV and Cost)
5. Guidance on disclosure of the fact that the financial statements are prepared are SFS
139
Earnings per Share

The objective of this standard is to prescribe principles for the determination and presentation of
earnings per share, so as to improve performance comparisons between different entities in the
same reporting period and between different reporting periods for the same entity. Even though
earnings per share data has limitations because of the different accounting policies that may
be used for determining ‘earnings’, a consistently determined denominator enhances financial
reporting. The focus of this standard is on the denominator of the earnings per share calculation.
Key principles
• Basic Earnings Per Share (EPS) is calculated by • An entity that reports a discontinued operation shall
dividing profit or loss attributable to holders of disclose the basic and diluted amounts per share for
ordinary equity of the parent (the numerator) by the discontinued operation either in the statement
the weighted average number of ordinary shares of profit and loss or in the notes.
outstanding (the denominator) during the period. • When an entity presents both CFS and SFS
• Where any item of income or expense which in accordance with Ind AS 110 and Ind AS 27
is otherwise required to be recognised in profit respectively, the disclosures required are to
or loss in accordance with Ind AS is debited or be presented both in the CFS and SFS. In CFS,
credited to securities premium account/other such disclosures shall be based on consolidated
reserves, the amount in respect thereof is required information and in SFS, such disclosures shall be
to be deducted from profit or loss from continuing based on information given in SFS. An entity is
operations for the purpose of calculating basic EPS. prohibited from presenting EPS in CFS based on the
• Diluted EPS is calculated by adjusting profit or loss information given in SFS and vice versa.
attributable to holders of the ordinary equity of the
parent, and the weighted average number of shares
outstanding, for the effects of all dilutive potential
ordinary shares.
• Potential ordinary shares shall be treated as dilutive
when, and only when, their conversion to ordinary
shares would decrease EPS or increase loss per
share from continuing operations.
• If the number of ordinary or potential ordinary
shares outstanding increases as a result of
a capitalisation, bonus issue or share split, or
decreases as a result of a reverse share split, the
calculation of basic and diluted EPS for all periods
presented shall be adjusted retrospectively.
• If these changes occur after the reporting period
but before the financial statements are approved for
issue, the per share calculations for those and any
prior period financial statements presented shall be
based on the new number of shares.
• Basic and diluted EPS for profit or loss from
continuing operations and profit or loss for the
period for each class of ordinary shares that has
a different right to share in profit for the period, is
required to be presented in statement of profit
and loss with equal prominence for all periods
presented.
In this context, accumulation of the exchange

Significant differences from IFRS1 differences arising from translation of long term
foreign currency monetary items in FCMITDA is
• IAS 33, Earnings Per Share, provides that permitted under the optional exemption available in
when an entity presents both CFS and SFS, Ind AS 101. Therefore, such exchange differences are
it may give EPS related information in CFS not required to be reduced from profit or loss from
only, whereas, Ind AS 33 requires EPS related continuing operations for the purpose of calculating
information to be disclosed both in CFS as well basic EPS. (ITFG 10, Issue 5)
as SFS.
Calculation of EPS by a subsidiary company that is
• In India, the 2013 Act, requires preparation and not wholly owned by its parent
presentation of both CFS as well as SFS and
consequently, for listed entities, EPS is required
to be disclosed both in CFS as well as SFS. In Ind AS 33, inter alia, states that an entity shall
addition, such disclosures are required to be in calculate basic EPS for profit or loss attributable
accordance with the information contained in to ordinary equity shareholders of the parent
the respective financial statements i.e. in CFS, entity. These requirements in Ind AS 33 have
EPS is to be disclosed based on consolidated been provided with respect to the calculation of
information while in case of SFS, it is to be EPS in the CFS of an entity.
disclosed for information contained in such SFS
only.
• The applicability or exemptions to the Ind AS Accordingly, a subsidiary company, which is not fully
are governed by the 2013 Act and the Rules owned by its parent should calculate and disclose its
made there under and consequently Ind AS 33 basic EPS as follows:
has been modified to that extent. • SFS: In case of SFS, the ‘parent entity’ mentioned
• In Ind AS 33, paragraph 15 has been amended in relevant paragraph will imply the legal entity of
by adding the phrase, ‘irrespective of whether which SFS are being prepared. Accordingly, when
such discount or premium is debited or an entity presents basic EPS in its SFS, then the
credited to securities premium account’ to same shall be calculated based on the profit or loss
further clarify that such discount or premium attributable to its equity shareholders.
shall also be amortised to retained earnings. • CFS: For the purpose of calculating EPS based on
CFS, the company would consider profit or loss
attributable to the ordinary equity holders of the
by ICAI. parent entity and if presented, profit or loss from
continuing operations attributable to those equity
holders. Profit or loss attributable to the parent
Guidance from ITFG clarifications entity refers to profit or loss of the consolidated
entity after adjusting profit attributable to Non-
Consideration of amounts debited to Foreign Controlling Interests (NCI). (ITFG 11, Issue 3)
Currency Monetary Item Translation Difference
Account (FCMITDA) for computation of basic EPS
A company may have availed the option given under
paragraph D13AA of Ind AS 101. This means, that it
continued to apply the accounting treatment permitted
by paragraph 46/46A of AS 11, The Effects of Changes
in Foreign Exchange Rates. Accordingly, the company
has accumulated such exchange gains/losses in the
reserve FCMITDA.
Ind AS 33 refers to items of income and expenses

which are required by Ind AS to be recognised
in the statement of profit and loss, but have
been debited or credited to securities premium/
other reserves and requires these to be added
to/deducted from profit or loss from continuing
operations for computing the basic EPS.
141
Provisions, Contingent Liabilities

and Contingent Assets
The objective of this standard is to ensure that appropriate recognition criteria and measurement
bases are applied to provisions, contingent liabilities and contingent assets and that sufficient
information is disclosed in the notes to enable users to understand their nature, timing and
amount.
Key principles Guidance from ITFG clarifications

• A provision is a liability of uncertain timing and Provision for unspent Corporate Social
amount that arises from a past event that is Responsibility (CSR) expenditure
expected to result in an outflow of the entity’s
resources. Section 135(5) of the 2013 Act (including the
• A provision is recognised for a legal or constructive Companies Amendment Act, 2017) provides
obligation if there is a probable outflow of resources that every company with net worth of INR500
and the amount can be estimated reliably. Probable, crore or more, or turnover of INR1,000 crore or
in this context, means likely than not. more or a net profit of INR5 crore or more during
• A constructive obligation arises when an entity’s the immediately preceding financial year should
actions create valid expectations of third parties that contribute at least two per cent of its average
it will accept and discharge certain responsibilities. net profits (made during the three immediately
preceding financial years) towards CSR. However,
• A provision is measured at the best estimate of the in case a company fails to spend the amount
expenditure to be incurred. earmarked for CSR, then the reasons for not
• A provision is not recognised for future operating spending the amount is required to be disclosed
losses. in the board’s report.1
• A provision is required for a contract that is onerous.
• A provision for restructuring costs is recognised only A company may be unable to spend the CSR amount
when the general recognition criteria for provisions i.e. there is a shortfall in the amount that was
are met. expected to be spent as per the provisions of the
• Contingent liabilities are recognised only if they 2013 Act on CSR activities and the amount actually
are present obligations assumed in a business spent at the end of a reporting period. In this case, the
combination i.e. there is uncertainty about the company may not be required to recognise a provision
outflows but not about the existence of an for the unspent amount in the financial statements.
obligation. However, if a company has already undertaken certain
• Contingent assets are not recognised in the balance CSR activity for which an obligation has been created,
sheet. If an inflow of economic benefits is probable, for example, through a contractual obligation, or
then details are disclosed in the notes to the either a constructive obligation has arisen during the
financial statements. year, then in accordance with Ind AS 37, a provision
for the amount of such CSR obligation, needs to be
recognised in the financial statements. (ITFG 8,
Issue 1)
1. On 31 July 2019, the Ministry of Corporate Affairs (MCA) notified the Companies (Amendment) Act, 2019. As per this, in case the CSR amount remains
unspent pursuant to any ongoing CSR project undertaken by the company as per its CSR policy, then the company should transfer such unspent amount to a
special account within a period of 30 days from the end of the FY. The special account should be opened by the company in any scheduled bank for the specific
financial year and would be called the ‘unspent CSR account’.
In other cases, the unspent amount should be transferred to a fund specified in Schedule VII of the Companies Act, 2013 within a period of six months from
the expiry of the financial year. The above amendment is not yet effective.
Opinions by EAC Accounting treatment of interest that may

