Accounting

Is XBRL implementation justified in India

Firstly one needs to know why XBRL implementation is important in India. Is it only because of statutory requirement or our approach shall be what was the need for such statutory requirement to change the whole of reporting system in India.  Corporate perception has to change in this regard and it can only be done once the top management realizes the importance that what is achieved by following XBRL Taxonomy.

Main objective of XBRL is Transparency. Investor has put in its money in company and shall be aware of it’s IN and OUT. The XBRL is a way of electronic communication of business and financial data and is of immense utility to the capital markets and the investing community.

 XBRL involves huge initial conversion costs for companies but the long-term benefits for investors and the capital markets would be significant.

What is XBRL (eXtensible Business Reporting Language)

 XBRL is a digital ‘language’ that was developed to provide a common electronic format for business and financial reporting.  

  • Developed specifically to communicate information between businesses and other users of financial information such as analysts, investors and regulators 
  • Provides a common electronic format for business reporting

 It does not change what is being reported.  It only changes how it is reported.
It is self-contained document.

There are thousands of companies releasing financial results on quarterly, interim and on annual basis. There is no easy way to compare contents, but for XBRL.

Advantages of XBRL

  • Streamlined processes for collecting, comparing and reporting financial information
  • Reduced costs
  • Improved financial communication and transparency 
  • Increased data accuracy 
  • Direct comparability 
  • Multi languages and accounting standards support 
  • Improved risk management and control 
  • Ease of maintenance 
  • Faster, more reliable and extended scope of analysis capabilities for better decision-making

  

ICAI & XBRL

 ICAI has built up the Taxonomy which contains the concept; it does not contain any factual information reported by entity.

 Taxonomy has been based on three broad reporting categories. These are

  1. Commercial and Industrial
  2. Banking Companies
  3. Non-Banking Finance companies

The ICAI XBRL taxonomy has been constructed to conform to the current Indian Accounting Standards and Company Law.

XBRL AND IFRS

Transparency in the financial reporting is tremendously increasing around the world and two global standards have assisted to achieve these objectives i.e. IFRS and XBRL.

IFRS and XBRL are two different projects, a combined project implementation approach can enable greater efficiency and control over reporting.

To enhance transition to IFRS, consider how XBRL fits into your reporting processes as on date and start assessing how your current reporting processes may be affected by the adoption of IFRS.

Author:CA Shalini Tibe

IFRS for exploration of mineral resources and Oil & Gas industry

What does it mean by Exploration for and evaluation of mineral resources, Oil and Gas?

It is basically search for mineral resources, including minerals, oil, natural gas and similar non-regenerative resources after the entity has obtained legal rights to explore in a specific area, as well as the determination of the technical feasibility and commercial viability of extracting the mineral resource.

 

 

 

Relevant IFRS applicable for Exploration and evaluation of Mineral resources, Oil and Gas Industry

  • IFRS 6: Exploration for and Evaluation of Mineral Resources
  • IAS 16 – Component accounting for assets
  • IAS 36 – Impairments
  • IAS 37 – Asset retirement obligations
  • IAS 38 – Intangible assets
  • IFRS 1 – opening balance sheet

What are the Exploration for and Evaluation Cost?

  • Lease acquisition rights
  • Technical studies and services
  • Seismic costs
  • Geologic and geophysical costs
  • Exploratory drilling and testing
  • Tangible and intangible costs

Transition issues (IFRS1)

Requires retrospective restatement of beginning balances which is subject to very high cost and limited benefits to users

Cash Generating Unit

IFRS 6 defines Cash Generating Unit (CGU) as smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets

Impairment of assets is done at the CGU level.  Application of CGU requires judgment. It will involve how management monitor operations, product line, regional areas, decision regarding continuing or disposing operations.

We have already discussed Component accounting in our previous articles.

IFRS 6

Objective - To specify the financial reporting for the exploration for and evaluation of mineral resources

Scope: It applies only to expenditure incurred before exploration and evaluation of mineral resources. It does not apply to companies who are engaged in exploration and evaluation of mineral resources.

