Indian Accounting Standard 101, First-time Adoption of Indian Accounting Standards
Ind AS 101 prescribes the accounting principles for first-time adoption of Indian Accounting Standards (Ind AS). It lays down various ‘transition’ requirements when a company adopts Ind AS for the first time, i.e., a move from Accounting Standards (Indian GAAP) to Ind AS. Conceptually, the accounting under Ind AS should be applied retrospectively at the time of transition to Ind AS. However, to ease the process of transition, Ind AS 101 provides certain exemptions from retrospective application of Ind ASs. The exemptions are broadly categorised into those which are mandatory in nature (i.e., cases where the company is not allowed to apply Ind AS retrospectively) and those which are voluntary in nature (i.e., the company may elect not to apply certain requirements of Ind AS retrospectively). Ind AS 101 also prescribes presentation and disclosure requirements to explain the transition to the users of financial statements including explaining how the transition from Indian GAAP to Ind AS affected the company’s financial position, financial performance and cash flows. Ind AS 101 does not provide any exemption from the disclosure requirements in other Ind ASs.
Ind AS 101 defines various terms used in the Standard. These are contained in Appendix A to Ind AS 101. These definitions are important to understand the requirements of Ind AS 101. Some of the key definitions are given below:
Date of Transition to Ind AS: The beginning of the earliest period for which an entity presents full comparative information under Ind AS in first Ind AS financial statements.
Deemed Cost: An amount used as a surrogate for cost or depreciated cost at a given date. Subsequent depreciation or amortisation assumes that the entity had initially recognised the asset or liability at the given date and that its cost was equal to the deemed cost.
First Ind AS Financial Statements: The first annual financial statements in which an entity adopts Ind AS, by an explicit and unreserved statement of compliance with Ind ASs.
First Ind AS Reporting Period: The latest reporting period covered by an entity’s first Ind AS financial statements.
First-time adopter: An entity that presents its first Ind AS financial statements.
Opening Ind AS Balance Sheet: An entity’s balance sheet at the date of transition to Ind ASs.
Previous GAAP: The basis of accounting that a first-time adopter used for its statutory reporting requirements in India immediately before adopting Ind ASs. For instance, companies required to prepare their financial statements in accordance with Section 133 of the Companies Act, 2013, shall consider those financial statements as previous GAAP financial statements.
To ensure that an entity’s first Ind AS financial statements, and its interim financial reports for part of the period covered by those financial statements, contain high quality information that:
(a) is transparent and comparable over all periods presented;
(b) provides a suitable starting point for accounting in accordance with Ind ASs; and
(c) its cost does not exceed the benefits.
An entity shall apply Ind AS 101 in its first Ind AS financial statements and each interim financial report, if any, that it presents in accordance with Ind AS 34, Interim Financial Reporting, for part of the period covered by its first Ind AS financial statements.
Opening Ind AS Balance Sheet
An entity shall prepare and present an opening Ind AS Balance Sheet at the date of transition to Ind ASs. This is the starting point for its accounting in accordance with Ind ASs.
An entity shall use the same accounting policies in its opening Ind AS Balance Sheet and throughout all periods presented in its first Ind AS financial statements. These accounting policies should comply with each Ind AS effective at the end of its first Ind AS reporting period.
Subject to mandatory exceptions and voluntary exemptions (if elected) an entity shall, in its opening Ind AS Balance Sheet:
(a) recognise all assets and liabilities whose recognition is required by Ind ASs;
(b) not recognise items as assets or liabilities if Ind ASs do not permit such recognition;
(c) reclassify items that it recognised in accordance with previous GAAP as one type of asset, liability or component of equity, but are a different type of asset, liability or component of equity in accordance with Ind ASs; and
(d) apply Ind ASs in measuring all recognised assets and liabilities.
The accounting policies in opening Ind AS Balance Sheet may differ from those that it used for the same date using previous GAAP. The resulting adjustments arise from events and transactions before the date of transition to Ind ASs, which shall be recognised directly in retained earnings (or, if appropriate, another category of equity) at the date of transition to Ind ASs.
In preparing Ind AS estimates at the date of transition to Ind ASs retrospectively, the entity must use the inputs and assumptions that had been used to determine previous GAAP estimates as of that date (after adjustments to reflect any differences in accounting policies). The entity is not permitted to use information that became available only after the previous GAAP estimates were made except to correct an error.
Presentation and Disclosure
Ind AS 101 does not provide exemptions from the presentation and disclosure requirements in other Ind ASs. This Ind AS requires that an entity’s first Ind AS financial statements shall include at least three balance sheets, two statements of profit and loss, two statements of cash flows and two statements of changes in equity and related notes, including comparative information for all statements presented.
Ind AS 101 requires disclosures that explain how the transition from previous GAAP to Ind AS affected the entity’s reported financial position, financial performance and cash flows. This includes:
1. reconciliations of equity reported under previous GAAP to equity under Ind AS both (a) at the date of transition to Ind ASs and (b) the end of the last annual period reported under the previous GAAP;
2. reconciliations of total comprehensive income for the last annual period reported under previous GAAP to total comprehensive income under Ind ASs for the same period;
3. explanation of material adjustments that were made, in adopting Ind ASs for the first time, to the balance sheet statement of comprehensive income and statement of cash flows;
4. if errors in previous GAAP financial statements were discovered in the course of transition to Ind ASs, those must be separately disclosed;
5. if the entity recognised or reversed any impairment losses in preparing its opening Ind AS balance sheet these must be disclosed; and
6. appropriate explanations if the entity has elected to apply any of the specific recognition and measurement exemptions permitted under Ind AS 101– for instance, if it used fair values as deemed cost.
Explanation of transition to Ind ASs
Ind AS 101 requires that an entity should explain how the transition from previous GAAP to Ind ASs affected its reported balance sheet, financial performance and cash flows.
Exceptions to the retrospective application of other Ind ASs
Ind AS 101 prohibits retrospective application of some aspects of other Ind ASs, i.e., provides mandatory exception in relation to the following:
- derecognition of financial assets and financial liabilities;
- hedge accounting;
- non-controlling interests;
- classification and measurement of financial assets;
- impairment of financial assets;
- embedded derivatives; and
- government loans.
An entity’s estimates in accordance with Ind ASs at the date of transition to Ind ASs should be consistent with estimates made for the same date in accordance with previous GAAP (after adjustments to reflect any difference in accounting policies), unless there is objective evidence that those estimates were in error.
Further, Ind AS 101 provides the optional exemptions in context of some requirements of Ind ASs where it has been felt that the retrospective application could be difficult or could result in undue cost exceeding any benefits to users. An entity shall not apply these exemptions by analogy to other items. An entity may elect to use one or more of the exemptions in relation to the following:
- business combinations;
- share-based payment transactions;
- insurance contracts;
- deemed cost;
- cumulative translation differences;
- long term foreign currency monetary items;
- investments in subsidiaries, joint ventures and associates;
- assets and liabilities of subsidiaries, associates and joint ventures;
- compound financial instruments;
- designation of previously recognised financial instruments;
- fair value measurement of financial assets or financial liabilities at initial recognition;
- decommissioning liabilities included in the cost of property, plant and equipment;
- financial assets or intangible assets accounted for in accordance with Appendix D to Ind AS 115 (Service Concession Arrangements);
- borrowing costs;
- extinguishing financial liabilities with equity instruments;
- severe hyperinflation;
- joint arrangements;
- stripping costs in the production phase of a surface mine;
- designation of contracts to buy or sell a non-financial item;
- non-current assets held for sale and discontinued operations; and
- foreign currency transactions and advance consideration.