arise on pending cases
The EAC clarified that with regard to the interest
Treatment of disputed amount (principal and liability that may arise on demands raised in
interest) in respect of cases pending before respect of such pending cases, would depend on
various regulatory authorities2 the decision taken by respective authorities - i.e.
The EAC deliberated on the following issues: whether interest needs to be paid in addition to
• Whether the disclosure of demands raised in
the principal amount (in case the outcome does
respect of cases pending before various tax not result in favour of the company (which itself is
authorities as ‘contingent liability’ is correct uncertain)).
• Whether the interest liability that may arise on Additionally, it was clarified that in case no
above cases is also required to be computed demand has been raised by the authorities,
and disclosed as contingent liability. then this fact does not necessarily indicate
that demand could not be raised in future.
Demands raised in pending cases Accordingly, whether interest liability that may
In accordance with the requirements of Ind AS 37, arise in respect of cases pending before various
the EAC clarified that an element of judgement authorities requires to be disclosed as contingent
is required to determine if the demand raised liability, requires an element of judgement.
in respect of cases pending before various The management, on the basis of all facts and
statutory authorities should be provided for or circumstances available on the balance sheet
instead disclosed as contingent liability. In fact, date (such as the past decisions taken by the
it is for the management of the entity to decide taxation and judicial authorities in similar cases,
and for the auditor to assess based on the facts etc.) should exercise judgement.
and circumstances of each case - whether the Accounting for provision to be created for
demand raised warrants recognition of provision onerous contract3
or disclosure of contingent liability.
The EAC clarified that any compensation or
The EAC suggested that while making this penalties arising from failure to fulfil the onerous
judgement, all facts and circumstances available contract is to be compared with the cost of
on the balance sheet date, including the following fulfilling such contract to determine the least
would be considered: net cost of exiting from a contract. Accordingly,
• The legal opinion of an expert on the possibility although it may be difficult to determine the
and extent of outcome (success or failure) of compensation/penalty payable for failure to fulfil
the company’s cases in the court of law the contract, the same should be determined/
• Experience of the company or other estimated on a reasonable basis. This should be
enterprises in similar cases considering the contract terms so as to determine
whether the contract is onerous or not and in
• Decisions of appropriate authorities, etc. case the contract is onerous, to determine the
should be considered. amount of provision to be made for such onerous
Additionally, the EAC suggested to not merely contract.
consider expert opinion in isolation. Other factors Further, the EAC deliberated on elements of costs
prevailing on the balance sheet date (for example, to be considered while recognition of provision in
as suggested above) should also be taken into respect of onerous contract under Ind AS 37.4
account while making the judgement. Further, the
events occurring after the balance sheet date but, In accordance with the principles of Ind AS 37, the
before the date of finalisation of accounts would EAC clarified that in case of onerous contracts,
also be taken into consideration in determining the amount that an entity would rationally pay to
whether the demand raised should be provided settle the obligation would be the lower of the
for or instead treated as a contingent liability. following:
• The compensation or penalties arising from
failure to fulfil the contract and
• The excess of the unavoidable costs of meeting
the obligations under the contract from the
economic benefits expected to be received
under it.
2. EAC Opinion published in the December 2018 edition of the 4. It was assumed that the compensation/penalty payable for failure to
Journal ‘The Chartered Accountant’ fulfil the contract is more than the expected cost of fulfilling/meeting
3. EAC Opinion published in the June 2019 edition of the Journal ‘The the obligations under the contract.
143
As the expression ‘unavoidable costs of the sales overhead and head office expenditure
meeting the obligations under the contract’ is etc. should not be considered while creating a
not defined, it was clarified that the expression provision for onerous contract, since such costs
‘unavoidable costs’ means the costs that could do not relate directly to a contract.
not be avoided due to existence of contract. Additionally, the EAC clarified that in a contract to
These are the costs that directly relate to supply the product, the costs should include all
the contract for example, direct labour, direct costs till supply of the product including the cost
material, allocations of costs that relate directly to of supplying the product (since Ind AS 37 requires
contract activities, etc. an entity to provide for all the costs to fulfil the
Generally, the administrative overheads, finance obligations under the contract).
charges, research and development expenses,

Issue
Topic
number
1 Guidance on classification as provisions in the financial statement with respect to:
a. Amount payable for utilities like electricity, gas, etc.
b. Amount payable for goods received but invoice not received
c. Financial guarantee given by the parent to the bank for loan taken by its subsidiary
d. Warranty obligation
e. Accrued interest payable on borrowings
2 Guidance on determination of present obligation as on reporting date
3 Guidance on determining obligating event to make provisions with respect to condition of
restoring the sea bed at the end of the contract period
4 Guidance on determining obligating event to make provisions with respect to promise to buy
back the goods at fixed price
5 Guidance on determining obligating event to make provisions with respect to unconditional
sales refund within specified period
6 Guidance on determining obligating event to make provisions with respect to uncertain future
event
7 Meaning of ‘Probable event’
8 Guidance on provision for warranty for repairs
9 Guidance on corresponding debit to a provision
10 Guidance on determination of best estimate
11 Guidance on selection of the discount rate to be used to determine present value of expected
expense
12 Guidance on accounting treatment for recognising the impact of unwinding of discounting
13 Guidance on considering the impact of future events while determining the amount of provision
14 Guidance on recognising the reimbursement from third party of some or all of the expenditure
required to settle a provision
15 Guidance on accounting for obligation to pay for decommissioning cost to the fund and
additional contribution
16 Guidance on accounting for a change in recognised provision once the amount payable under
the obligation becomes certain
17 Guidance on onerous contracts where there is an increase in cost of input and penalty for non-
performance
18 Guidance on onerous contracts where sales of final product is at profit
19 Guidance on onerous contracts where sales of final product is at loss
20 Guidance on provision for restructuring leading to closure of units resulting in cost such as:
a. Cost of employee termination
b. Staff training cost
c. Recruitment and relocation cost of new manager
21 Guidance on disclosure of contingent Assets
22 Guidance on provision for government levies
145
Operating Segments
The core principle is the disclosure of information that enables users of an entity’s financial
statements to evaluate the nature and financial effects of the business activities in which it
engages and the economic environment in which it operates. The core principle is considered
when forming judgements about how and what information is disclosed.
Key principles
• Ind AS 108 applies to entities to which Ind AS apply assets, and about major customers, regardless of
as notified under the 2013 Act. It is primarily a whether that information is used by management in
disclosure standard. making operating decisions.
• Its core principle is that an entity is required to • An entity is also required to give descriptive
disclose information to enable users of its financial information about the way the operating segments
statements to evaluate the nature and the financial were determined, the products and services
effects of the business activities in which it engages provided by the segments, differences between
and the economic environment in which it operates. the measurements used in reporting segment
• If a financial report contains both the CFS of a parent information and those used in the entity’s financial
that is within the scope of this Ind AS as well as the statements and changes in the measurement of
parent’s SFS, segment information is required only segment amounts from period to period.
in the CFS.
• Operating segments are components of an entity Significant differences from IFRS1
about which separate financial information is
available that is evaluated regularly by the Chief IFRS 8, Operating Segments, requires that it
Operating Decision Maker (CODM) in deciding how is applied to the separate or individual financial
to allocate resources and in assessing performance. statements of
• Generally, financial information is required to be an entity as well as the CFS of a group with a
reported on the same basis as is used internally parent:
for evaluating operating segment performance and a. Whose debt or equity instruments are traded
deciding how to allocate resources to operating in public market (a domestic or foreign stock
segments. exchange or an over-the-counter market,
• It requires an entity to report a measure of operating including local and regional markets) or
segment profit or loss and of segment assets. It b. That files, or is in the process of filing its
also requires an entity to report a measure of financial statements or CFS with a securities
segment liabilities and particular income and commission or other regulatory organisation for
expense items if such measures are regularly the purpose of issuing any class of instruments
provided to the CODM. in a public market.
• It requires reconciliations of total reportable However, the applicability and exemptions to
segment revenues, total profit or loss, total assets, the Ind AS are governed under the 2013 Act and
liabilities and other amounts disclosed for reportable the Rules made thereunder. Consequently, Ind
segments to corresponding amounts in the entity’s AS 108 does not include the above applicability
financial statements. requirements as included in IFRS 8.
• It requires an entity to report information about
the revenues derived from its products or services
(or groups of similar products and services), about by ICAI.
the countries in which it earns revenues and holds
Guidance from ITFG clarifications Opinion by EAC