Measurement: Exploration for and evaluation assets shall be measured at cost

 It allows Full Cost Method for exploration and evaluation after this the companies are required to follow Successful effort method.

Successful Effort method (SE) v/s Full Cost Method (FC)

Oil and gas sector is only industry where companies are allowed to chose between two extreme different accounting methods.

Exploratory dry holes cost are capitalized in FC method where as in SE it is expensed.

Geologic and geophysical costs are capitalized in FC method where as in SE it is expensed.

Steps to proceed with IFRS 6

  • The entity must determine accounting policies specifying which exploration and evaluation expenditures are recognized as assets, and how such assets are to be measured.
  • On recognition, exploration and evaluation assets are measured at cost. Subsequently they are measured using either the cost model or the revaluation model. 
  • Exploration and evaluation assets are classified as tangible or intangible assets according to their nature.

 

An exploration and evaluation asset is assessed for impairment when circumstances suggest the carrying amount exceeds the recoverable amount.

Author: Shalini Tibe, IFRS Consultant

Phase 2 of IFRS 9: Exposure Draft on Amortised cost and Impairment

Further to our earlier explanation of IFRS 9 (click here to read), our analyst Shalini Tibe comments on the exposure draft of IFRS 9. We hope the information is useful to you.

Exposure Draft (ED) proposes to replace Incurred Loss Model for the assessment of impairment of financial assets measured at amortized cost currently included in IAS 39 with Expected Loss Approach that enables earlier recognition of credit risk.

Incurred Loss Model has been criticized because of following reasons:

 Expected losses are implicit in initial measurement of assets but are not taken into account when determining the Effective Interest rate used for subsequent measurement.

This results in a systematic overstatement of interest revenue in the period before a loss event occurs. In effect, subsequent impairment losses are in part reversals of inappropriate revenue recognition in earlier periods.

If suppose ABC Bank has given loan of Rs.100, 000 @ of 10 percent P.A. for 5 years then following will the schedule for interest repayment:

Year Interest to be accounted

in P & L a/c (Rs.)
1 10,000
2 10,000
3 10,000
4 10,000
5 10,000

 

Under Incurred loss approach 10 percent interest rate includes expected loss factor which is accounted in Profit and Loss account as interest revenue.

Impairment loss is accounted only after a loss trigger is indicated. Thus there is an overstatement of interest revenue in the period before a loss event occurs.  

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Thus ED has come out with Expected Loss Approach.

 

Expected Loss Approach (ELA)

  •  An entity would have to estimate the expected credit losses over the life of asset on initial measurement of the asset.
  •  No gain or loss would be recognized at inception of the asset.
  •  The expected credit loss would be incorporated into Effective Interest rate (EIR) and consequently reduces EIR.
  • Expected Cash flows (ECF) have to be determined at each measurement date and any gain or loss on subsequent reassessment would have to be recognized immediately in statement of Comprehensive income i.e. Profit and Loss a/c.

 

The proposed impairment model of ELA generates changes in Effective Interest rate (EIR) to include Expected loss rate in EIR calculation. Mingling of credit risk and credit rate would be difficult and costly to implement and generate significant operational challenges when it comes to practical implementation.

The operational aspects of applying the expected loss approach that requires historical information may not be available with all the entities.

ED proposes that Expected cash flows may be estimated on a Portfolio basis or on Individual basis.

A financial asset can be moved from Portfolio basis to Individual basis or vice versa. Whatever basis chosen, it shall provide the best estimate of Expected cash flow as per ED.

In case of Portfolio basis, Financial assets shall be grouped with similar credit risk characteristics that are indicative of the debtors ability to pay all the contractual amounts when due.

Amount of Expected credit loss would be more reliable when determined on portfolio basis and when based on statistical assessment. Loan portfolio contains a global credit risk exposure that can be estimated with certainty where as for each individual loan granted it will remain unpredictable.