Information about major customers where an Company’s policy on transfer price for
entity operates only in one segment segment revenue and segment results
Ind AS 108 is applicable to entities to which Ind AS under segment reporting2
applies. According to Ind AS 108, an entity is required The EAC deliberated on measurement
to provide information about the extent of its reliance principles to be adopted for inter-segment
on its major customers. If revenues from transactions transfer for presenting segment information
with a single external customer amount to 10 per cent in accordance with Ind AS 108.
or more of an entity’s revenues, the entity should Ind AS 108 requires the amount of each
disclose that fact, the total amount of revenues from segment item reported should be the
each such customer, and the identity of the segment measure reported to the CODM for the
or segments reporting the revenues. The entity need purposes of making decisions about
not disclose the identity of a major customer or the allocating resources to the segment and
amount of revenues that each segment reports from assessing its performance. Thus, it uses
that customer. the ‘management approach’. Hence, the
The ITFG clarified that the disclosure requirements as information to be reported about each
specified in paragraphs 32-34 of Ind AS 108 apply to all segment should be measured on the
entities to which Ind AS applies including entities that same basis as the information used by
have a single reportable segment. CODM for purposes of allocating resources
to segments and assessing segments’
performance rather than that provided
In the case of single reportable segment in accordance with the same accounting
companies, information regarding customers principle and policies used to prepare the
contributing to more than 10 per cent of total financial statements.
revenue would have to be disclosed. However, The EAC clarified that the measurement
the entity need not disclose the identity of a principles to be followed for presenting
major customer or customers, or the amount of segment information could be different
revenues that each segment reports from that from the accounting principles and policies
customer or those customers. (ITFG 13, Issue 3) followed for preparing the general purpose
financial statements.
Though Ind AS 108 does not specifically
mention as to how this measure should
be calculated, nor does it require that the
same accounting policies be used as those
in preparing the financial statements.
The measurement principles are also not
required to be in accordance or consistent
with those used in an Ind AS.
Additionally, the EAC clarified that in the
given case, inter-segment transfer price
of one product from particular segment to
other segments should be at the measure
reported to the CODM for the purposes
of making decisions about allocating
resources to the segment and assessing its
performance. However, in case CODM uses
more than one measure of an operating
segment’s results/assets/liabilities, the
reported measures should be those that
the management believes are determined
in accordance with the measurement
principles most consistent with those used
in the entity’s financial statements as per
the requirements of Ind AS 108.
2. EAC Opinion published in the November 2019 edition of the Journal ‘The
147

Issue
Topic
number
1 Guidance on applicability of Ind AS 108 to entities that are not required to prepare CFS
2 Guidance on whether there is an upper limit on the number of reportable segments which an
entity should disclose
3 Guidance on whether an entity can omit disclosure of segment information if the management
concludes that disclosing which is seriously prejudicial to the interests of the entity as
concluded by management
4 Guidance on voluntary disclosure of some information about segments by entity which is not
required to comply with Ind AS 108
5 Guidance on primary and secondary reporting segments
6 Guidance on exclusion of part of an entity under any operating segment inspite of earning
revenue and incurring expenditure
7 Guidance on what is meant by discrete financial information
8 Guidance on whether an entity that earns no revenue can be classified as an operating segment
9 Guidance on whether activities of joint ventures or associates to be considered as operating

segment
10 Guidance on significant factors for entity to identify chief operating decision maker
11 Guidance on reporting different operating segments for entities in the same industry
12 Guidance on reporting as operating segment where chief operating decision maker only reviews
revenue information
13 Guidance on whether an entity is required to provide separate disclosures for each of its
operating segments
14 Guidance on aggregation of segments
15 Guidance on the ‘economic characteristics’ that would need to be ‘similar’ for the purpose of
aggregating operating segments
16 Guidance on when products/services, production processes, customers, distribution methods
and regulatory environment are said to be of similar nature
17 Guidance on application of 10 per cent thresholds test based on profitability criteria when
certain segments report profits and certain segments report losses
18 Guidance on how an entity should perform the 10 per cent test when different operating
segments report different measures of segment profitability and segment assets
19 Guidance on aggregation criteria being different from the aggregation criteria
20 Guidance on selection of operating segments to achieve threshold of 75 per cent. (e.g.

reportable segments constitute 72 per cent of consolidated revenue)
21 Guidance on combination of non-reportable operating segment and disclosure along with the
reconciliation items under Ind AS 108
22 Guidance on disclosure requirements of an operating segment that no longer meets the
quantitative thresholds in the current period but qualified as a reportable segment in the prior
period
23 Guidance on disclosure of an operating segment that has never met the quantitative threshold
24 Guidance on aggregation of new businesses with existing businesses
25 Guidance on aggregation of an operating segment that does not meet quantitative threshold
individually with a reportable operating segment
26 Guidance on measurement of segment’s profit or loss to be reported when the CODM is
provided with more than one measure of segment’s profit or loss
27 Guidance on key terms such as ‘segment profit’, ‘segment loss’, ‘segment assets’ and
‘segment liabilities’ in the absence of any definition in Ind AS
28 Guidance on alignment of operating segments reported by subsidiary with that of parent entity
29 Guidance on formula to be used when inconsistent cost formula for inventory valuation,
financial reporting and reports to CODM for evaluating performance is used
30 Guidance on treatment of discontinued operation under Ind AS 108
31 Guidance on disclosure requirements under Ind AS 108

32 Guidance on disclosure relating to identity of a customer which accounts for entity's revenue
exceeding 10 per cent
33 Guidance on disclosure requirements for entity having only a single operating segment
34 Guidance in case the measurement bases of the information provided to the CODM differs
from the measurement bases of the Ind AS financial statements
35 Guidance on ‘cost to develop is excessive’ in relation to geographical data need not be given if
the necessary information is not available and cost to develop is excessive
36 Guidance on term ‘entity’s country of domicile' in context to Ind AS 108
149
Applicability of Ind AS
The core principle is the disclosure of information that enables users of an entity’s financial
statements to evaluate the nature and financial effects of the business activities in which it
engages and the economic environment in which it operates. The core principle is considered
when forming judgements about how and what information is disclosed.
The ITFG has dealt with a number of issues regarding the financial year (i.e. by March 2018), would be
applicability based on Ind AS road map. Some of the covered within phase II of the corporate road map.
relevant principles opined by ITFG are as follows: Since the process of listing for the entity had begun
at the beginning of the financial year, it would be
Guidance from ITFG clarifications required to prepare Ind AS financial statements for
the financial year 2017-18.
Applicability in case of net worth or listing criteria b. Scenario 2: Where the entity was listed at the
Once a company met the threshold criteria for beginning of the year but was de-listed during the
applicability of Ind AS, it would then be required to year, the ITFG clarified that the entity would need
comply with the Ind AS road map irrespective of the to comply with Ind AS from the same year (i.e.
fact that at a later date its net worth fell below the prepare Ind AS financial statements for 2017-18).
applicability criteria. In a situation relating to a debt- The basis for above clarification was the entity
listed company, where the company met the net was listed at the beginning of the year (2017-18)
worth criterion on 31 March 2014 (i.e. met the net irrespective of the fact that it was delisted as at the
worth criteria for phase I of road map), but later its net year end.
worth fell below the specified threshold. According c. Scenario 3: If the process of listing began during
to ITFG, the net worth of the company should be the year (in May 2017) but the entity could be listed
calculated in accordance with the SFS of the company as at the end of the year i.e. March 2018. The
as on 31 March 2014 (i.e. when the road map for process of listing had begun during the year (in
phase I companies became applicable. (ITFG 6, Issue May 2017) and the entity was listed at the end of
1) the year. Therefore, the entity was still required to
comply with Ind AS from financial year 2017-18. In
addition, it was clarified, had the entity been listed
Ind AS road map would be applicable to a during the year, say in November 2017, it would
company when it meets the listing criteria. If be required to provide Ind AS financial statements
a company ceased to meet the listing criteria for the quarter ending 31 December 2017 and
immediately before the mandatory Ind AS consequently for the year ended 31 March 2018.
application date, then it would not be required to d. Scenario 4: If an entity began process of listing
comply with Ind AS even if it met the criteria on a during the year but was listed post March 2018,
prior date. (ITFG 3, Issue 8) then the entity would be required to comply with
Ind AS and present Ind AS financial statements for
the year ending 31 March 2018.
Certain scenarios regarding applicability of Ind AS to e. Scenario 5: An entity (whose debentures were
an entity with net worth less than INR250 crore as on listed in May 2017) was neither in the process of
31 March 2018 were considered by the ITFG. Those listing at the beginning nor at the end of the year,
scenarios are as follows: but its debentures were de-listed in January 2018.
a. Scenario 1: The entity which was in the process It was clarified that such an entity would not be
of listing, in the beginning of the year (say, on 1 required to prepare Ind AS financial statements.
April 2017) and was listed only towards the end of (ITFG 15, Issue 4)
Ind AS applicability to entities in a group (Case unlisted entity with net worth less than INR250 crore.
no. 1) Additionally, C Ltd. is an unlisted entity which holds 25
A Ltd., a listed entity, was covered in phase II of Ind per cent in A Ltd (i.e. C Ltd. is an investor company of
AS road map (i.e. would be required to prepare Ind A Ltd. with a net worth less than INR250 crore). D Ltd.
AS financial statements for financial year 2017-18 is another fellow subsidiary of A Ltd. i.e. subsidiary of
and onwards) while its holding company B Ltd. is an the holding B Ltd.
C Ltd.(Unlisted Investor) B Ltd. (Unlisted holding company)

(Net worth less than INR250 crore) (Net worth less than INR250 crore)
D Ltd. (subsidiary of B Ltd.)