Practically also expected losses can be determined at portfolio level. Because when we are looking at portfolio having similar credit risk characteristics, we can determine that some contractual cash flow will not be received although it may not be known at that point of time which specific asset will not perform.

In contrast entities in respect of individual loan at inception will estimate that it will receive full contractual payment over its term.

Thus International Accounting Standard Board (IASB) shall consider applying Expected loss model on portfolio basis.

IASB plans to issue final standard on amortized cost and impairment in the forth quarter of 2010. However the IFRS implementation date for is January 1, 2013.

 

Author: CA Shalini Tibe

Depriciation and Impairment – IFRS and Indian GAAP

Link between Depreciation and Impairment under IFRS

When an item of Property, Plant and Equipment (PPE) is impaired i.e. recoverable amount < carrying amount, carrying amount is reduced to the amount of recoverable amount.

Asset should no more be carried more than their Recoverable amount.

Such a decrease in carrying amount is impairment and is booked in Profit and Loss.

After recognition of an impairment loss, the depreciation charge of the asset shall be adjusted in the future periods to allocate the asset’s revised carrying amount over its remaining useful life.

Example 1: More >

Fixed Assets / Property, Plant & Equipment : Differences between Indian GAAP and IFRS

  1. Under Indian GAAP the terminology used is Fixed Assets  where as under IFRS it is termed as Property, Plant and Equipment
  2. Standard IAS 16 covers Property, Plant and Equipment (PPE) where as there are 2 standards for Fixed Assets under Indian GAAP i.e. AS-10 Fixed Assets and AS-6 Depreciation
  3. As per Indian GAAP subsequent expenditure related to item of fixed assets are to be capitalized only if they increase the future benefit from the existing asset beyond its previously assessed standard of performance where as under IFRS subsequent costs are evaluated on the basis of same recognition principles as that of initial cost for recognizing as item of PPE
  4. Under IFRS cost of major inspections should be capitalized where as under Indian GAAP there is no specific provision for the same.
  5. IFRS for PPE is based on component approach. Under this approach “Each part of an item of PPE with a cost that is significant in relation to the total cost of the item shall be depreciated separately” where as Indian GAAP does not mandatory require full adoption of the component approach
  6. Under IFRS the residual value and useful life of an asset be reviewed at least each financial year end and if it differs from previous estimate then it is considered as change in accounting estimate where as such a review is not required under Indian GAAP
  7. Change in depreciation method is considered as change in accounting estimate under IFRS where as under Indian GAAP it is considered as change in accounting policy
  8. IFRS requires an entity to choose either the cost model or the revaluation model as its accounting policy and to apply that policy to entire class of PPE. Kindly refer http://moneybol.com/treatment-of-tangible-assets under-ifrs/ Under Revaluation model; revaluation will be with respect to fair value of item of PPE. It also says that revaluation shall be made with sufficient regularity to ensure that the carrying amount does not materially differ from the fair value as at the balance sheet date where as under Indian GAAP revaluation approach does not specifically state adoption of fair value basis and also about frequency of revaluation of assets.

Judgment required in applying Depreciation rates and Method

When deciding on depreciation rates and method, most common factors that can be taken into account are expected rate of technological developments, expected market requirement and the expected pattern of usage of the assets.

Review of Residual life

When reviewing residual values, an entity would estimate the amount that it would currently obtain for the disposal of the asset after deducting the estimated cost of disposal if the asset were already of the age and condition expected at the end of its useful economic life.

How to do Component Accounting?

Firstly allocate amount to significant parts and depreciate separately. Then group together significant parts with same useful life and depreciation methods.

The remainder of the item is to be also depreciated separately. Remainder consists of parts that are individually not significant.

Regular major inspection performed can also be considered as component of an item of PPE and can be depreciated separately.

For Instance

Suppose Cost of Acquisition of Building is Rs. 100,000 allocated to following components:

Component Amount Depreciation period
Interior 10000 5 years
Restoration 12000 10 years
Elevators 15000 15 years
Building 63000 30 years

Above is an illustrative example. An opinion of expert valuers has to be sought for above information by companies for component accounting.