A Ltd.(Listed) (Subsidiary of B Ltd.)
(Unlisted) (Net worth less than
(Net worth less than INR250 crore)
INR250 crore)
However, B Ltd. (the holding company) would be

In accordance with the road map for applicability required to prepare both SFS and CFS mandatorily
of Ind AS, holding, subsidiary, joint venture or under Ind AS, because one of its subsidiaries (A Ltd.
associate companies of companies (which meet in this case) meets the specified criteria (either the
the specified criteria to apply Ind AS) are required net worth or the listing criteria) of the Ind AS road
to comply with the Ind AS. map. Therefore, subsidiaries (such as D Ltd. in the
given case) may be required by the holding company)
to furnish financial statements as per Ind AS for the
purpose of preparing holding company’s (B Ltd.)
In the given case, since A Ltd. meets the criteria for consolidated Ind AS financial statements. Such fellow
Ind AS adoption, its holding company i.e. B Ltd. would subsidiaries may, however, voluntarily opt to prepare
also be required to adopt Ind AS from the same date. their financial statements as per Ind AS. (ITFG 15,
The applicability of Ind AS to C Ltd. and D Ltd. would Issue 10)
be as follows: If a fellow subsidiary does not adopt Ind AS then it
• Applicability of Ind AS to C Ltd.: It was clarified would need to have two sets of books - one for the
that as C Ltd. is just an investor, it did not qualify purpose of consolidation requirement for parent and
as a holding company of A Ltd. Additionally, it was another for its own statutory filings. Another approach
clarified that C Ltd. was not required to comply would be (as pointed out by ITFG) to voluntarily adopt
with Ind AS simply by virtue of A Ltd. being covered Ind AS for statutory reporting.
under the threshold of Ind AS applicability (unless
C Ltd. itself is within the road map for applicability
of Ind AS). Additionally, for consolidation purposes,
A Ltd., would be required to provide financial
statements’ data prepared in accordance with
Companies (Accounting Standards) Rules, 2006,
for the purpose of preparation of CFS of C Ltd. in
accordance with the above said Rules.
• Applicability of Ind AS to D Ltd.: D Ltd. is a fellow
subsidiary of A Ltd., and the requirement of Ind AS

road map do not extend to D Ltd. (another fellow
subsidiary of A Ltd.) merely because its holding
company (B Ltd.) met the applicability criteria of Ind
AS road map on account of one of its subsidiaries
(A Ltd. in this case met the listing criteria) meeting
the networth or the listing criteria of the applicability
of Ind AS road map.
151
Ind AS applicability to entities in a group (Case mentioned below) would be required to follow Ind AS
no. 2) from the implementation dates prescribed in the road-
The Ind AS corporate road map applies to all the map i.e. 1 April 2016 or 1 April 2017 respectively:
companies which meet the specified criteria (as
01 02 03
Listing criteria Unlisted companies Holding, subsidiary,

meeting the net worth joint venture or
criteria i.e. has net associate of companies
worth greater than covered in
INR500 crore or INR250 (1) or (2)
crore, respectively
In this context, ITFG considered a situation where a Employees Stock Option Plan (ESOP) reserve in
parent (ABC Ltd) and its unlisted subsidiary PQR Ltd. computation of net worth
(with net worth of INR50 crore) complied with Ind AS In order to compute net worth for assessing
beginning 1 April 2017 considering the requirements applicability of Ind AS, ESOP reserve is required to be
of the road map. During financial year 2018-19, ABC included within net worth. The ITFG considered the
Ltd. sold off substantially all of its investment in PQR Guidance Note on Accounting for Employee Share-
Ltd. to an unrelated unlisted company, XYZ Ltd. based Payments, which., inter alia, provided that an
The issue under consideration is after the sale of its enterprise should recognise as an expense (except
shareholding in PQR Ltd. by ABC Ltd., would PQR Ltd. where service received qualifies to be included as a
and XYZ Ltd. be required to apply Ind AS. part of the cost of an asset) the services received in
an equity-settled employee share-based payment plan
when it receives the services, with a corresponding
ITFG clarified that entity (PQR Ltd.) is required credit to an appropriate equity account, say, ‘Stock
to continue to follow Ind AS, considering the Options Outstanding Account’. This account is
requirements of Rule 9 of Ind AS rules which transitional in nature as it gets ultimately transferred
provides that once a company adopts Ind AS to another equity account such as share capital,
voluntarily or mandatorily would continue to securities premium account and/or general reserve as
prepare financial statements under the Ind AS for recommended in the subsequent paragraphs of this
all the subsequent years. Guidance Note.
It is important to note that the definition of net

XYZ Ltd. is a holding company of PQR Ltd. XYZ Ltd. worth for assessing applicability of Ind AS should
does not meet the specified criteria (either the net not be applied by analogy for determining net
worth or the listing criteria) of the Ind AS road map. worth under other provisions of the 2013 Act.
PQR Ltd. is required to comply with Ind AS only for (ITFG 11, Issue 1)
the sole reason that it was earlier subsidiary of ABC
Ltd. Ind AS does not apply to XYZ Ltd. simply by virtue
of being PQR’s parent. However, it may opt to apply Applicability of Ind AS to a branch of a company
Ind AS voluntarily. (ITFG 19, Issue 6) incorporated outside India
Capital reserve in the nature of promoter’s A company incorporated outside India with limited
contribution liability, may have established a branch office in India,
An entity may have received grant from government, with the permission of the Reserve Bank of India
in the nature of promoter’s contribution which was (RBI), to provide consultancy services in India. Ind AS
included in capital reserve in accordance with the road map is applicable to a company as defined in
principles of AS 12 . Such a capital reserve (in the Section 2(20) of the 2013 Act.
nature of promoter’s contribution) should be included
as a part of net worth only for the purpose to assess
According to the definition, a company means
applicability of Ind AS.
a company incorporated under the 2013 Act or
It is important to note, the definition of net worth for under any previous company law. A branch office
assessing applicability of Ind AS should not be applied of a foreign company established in India does
by analogy for determining net worth under other not meet the definition of a company under the
provisions of the 2013 Act. (ITFG 6, Issue 4) 2013 Act.
Hence, Ind AS road map is not applicable to a branch Accordingly, in the given scenario, on the assumption
of a company that is not incorporated in India. (ITFG that the entity ceased to carry on the activities as
12, Issue 6) NBFC from July 2016 onwards, it would be required
Applicability of Ind AS road map to NBFC to comply with the requirements of Ind AS from July
performing such a role but not yet registered with 2016 onwards. (ITFG 15, Issue 5)
the RBI Applicability of Ind AS to a Limited Liability
A company, awaiting its registration as NBFC with the Partnership (LLP)
RBI, may in the meanwhile, be performing the role A Ltd. was covered in phase I of the applicability of Ind
of NBFC. The definition of NBFC included in the Rule AS road map and accordingly prepared its first Ind AS
4(1) of the Companies (Indian Accounting Standards) financial statements for the year ended 31 March 2017.
(Amendments) Rules, 2016, laying down the road map Its wholly owned subsidiary, B Private (P) Ltd. also
for the applicability of Ind AS to NBFCs is very wide. It prepared its financial statements for the year ended
covers a company which is carrying on the activity of 31 March 2017 and thereafter for 31 March 2018 as
NBFC. per Ind AS even though it did not on its own meet the
net worth criterion for applicability of Ind AS road map.
Accordingly, a company which is carrying on
the activity of NBFC but not registered with RBI
would also be subject to the road map for the Company Ind AS
applicability of Ind AS applicable to any other (Ind AS compliant) Applicable?
NBFC.
However, the requirements with regard to registration,

eligibility of a company to operate as NBFC (pending
registration), etc., are governed by the RBI Act, 1934,
and the Rules laid down thereon and should be
evaluated by the entity based on its own facts and Converted
circumstances separately. (ITFG 13, Issue 4) to LLP
Ind AS applicability to NBFC entity which ceased
NBFC activities During the financial year 2018-19, A Ltd. undertook a
restructuring exercise, pursuant to which it transferred
In a particular scenario, an entity, a registered stock-
its shareholding in B (P) Ltd. to its promoters (who are
broker (recognised by SEBI), with a net worth of
individuals and therefore, not required to comply with
INR500 crore as on 31 March 2015 (and its debt
Ind AS). Subsequently, the promoters converted B (P)
is listed on the stock exchange) had applied for
Ltd. from a company to a LLP after the due process of
termination of its membership to the stock exchange
law.
in the month of July 2016. The acceptance of
termination of membership from SEBI was received in ITFG considered whether the LLP needs to continue
August 2017. to prepare its financial statements under Ind AS from
the financial year 2018-19 and onwards.
In this case, the stock-broker entity would be covered
within the definition of NBFC and based on the net
worth criteria, would be expected to comply with Ind
If a company is converted from a company into
AS from 1 April 2018. However, since the entity had
an LLP, then the 2013 Act and the Rules framed
applied for termination of its membership as a stock
thereunder cease to apply to it. Instead as a LLP,
broker in July 2016, following possibilities arose:
it is governed by the provisions of the Limited
Liability Partnership Act, 2008 and the Rules
framed thereunder.
• If the entity carried on the activities as NBFC
during the period it was awaiting approval, then
it should comply with Ind AS in accordance
with the road map applicable to NBFCs. Accordingly, in the given case, upon conversion of B
(P) Ltd. into an LLP, Ind AS would cease to apply to it.
• If it ceased to carry on the activities as NBFC, (ITFG 18, Issue 5)
then it would be required to comply with
corporate road map applicable to non-NBFC
companies based on its net worth.
153
Other opinions by EAC

Accounting treatment and disclosure Accordingly, it was clarified that in this case, actuarial
requirement for contribution to exempt risk (that benefits will cost more than expected) and
investment risk fall, in substance on the company.
provident fund1 Therefore, the exempt provident fund set up by the
Defined contribution vs defined benefit company is a defined benefit plan under Ind AS 19,
plan Employee Benefits.
In accordance with the definition of defined Accounting treatment of plan assets, liability, etc.
contribution plan included in Ind AS 19, the liability In case an employee benefit scheme is treated as
of an enterprise is restricted only to the amount it defined benefit scheme, all the requirements relating
contributes to a separate fund for the benefit of its to recognition, measurement and disclosures of
employees and has no further obligation whatsoever the defined benefit expense, obligation and plan
beyond its contribution. assets, etc. as contained in Ind AS 19 should follow.
In case an entity has an independent exempt In accordance with Ind AS 19, the plan asset is to be
provident fund trust which manages its provident fund measured at fair value and defined benefit obligation
obligations towards its employees, such an entity is is to be measured at its present value using actuarial
required to mandatorily declare interest rate not below technique (projected unit credit method) and the
the rate announced by the Employee’s Provident difference between the two is to be recognised as
Fund Organisation (EPFO). Further, if the trust is net defined benefit liability (asset) in the balance
unable to meet such interest rate, then the employer sheet. However, gains and losses resulting from the
has to make good the shortfall. Thus, the employer remeasurement of net defined liability (asset) including
(company) guarantees a specified rate of return on the actuarial gains and losses are to be recognised in
contributions made and the liability of the enterprise Other Comprehensive Income (OCI).
is not restricted to the contribution it makes to the Disclosure to be made in financial statements
separate fund but also extends to any deficiency in An entity is required to make all the disclosures in
the rate of interest earned by the separate fund as accordance with Ind AS 19 related to the defined
compared to the rate declared by the EPFO. benefit plan in the financial statements.
1. EAC – Compendium of Opinions -Volume XXXVI (published in July 2019) -Query 1
Provision for un-encashable portion of half pay embodying economic benefits and a provision should
leave as per Ind AS 192 be recognised where liability could be measured only
The nature of un-encashable leave is similar to that by using a substantial degree of estimation provided it
of the encashable leave. The reason is that even an meets the definition of liability.
un-encashable leave provides a right to an employee to But, Ind AS 19 does not provide detailed guidance
receive salaries and wages for the period for which he/ as to when and in what circumstances, employee
she avails leave as during that period he/she does not benefits should be considered to be expected to
render any services to the employer. be paid and accordingly whether there is any need
Accumulating Half Pay Leave (HPL) creates an to provide for the same in the financial statements.
obligation on the company because any unused Similarly, the Framework also does not give detailed
entitlement increases the employee’s entitlement to guidance on present obligation and when can it be
avail leave in future periods. Thus, a provision needs to considered to exist.
be recognised for all these benefits and recorded as In the above regard, however, Ind AS 37, Provisions,
part of the cost of service rendered during the period Contingent Liabilities and Contingent Assets provides
in which the service was rendered which resulted in detailed guidance on present obligation and the
the entitlement. circumstances in which liability/provision should be
In accordance with Ind AS 19, an obligation exists in recognised. A company should determine whether
respect of short-term accumulating compensated there exists a present obligation and therefore,
absences irrespective of whether these are vesting or whether a provision needs to be recognised or not in
non-vesting and is required to be recognised. Similarly, the specific facts and circumstances, considering all
a liability in respect of other long-term compensated the evidences/factors available at the reporting date.
absences is required to be provided as per Ind AS 19. If it is determined that a present obligation (legal or
Accordingly, it was clarified that irrespective of constructive) exists and other conditions as per Ind AS
whether accumulating HPL could be classified 37 are met, provision should be recognised. However,
as ‘short-term employee benefits’ or as ‘other where it is determined that ‘present obligation’ does
long-term employee benefits’, a liability on account not exist or due to any other reason, provision could
of compensated absences should be recognised. not be recognised, then, the company should also
Additionally, this liability should be reviewed at each consider whether there is any need for disclosure as a
reporting date to recognise the effect of any change in ‘contingent liability’ (unless the possibility of an
estimates in this regard. outflow of resources embodying economic benefits is
remote).
Provision for wage revision3
Amortisation of goodwill in respect of subsidiaries
In accordance with the Ind AS 19 when an employee and jointly controlled entities recognised as an
has rendered service during a period, the employee asset in Consolidated Financial Statements (CFS)4
benefits which are expected to be paid in exchange for
that service are required to be provided for as liability. On the date of transition, the carrying amount of
goodwill arising on consolidation of subsidiary or jointly
Further, as per the requirements of The Framework controlled entity as per Ind AS cannot be amortised
for the Preparation and Presentation of Financial under Ind ASs. In accordance with the principles of
Statements in accordance with Indian Accounting Ind AS, the carrying amount of goodwill or goodwill
Standards (the Framework), liability is a present acquired under business combination should be tested
obligation arising from past events, the settlement of for impairment periodically as per the guidance under
which is expected to result in an outflow of resources Ind AS 36.
2. EAC- November 2018 edition of ICAI Journal ‘The Chartered

Accountant’
3. EAC- April 2019 edition of ICAI Journal ‘The Chartered Accountant’
4. EAC-June 2018 edition of ICAI Journal ‘The Chartered Accountant’
155
Other EMs
Issue
Topic
number
1 Difference between ‘Net
Realisable Value (NRV)’ and ‘Fair Value (FV)’
2 Applicability of measurement criteria for certain type of inventories
3 Packing material and publicity material whether covered by the term ‘materials and supplies
awaiting use in the production process’
4 Exclusion of distribution costs from inventory
5 Recognition and disclosure of amount of reversal of any write-down of inventories
6 Free choice between First-In-First-Out (FIFO) and weighted average methods
7 Different cost formulae for inventories held at different geographical locations having similar
nature and uses to it
8 Costs to be considered while determining the NRV
9 Disclosure of the carrying amount of inventories pledged as security for liabilities - whether pledge
covers other kinds of charges/encumbrances
10 Accounting treatment of machinery spares- Similar to ITFG 2, Issue 4 included in chapter 4,
Tangible and intangible assets
11 Accounting treatment of excise duty1 for the purpose of valuation of inventories
1. This issue would apply to few companies e.g. petroleum products and tobacco.
Refer to educational material on Ind AS 10 for further issues/topics:

1 Date of approval for issue of the financial statements
2 Adjustment of events occurring between end of the interim financial report and date of approval by
BOD
3 Date of approval for issue as per Ind AS 10 in the event of reopening of books of accounts by the
BOD
4 Events are adjusting or non-adjusting events and their treatment for
financial statements for the year 2016-17 when an entity receives a demand notice for an
additional amount from the Excise Department on 15 June 2017
5 Provisions to be made in the following cases for financial statements of the year 2016-17:
Scenario 1 For a debtor which suffered heavy losses due to an earthquake in February 2017 and
consequently became bankrupt in April 2017
Scenario 2
For a debtor which suffered heavy losses due to an earthquake after March 2017
6 Adjusting event- cost of project and profit to be adjusted in case of an adjusting event
7 Entity approached for arbitration in a case before the end of the reporting period. Whether this
event is an adjusting event and treatment of contingent asset (i.e. costs which were charged to
the statement of profit and loss as an expense for the year 2016-17)
8 Treatment of duty drawback credit where application not filed within time
9 Selling of goods at a discount if payments received within 15 days- whether discount would be
adjusted from the sales at the end of the reporting period
10 Exception to the principle that adjusting events are those that provide evidence of conditions that
existed at the end of the reporting period
11 Treatment of the fraud related to a prior financial year discovered after the end of the reporting
period but before the date of approval of financial statements
12 The value of investment found fraudulently inflated after the end of the reporting period but
before the approval of the financial statements
13 Disclosure requirements regarding significant non-adjusting events occurring after the end of the
reporting period
14 Disclosure of proposed dividend under Ind AS
15 Difference in the treatment of interim dividend declared and paid during the year vis-a-vis
proposed dividend
16 Treatment for dividends declared to redeemable preference shareholders after the reporting
period but before the financial statements are approved for issue
17 Preparation of financial statements on a going concern basis
18 Disclosure of a significant non-adjusting event-fire in a plant after the reporting date of 31 March
2017 and expected financial effect known
157
Index of ITFG clarifications bulletins

Issue no. Topic Reference Page No.
ITFG Bulletin 1
1 Applicability-general requirements for Not considered in this publication Not
applying Ind AS applicable
3 Applicability of exemption under Chapter 9-First-time adoption of Ind 98
paragraph D13AA of Ind AS 101 AS
4 Exemption under paragraph D13AA on Chapter 9-First-time adoption of 98
change in functional currency Indian Accounting Standards
5 Determination of date for assessing Chapter 9-First-time adoption of 100

functional currency Indian Accounting Standards
ITFG Bulletin 2
1 Amortisation of FCMITDA on Chapter 9-First-time adoption of 98
transition to Ind AS Indian Accounting Standards

4 Capitalisation of spares Chapter 4-Tangible and intangible 49
assets
5 Capitalisation of enabling assets Chapter 4-Tangible and intangible 49
assets
6 Amortisation of FCMITDA on transition to Chapter 9-First-time adoption of 98
Ind AS Indian Accounting Standards
7 Premium on redemption of financial Chapter 9-First-time adoption of 100
liabilities Indian Accounting Standards
ITFG Bulletin 3
3 Determination of functional currency Chapter 8-The Effects of Changes in 89
Foreign Exchange Rates
4 Companies voluntarily adopting Ind AS Not considered in this publication Not
from Financial year 2015-16 applicable
5 Consider potential voting rights while Chapter 1-Consolidation 3
assessing whether an investment meets
the criteria of an associate


8 Applicability in case of net worth Chapter 10-Other topics (Applicability 149

of Indian Accounting Standards)
9 Capital spares Chapter 9-First-time adoption of 49

Indian Accounting Standards
10 Application of hedge accounting principles Chapter 9-First-time adoption of 99
where an entity avails option under para Indian Accounting Standards
46A of AS 11
Hedge accounting Chapter 3-Financial instruments 43
11 Capital work-in-progress Chapter 9-First-time adoption of 96

12 Deemed cost of an investment in a Chapter 9-First-time adoption of 96

subsidiary Indian Accounting Standards
13 Revenue-based amortisation Chapter 4-Tangible and intangible 99
assets
14 Depreciation on first-time adoption Chapter 9-First-time adoption of 101
ITFG Bulletin 4
1 Disclosure of excise duty as an expense Not considered in this publication Not
applicable
2 Service tax would not form part of revenue Not considered in this publication Not
applicable
3 Applicability-net worth criteria Not considered in this publication Not
applicable
ITFG Bulletin 5
1 Principle of control as per Ind AS 110 to be Chapter 1-Consolidation 3
applied
2 Classification of security deposits accepted Chapter 10-Other topics Not
by utility companies as current liabilities (Presentation of Financial applicable
Statements)-Withdrawn by ITFG
3 Applicability of deemed cost exemption Chapter 9-First-time adoption of 94
4 Processing fees on loans Chapter 9-First-time adoption of 95
5 Government grants for purchase of a fixed Chapter 9-First-time adoption of 95
asset-carrying value as deemed cost Indian Accounting Standards
159
6 Capital spares Chapter 9-First-time adoption of 95

7 Lease rent with escalation clause Not considered in this publication Not
applicable
8 Accounting of profit share from LLPs Chapter 10-Other topics-(Separate 136
financial statements)
ITFG Bulletin 6
1 Applicability in case of net-worth Chapter 10-Other topics (Applicability 149
of Indian Accounting Standard)
2 Section 8 companies to prepare Ind AS Chapter 1-Consolidation 4
financial statements if covered under road
map
3 General applicability criteria- in case of Not considered in this publication Not
NBFC applicable
4 Capital Reserve in the nature of promoter’s Chapter 10-Other topics (Applicability 151
contribution of Indian Accounting Standards)
ITFG Bulletin 7
1 Applicability of exemption under paragraph Chapter 9-First-time adoption of 98
D13AA of Ind AS 101 Indian Accounting Standards
2 Determination of presentation currency for Chapter 8-The effects of changes in 89
CFS foreign exchange rates
3 Reversal of the effects of paragraph 46/46A Chapter 9-First-time adoption of 94
of AS 11 under previous GAAP carrying Indian Accounting Standards
amount of PPE on transition to Ind AS
4 Accounting policy for exchange differences Chapter 9-First-time adoption of 98
to long-term forward exchange contracts Indian Accounting Standards
5 Classification of long- term lease of land Not considered in this publication Not
applicable
6 Dividends on financial liabilities Chapter 3-Financial instruments 38
7 Recognition of deferred tax on freehold Chapter 5-Income taxes 59
land
8 Investment in debentures of a subsidiary Chapter 9-First-time adoption of 97
company Indian Accounting Standards
9 Application of exemption to toll roads under Chapter 9-First-time adoption of 99

construction Indian Accounting Standards
ITFG Bulletin 8
1 Provision for unspent CSR expenditure Chapter 10-Other topics (Provisions, 141
contingent liabilities and contingent
assets)
2 Disclosure of impact of new standard not Chapter 10-Other topics (Accounting 122
yet effective policies, changes in accounting
estimates and errors)
3 Date of transition for presentation of Chapter 9-First-time adoption of 100

opening balance sheet Indian Accounting Standards
4 Capitalisation of an item of PPE not falling Chapter 9-First-time adoption of 96
under the definition of an asset Indian Accounting Standards
5 Reversal of impairment provision Chapter 9-First-time adoption of 96

6 Accounting for accumulated losses of Chapter 1-Consolidation 7
subsidiaries
7 Revalued amount of PPE considered as Chapter 9-First-time adoption of 96
deemed cost Indian Accounting Standards
8 Deferred taxes on capitalised exchange Chapter 5-Income taxes 61
differences
Chapter 9-First-time adoption of 97

9 Recognition of interest income Chapter 3-Financial instruments 39
ITFG Bulletin 9
1 Deferred tax on undistributed profits Chapter 5-Income taxes 61
2 Accounting for business combinations of Chapter 2-Business combinations 17

entities under common control
3 Accounting treatment for grants in the Chapter 10-Other topics (Accounting 126
nature of promoter’s contribution for government grants and disclosure
of government assistance)
ITFG Bulletin 10
1 Accounting for interest-free loan provided Chapter 9-First-time adoption of 97
by holding entity in its SFS Indian Accounting Standards
2 Undisbursed loans Chapter 3-Financial instruments 40
3 Recognition of deferred tax on tax Chapter 5-Income taxes 64

deductible goodwill of subsidiary, not
recognised in CFS
4 Applicability of deemed cost exemption on Chapter 9-First-time adoption of 96
assets classified as held for sale Indian Accounting Standards
5 Consideration of amounts debited to Chapter 10-Other topics (Earnings per 97