Replacement of components of PPE

  • Capitalize the cost of replacing major component as separate assets such as replacement of elevators
  • Net book value of old component is removed
  • Routine repair and maintenance expenditure is to be expensed as incurred

Author name: CA Shalini Tibe

IFRS: an improvement in accounting quality as well as corporate governance

With India going global, corporate management is now feeling the pressure for reforming accounting practices and level of transparency arising from lenders, regulatory agencies, financial analyst and above all board of directors who realize that it is the quality of information which will determine how efficiently they have discharged their responsibilities towards the good Corporate Governance.

There is no doubt in that the IFRS results into better accounting quality. There is more detailed disclosure under IFRS as compared to what companies do under Indian GAAP.

Every organization will have to review there business policy & procedures, valuation models, agreements etc. Instead in many organization most of them are carry forward from year to year.

Currently management of companies in India is not serious for convergence to IFRS but rather consider it as a label and not as a commitment to provide investors with higher quality financial information.

A European study on IFRS shows high governance quality companies will be more willing to apply the standard early, even if they have no incentive to do, as opposed to companies with worse governance practices.

But good news is that the regulator, ICAI and other bodies in financial markets have stepped up to respond to investor demands for improved corporate governance, compliance, and transparency by making corporate converging to IFRS by April 2011.

Author name: CA Shalini Tibe

MARKET RISK DISCLOSURES UNDER IFRS 7

 An entity possesses the risk if the fair value or cash flow of financial instrument will fluctuate as a result of change in market prices.

Following disclosures need to be shown in financial statement:

  • A sensitivity analysis of each type of market risk to which the entity is exposed showing how profit or loss and equity is affected.
  • The methods and assumption used
  • Sensitivities must be reasonably possible
  • The changes from the previous period in the methods and assumptions and the reason for changes

 

 There are three types of market risk that an IFRS 7 addresses:

Currency exchange Risk, Interest Rate Risk & Price Risk

Currency Exchange risk is risk that an entity possess due to fluctuation in fair value or future cash flow because of change in exchange rate.

Generally the Corporate with frequent sale and purchase transactions in foreign denominated currency are more exposed to currency risk. Also Bank Borrowings held in foreign currency is also exposed to this type of risk.

Presentation of Exchange currency risk will require quantitative data about the entity’s exposure to a risk at the reporting date as:

  Financial Assets Financial Liabilities
Short term exposure X X
Long term exposure X X

 Disclosure would include as to much will be the impact on Profit or Loss and Equity if Dollar appreciate by X % against Rupee

And

Impact on Profit or Loss and Equity if dollar depreciate by X % against Rupee

This has to be given in respect of all the currencies to which an entity is exposed to.

Interest Rate Risk is risk that an entity possesses due to fluctuation in fair value or future cash flow because of changes in market interest rate. Example: Variable rate Borrowings

Interest rate primarily relate with respect to cash, short term deposits and external borrowings. External borrowings are mostly linked to LIBOR rates while cash and short term borrowings are affected by local markets prevailing in country.

All this has to be continuously tracked by an entity and disclosure has to be made in financial statement.

Price Risk is risk that an entity possesses due to fluctuation in fair value or future cash flow because of changes in market conditions other than Interest rate and Currency Exchange risk. An example is quoted equity investments held

Moreover an organization has to disclose as part of Risk Management policy the method / model adopted to measure those risk with respect to changes in Currency price, Interest rate and price risk changes and underlying assumptions used

All these information are available with organization for internal reporting but matter of attention with respect to management of an organization is that there needs to be drawn thin line which comply requirement of IFRS 7 as well as sensitive information is not disclosed to competitors.

Thus Companies has to be informative and well versed with requirement of IFRS 7.

 Author name: CA Shalini Tibe

IFRS on Effective Interest Rate

Effective Interest Rate

Effective Interest Rate (EIR) is a new concept to the existing Indian GAAP.

TheEffective Interest Rate (EIR) method is a method of calculating the amortized cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period.

TheEffective Interest Rate (EIR)use in the allocation process is the rate that exactly discounts estimated future cash flows (receipts or payments) to the net carrying amount of the financial instrument through the expected life of this instrument.

EIR calculation is not the same as for Yield to Maturity (YTM). YTM is nothing but the Internal Rate of Return (IRR) of the bond. But Effective Interest Rate (EIR) may also include some non-interest components such as loan origination charges, processing fees as part of the effective rate.

Under IFRS income from Loans and receivables has to be recognized through application of effective interest rate.

An illustration given below gives better clarity for calculation of Effective Interest Rate (EIR).


Given Data:

Nominal value (payable in 5 years’ time) INR 1,250
Loan origination fee (inflow) INR 40
Transaction costs (directly related to loan origination, outflow) INR (90)
Net transaction costs (40-90) INR (50)
Fair value (net of transaction costs and fees) (1250+50) INR 1,300
Coupon Rate 4.70%


Calculation of INTERNAL RATE OF RETURN based on above data:

Year 0 -1300
Year 1 (1250*4.7%) 59
Year 2 (1250*4.7%) 59
Year 3 (1250*4.7%) 59
Year 4 (1250*4.7%) 59
Year 5 1250 + (1250*4.7%) 1309

Thus IRR will work out to 3.83%

Thus companies has to maintain Coupon rate as well as EIR which will practically for each transaction will be a major task and will add significantly  load on IT systems.

Author: CA Shalini Tibe, IFRS Consultant

Comparison of IFRS and Indian Accounting Standards

IFRS is a novel way of looking at accounting. IFRS is a “principle-based” standards rather than “rule-based” standard which are currently followed.

Under IFRS there is need to apply professional judgment consistent with intent and spirit of standards.

Various countries have adapted to IFRS in different ways, often embedding local cultures and that is why there are no standard rules; only broad principles which define the outer boundary of accounting.

IFRS fixed assets rules questions valuation on historical cost basis, questions application of uniform rates of depreciation on all components of a fixed asset as also the amortization of intangible assets such as goodwill or patents.

In IFRS off-balance sheet transactions had been made as part of accounts; it brings a whole new meaning to the reported numbers.

It defines control of entities not through percentage of holdings but by the decision-making power inherent in the parent company.

Top management has, thus, to work out new targets of earnings depending on the direction of impact caused by the new accounting principles and recognising the IFRS GAAP differences.

Earnings will no more be a steady figure that can be easily targeted depending as it is not just on sales and expenses but also changes in asset values and the ability to measure those correctly.

To be adequately prepared for IFRS, senior management has to also shape up by analyzing which management models and strategies will work best for their organizations facing a huge level of turbulence and thus should prepare an IFRS roadmap.


More >

Challenges for implementation of IFRS

Key Practical Challenges for implementation of IFRS in India for Banking Industry

No stable Platform: There are many changes / amendment taking place for most of the standards from International Accounting Standard Board there has been no stable platform ready for banks.

Training: All Stakeholders has to be conversant and shall be able to understand and interpret Financials prepared as per IFRS. Training to personnel in an organization is a most crucial.

Judgment: Banks in India are subject to regulatory guidelines provided by regulator i.e. RBI where as under IFRS in most of the areas management judgment is required in framing accounting policy and procedures.

Fair Value: There is extensive use of fair value under IFRS and for assessment of fair value there is need for specialization which is seldom.

Data Capture: There has been modification in reporting system under IFRS and also there has been changes in recognition criteria and an extensive disclosure requirement will require new data and also extraction of historical data for retrospective application will be difficult.

Consolidation of Accounts: IFRS requires data requirement from subsidiary, joint ventures and associates for consolidation purpose at every reporting date. Also policies and procedures have to be consistent throughout the group.

Author : CA Shalini Tibe

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