FCMITDA for computation of basic EPS share)
6 Accounting treatment of customer loyalty Not considered in this publication Not

program applicable
ITFG Bulletin 11
1 ESOP reserve in computation of net worth Chapter 10-Other topics (Applicability 151
2 Applicability of ASIs issued under previous Chapter 5-Income taxes 64
GAAP to situations of tax holiday under Ind
AS
161
Ind AS 19, Employee

3
4
Calculation of EPS by a subsidiary company
that is not wholly owned by its parent
Measurement of investment in
Chapter 10-Other topics-Earnings Per
Share
Chapter 9-First-time adoption of Indian

140
97
Benefits
subsidiaries, joint ventures and associates Accounting Standards
at the end of the first Ind AS financial
reporting period
5 Exemption of custom duty on capital goods Chapter 10-Other topics (Accounting 128
as government grant for government grants and disclosure
of government assistance )
6 Uniform accounting estimates vs. uniform Chapter 10-Other topics (Accounting 122
accounting policies policies, changes in accounting
Chapter 1-Consolidation 6
7 Consolidation of non-corporate entities Chapter 1-Consolidation 4
8 Capitalisation of enabling assets Chapter 4-Tangible and intangible 49

assets
9 Disclosure of sitting fees paid to Chapter 10-Other topics (Related party 134
independent and non-executive directors disclosures)
ITFG Bulletin 12
1 Application of revaluation model for land Chapter 4-Tangible and intangible 29
and building assets
2 Government grants for purchase of a fixed Chapter 9-First-time adoption of Indian 95
asset-fair value as deemed cost Accounting Standards
3 Financial guarantee contracts Chapter 3-Financial instruments 28
4 Refinancing arrangements Chapter 3-Financial instruments 42
5 Treatment of intra-group profit in the CFS Chapter 1-Consolidation 8

and previous GAAP deemed cost
exemption
6 Applicability of Ind AS to a branch of a Chapter 10-Other topics (Applicability 152
company incorporated outside India of Indian Accounting Standards)
7 Accounting treatment of government loans Chapter 9-First-time adoption of Indian 101
at a below-market rate of interest Accounting Standards
8 Acquisition date in a scheme approved by Chapter 2-Business combinations 21
NCLT
9 Retrospective application of Ind AS 109 to Chapter 9-First-time adoption of Indian 100

financial instruments acquired in past Accounting Standards
business combinations
10 Consequential adjustments to deemed Chapter 9-First-time adoption of Indian 94
cost, being the previous GAAP carrying Accounting Standards
amount of assets and liabilities
11 Financial guarantee contracts Chapter 3-Financial instruments 29
ITFG Bulletin 13
1 Capitalisation of DDT paid on preference Chapter 10-Other topics (Borrowing 35
share dividend costs)
2 Financial guarantee contracts(disclosure of Chapter 3-Financial instruments 134
financial guarantee (without any fee) given
by a director)
3 Information about major customers where a Chapter 10-Other topics (Operating 146
company operates only in one segment Segments)
4 Applicability of Ind AS road map to Chapter 10-Other topics (Applicability 152

NBFC performing such a role but not yet of Indian Accounting Standards)
registered with the RBI
5 Presentation of operating profit as a Chapter 10-Other topics 112
separate line item not permitted (Presentation of financial
statements)
6 Modification of terms financial instruments Chapter 3-Financial instruments 41
7 Accounting for partial disposal of an Chapter 1-Consolidation 8

investment in a subsidiary
8 Market risk disclosures for certain Chapter 3-Financial instruments 43

instruments
9 Deferred tax on undistributed profits Chapter 5-Income taxes 63
10 Measurement of compound financial Chapter 3-Financial instruments 35

instrument
ITFG Bulletin 14
1 Capitalisation of processing charges to the Chapter 10-Other topics (Borrowing 130
cost of the qualifying asset costs)
Chapter 3-Financial instruments 40
2 Accounting for restoration cost in case of a Chapter 4-Tangible and intangible 50

leasehold land assets
3 Adjustments of advance payments received Not considered in this publication Not

for goods or services for the effect of time applicable
value of money
4 Business combination after the year end Chapter 2-Business combinations 22
but before approval of accounts to be
considered an adjusting event
5 Accounting of shares held by a broking Chapter 3-Financial instruments 27
entity for trading on its own account
6 Retrospective application of revaluation Chapter 4-Tangible and intangible 50

model in PPE assets
7 Classification as debt or equity Chapter 3-Financial instruments 32
163
Ind AS 19, Employee

ITFG Bulletin 15
1
2
Classification as debt or equity (FCCBs)
Classification as debt or equity (RNCPS)
Benefits
3 Incentives receivable from the government Chapter 3-Financial instruments 27
considered as financial instruments
Chapter 10-Other topics (Accounting 128

for government grants and disclosure
4 Applicability in case of networth or listing Chapter 10-Other topics (Applicability 149
criteria of Indian Accounting Standards)
5 Ind AS applicability to NBFC entity which Chapter 10-Other topics (Applicability 152
ceased NBFC activities of Indian Accounting Standards)
6 Application of Ind AS to past business Chapter 2-Business combinations 19
combinations of entities under common
control
7 Low interest and interest free financial Chapter 3-Financial instruments 37
instruments
8 Lease premium collected at the time of Not considered in this publication Not
deed (accounting from the perspective of a applicable
lessor)
9 Accounting for amounts outstanding Chapter 3-Financial instruments 28
towards retired partners’ capital balances
10 Ind AS applicability to entities in a group Chapter 10-Other topics (Applicability 150

ITFG Bulletin 16
1 Financial guarantee provided by a Chapter 3-Financial instruments 28
subsidiary for a loan taken by its parent
2 Treatment of income tax related interest Chapter 5-Income taxes 65

and penalties under Ind AS vis-à-vis IFRS
3 Restructuring of loan Chapter 3-Financial instruments 42

4 Classification of investments made in units Chapter 10-Other topics (Statement of 118
of money-market mutual funds as cash Cash Flows)
equivalents
5 Demerger of one of the businesses of Chapter 2-Business combinations 20
parent to its subsidiary and court approved
scheme
6 Classification of infrastructure usage rights Not considered in this publication Not
as intangible assets or as part of land lease applicable
7 Financial guarantee by a parent for a loan Chapter 3-Financial instruments 31
taken by its subsidiary that is repaid earlier
than the scheduled term
ITFG Bulletin 17
1 Accounting of non-monetary asset grant Chapter 10-Other topics (Accounting 95
for government grants and disclosure
2 Inclusion of DDT on preference shares in Chapter 3-Financial instruments 39

EIR
3 Export benefits under a scheme of the Chapter 10-Other topics (Accounting 128
Government of India for government grants and disclosure
4 Recognition of interest income (further Chapter 3-Financial instruments 40

clarification on financial asset to be classified
or not under amortised cost or FVOCI (debt)
category)
5 Equity accounting in the CFS of investor in Chapter 1-Consolidation 9
case of loss of control
6 Disclosure of related party transactions Chapter 10-Other topics 134
(Related party disclosures)
7 Creation of deferred taxes on land Chapter 5-Income taxes 60
converted to inventory
8 Classification of interest related to delay in Chapter 10-Other topics 112
payment of taxes (Presentation of financial statements)
9 Classification as debt or equity (optionally Chapter 3-Financial instruments 32

convertible preference shares)
10 Classification as debt or equity Chapter 3-Financial instruments 33
(issue of rights offer)
11 Classification as debt or equity (preference Chapter 3-Financial instruments 34
shares issued in foreign currency)
ITFG Bulletin 18
1 Exemption under paragraph D13AA of Ind Chapter 9-First-time adoption of Indian 98
AS 101 vis-a-vis borrowing costs under Ind Accounting Standards
AS 23
Chapter 10-Other topics (Borrowing 131
costs)
2 Deferred taxes on undistributed profits Chapter 5-Income taxes 62
3 Low interest and interest free financial Chapter 3-Financial instruments 37
instruments
4 Retrospective restatement of business Chapter 2- Business combinations 19
combination under a court scheme
5 Applicability of Ind AS to LLP Chapter 10-Other topics (Applicability 152
ITFG Bulletin 19
1 Business combination accounting in case of Chapter 9-First-time adoption of Indian 102
acquisitions by first-time adopter Accounting Standards
2 Timing of revenue recognition Chapter 6- Revenue 70
3 First-time adopter of Ind AS-transitional Chapter 9-First-time adoption of Indian 70

options under Ind AS 115 Accounting Standards
4 Application of capitalisation rate for assets Chapter 10-Other topics (Related party 131
acquired under business combination disclosures)
165
Ind AS 19, Employee

5
6
Restatement of financial statements of
entities under common control
Application of Ind AS to entities in a group
Chapter 2- Business combinations
Chapter 10-Other topics (Applicability

17
151
Benefits
ITFG Bulletin 20
1 Disclosure of foreign exchange differences Chapter 8-The effects of changes in 89
separately from other fair value changes foreign exchange rates
2 Consolidation by an investment entity Chapter 1-Consolidation 5
3 Accounting for accumulated arrears of Chapter 3-Financial instruments 38

dividend on cumulative preference shares
on transition to Ind AS
4 Demerger of business divisions between Chapter 10-Other topics-(Separate 137
unrelated companies within the same financial statements)
group
policies, changes in accounting
5 Different policies and estimates being Chapter 1-Consolidation 6
adopted by an associate and an investor
ITFG Bulletin 21
1 Short-term leases without any purchase Chapter 7-Leases 77
option
2 Accounting treatment of rent equalisation Chapter 7-Leases 80
liability
3 Non-refundable lease premium amount Chapter 7-Leases 81
equaling market value
4 Accounting of operating leases of a Chapter 9-First-time adoption of Indian 103
subsidiary not capitalised by a first-time Accounting Standards
adopter parent
Chapter 7-Leases 82
5 Accounting for foreign exchange Chapter 7-Leases 81

differences relating to lease liability
ITFG Bulletin 22
1 Recognition exemption for short term Chapter 7-Leases 77
leases
2 Accounting for lease rental income Chapter 7-Leases 82
3 Accounting for mining lease rights as Chapter 4-Tangible and intangible 82
intangible assets after demonstration of assets
technical feasibility and commercial viability
of extracting a mineral resource
4 Applicability of Ind AS 115, Revenue from Chapter 4-Tangible and intangible 52
Contracts with Customers to distribution of assets
gifts
5 Restatement of comparative information in Chapter 2-Business combinations 18

case of common control business
combination
6 Requirement to restate in case of common Chapter 2-Business combinations 18
control merger
7 Accounting treatment of interest on loan Chapter 10-Other topics (Presentation 113

obtained from a Director of financial statements)
ITFG Bulletin 23
1 Measurement of current tax and DTA/DTL Chapter 5-Income taxes 65
to give effect to lower tax rates
policies, changes in accounting
2 Accounting treatment of deferred tax Chapter 9-First-time adoption of Indian 104
adjustments recognised in equity on Accounting Standards
first-time adoption of Ind AS in accordance
with Ind AS 101, at the time of transition to Chapter 5-Income taxes 65
Ind AS 115 and Ind AS 116
Chapter 6-Revenue 70
Chapter 7-Leases 82
167
Index of EAC Opinions

‘The Chartered
Description of issue Reference Page No.
Accountant’
June-18 Amortisation of goodwill in respect of Chapter 10-Others 154
subsidiaries and jointly controlled entities
recognised as an asset in CFS
July-18 Accounting treatment to recognise Not considered in this Not
interest earned on advance fee as its publication Applicable
income is correct as per the provisions of
Ind
August-18 Treatment of financial liability under Ind AS Chapter 3-Financial 44
32 and Ind AS 109 instruments
September-18 Disclosure of impairment loss on long-term Chapter 10-Other topics 114
investments as exceptional item (Presentation of financial
statements)
October-18 Provisioning for Expected Credit Loss Chapter 3-Financial 44
(ECL) on the amount due in the course of instruments
business from government organisations
November-18 Provision for un-encashable portion of half Chapter 10-Others 154
pay leave as per AS 15 / Ind AS 19
December-18 Treatment of disputed amount (principal Chapter 10- Other topics 142
and interest) in respect of cases pending (Provisions, contingent
before various regulatory authorities liabilities and contingent
assets)
January-19 Treatment of ‘prepayment penalty’ Chapter 3-Financial 44
incurred for foreclosure of existing loan instruments
and availing new loan borrowings
February-19 Accounting treatment of free land Not considered in this Not
provided to BMTC for setting up of CNG publication Applicable
station at BMTC depot
March-19 Accounting for Funded Interest Term Loan Chapter 3-Financial 45
(FITL) subsequent to restructuring of a instruments
loan taken from a shareholder
April-19 Provision for wage revision Chapter 10-Others 154
May-19 Presentation of deferred tax recoverable Chapter 5-Income taxes 66

from beneficiaries (customers) accounted
as ‘Deferred Asset for Deferred Tax
Liability’ under Ind AS
June-19 Accounting for provision to be created for Chapter 10-Others- 142

onerous contract Miscellaneous
August-19 Computation of EIR on borrowings Chapter 3-Financial 44
instruments
September-19 Disclosure of government grant Chapter 10-Other topics 114
(Presentation of financial
statements)
October-19 Classification of consumer security Chapter 10-Other topics 113
deposits (Presentation of financial
statements)
November-19 Company’s policy on transfer price for Chapter 10-Other topics 146
segment revenue and segment results (Operating Segments)
under segment reporting
December-19 Deferred tax under Ind AS 12 on fair value Chapter 5-Income taxes 66
changes of investment u/s 112A of IT Act,
1961
January-20 Accounting treatment of expenditure Chapter 4-Tangible and 54
relating to employee benefits expenses, intangible assets
rent expenses, travelling expenses and
house-keeping expenses which are
compulsorily required to be incurred for
construction of the project
Vol 36 Accounting treatment and disclosure Chapter 10-Others 153
(June 2019) requirement for contribution to exempt
provident fund
169
Notes
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Ind AS

1. Indian Accounting Standards (Ind AS): An Overview

Guidance from ITFG clarifications In order to apply Ind AS to a group, relationships

Consider potential voting rights while assessing

Entities included in CFS

Subsequently, A Ltd. incorporates a wholly-owned to provide investment management services to the

Whether B Limited qualifies to be an investment

Non-controlling interest An entity may have multiple subsidiaries and could

Intra-group transactions (though there is no loss of control of the parent on its

• Whether the adjustments arising out of fair

Ind AS require the application of a mixed

In accordance with the above, on acquisition of the

Refer to educational material on Ind AS 110 for following issues/topics:

7 Guidance on consolidation of investment entities

8 Guidance on consolidation of trusts or other structured entities

9 Assessment of control when an investor has power to direct

15 Assessment of control when an entity is economically dependent of a customer

18 Assessment of control when an investor has veto rights

19 Assessment of control in a franchise agreement

20 Assessment of control when there is a shareholders’ Agreement.

24 Application of consolidation procedures on direct and indirect holding in a subsidiary

Refer to educational material on Ind AS 111 for following issues/topics:

7 Assessment of joint control when a nominee director has a casting vote

9 Assessment of joint control when unanimous consent is required implicitly

10 Assessment of joint control when there are layers of governing structures

11 Assessment of joint operation vis-à-vis joint venture

16 Financial statements of parties to a joint operation

Refer to educational material on Ind AS 28 for following issues/topics:

Assets and liabilities (other than goodwill)

Goodwill or a gain from a bargain accumulated in equity as capital reserve after

Restatement of comparative period’s financial statements of entities under common control

Following situations arose in a financial year: • Situation 1:

Retrospective restatement of business Application of Ind AS to past business

As the schemes approved by the relevant

In such a case, an entity is required to restate its

Business combination after the year end but

Ind AS 10, Events After the Reporting Period,

In accordance with the requirements of Section 230(7)

Refer to educational material on Ind AS 103 for following issues/topics:

19 Guidance on acquisition related cost i.e. additional payment to a regulator

20 Guidance on accounting of contingent liability in a business combination

21 Guidance on accounting of indemnification asset in a business combination

Guidance on exceptions to recognition and measurement principles for indemnification assets

31 Guidance on accounting of business combination achieved in stages

32 Guidance on accounting of reacquired rights (pre-existing relationships)-

33 Guidance on accounting for a reverse acquisition

34 Guidance on accounting of a lease acquired in a business combination

40 Guidance on common control transactions and evaluation of transitory common control

1. Indian Accounting Standards (Ind AS): An Overview (Revised 2019)

Accounting for amounts outstanding

2. The definition of a contract in Ind AS 115, Revenue from Contracts with

In this case, capital balances could be demanded Accounting

Initial measurement • Guarantee provided by subsidiary to its parent:

Financial guarantee given by P Ltd.

Loan taken by S Ltd. for 10 years

As per Ind AS 8, the effect of change in an accounting Debt-equity classification

The attribution debited to ‘investment’ upon

Financial instruments or their components that

6. For the purpose of this issue, it was assumed that issuance of