INDIAN ACCOUNTING STANDARD 101: FIRST-TIME ADOPTION OF IND AS

Ind AS 101 prescribes the accounting principles for first – time adoption of 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.

Definitions:

• 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 AS. This means compliance with all Ind-AS, partial compliance is not enough to  make entity Ind AS compliant.
• First–time adopter: An entity that presents its first Ind AS financial statements, is known as first time adopter.
• Opening Ind AS Balance sheet: An entity’s balance sheet at the date of transition to Ind AS.
• Date of Transition to Ind AS: The beginning of the earliest period for which an entity presents full comparative information under Ind AS is first Ind AS Financial statements.
• First Ind AS reporting period: The latest reporting period covered by an entity’s first Ind AS financial statements.

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 has given certain exemptions from retrospective application of Ind AS.
The exemptions are  broadly categorized  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).

Mandatory (Exceptions to  the  retrospective  application  of  other Ind AS)

• Estimates: An entity’s estimates in accordance with Ind AS at the date of transition to Ind AS shall 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.
• De-recognition of financial assets and liabilities: A first-time adopter shall apply the derecognition requirements in Ind AS 109 prospectively for transactions occurring on or after the date of transition to Ind AS. An entity may apply the derecognition requirements in Ind AS 109 retrospectively from a date of the entity’s choosing, provided that the information needed to apply Ind AS 109 to financial assets and financial liabilities derecognised as a result of past transactions was obtained at the time of initially accounting for those transactions.
• Hedge accounting: At the date of transition to Ind AS an entity shall, measure all derivatives at fair value; and eliminate all deferred losses and gains arising on derivatives that were reported in accordance with previous GAAP as if they were assets or liabilities.
  An entity shall not reflect in its opening Ind AS Balance Sheet a  hedging relationship of a type that does not qualify for hedge accounting in accordance with Ind AS 109 (for example, many hedging relationships where the hedging instrument is a  stand-alone written option or  a net written option;or
  Where the hedged item is a net position in a cash flow hedge for another risk than foreign currency risk). However, if an entity designated a net position as a hedged item in accordance with previous GAAP, it may designate as a hedged item in accordance with Ind AS an individual item within that net position, or a net position if that meets the requirements in Ind AS 109, provided that it does so not later than the date of transition to Ind AS.
  Ind AS 109 to discontinue hedge accounting. Transactions entered into before the date of transition to Ind AS shall not be retrospectively designated as hedges.
• Non-controlling interests:
  A first-time adopter shall apply the following requirements of Ind AS 110 prospectively from the date of transition to Ind AS:-Total comprehensive income is attributed to the owners of the parent and to the non- controlling interests even if this results in the non-controlling interests having a deficit balance;
  Accounting for changes in the parent’s ownership interest in a subsidiary that do not result in a loss of control; and
  Accounting for a loss of control over a subsidiary, and the related requirements of Ind AS 105, Non-current Assets Held for Sale and Discontinued operations.
  However, if a first-time adopter elects to apply Ind AS 103 retrospectively to past business combinations, it shall also apply Ind AS 110 from that date.
• Classification and measurement of financial assets: An entity shall assess whether a financial asset meets the conditions of Ind AS 109 on the basis of the facts and circumstances that exist at the date of transition to Ind AS.
  If it is impracticable to assess a modified time value of money element in respect of financial asset, an entity shall assess the contractual cash flow characteristics of that financial asset on the basis of the facts and circumstances that existed at the date of transition to Ind AS without taking into account the requirements related to the modification of the time value of money element. An entity shall disclose the carrying amount at the reporting date of such financial assets until those financial assets are derecognized.
  If it is impracticable to assess whether the fair value of a prepayment feature is insignificant on the basis of the facts and circumstances that exist at the date of transition to Ind AS, an entity shall assess the contractual cash flow characteristics of that financial asset on the basis of the facts and circumstances that existed at the date of transition to Ind AS without taking into account the exception for prepayment features. An entity shall disclose the carrying amount at the reporting date of such financial assets until those financial assets are derecognised.
  If it is impracticable (as defined in Ind AS 8) for an entity to apply retrospectively the effective interest method in Ind AS 109, the fair value of the financial asset or the financial liability at the date of transition to Ind AS shall be the new gross carrying amount of that financial asset or the new amortised cost of that financial liability at the date of transition to Ind AS.

• Impairment of financial assets: An entity shall apply the impairment requirements of Ind AS 109 retrospectively subject to:
  At the date of transition to Ind AS, an entity shall use reasonable and supportable information that is available without undue cost or effort to determine the credit risk at the date that financial instruments were initially recognized.
  An entity is not required to undertake an exhaustive search for information when determining, at the date of transition to Ind AS, whether there have been significant increases in credit risk since initial recognition.
  If, at the date of transition to Ind AS, determining whether there has been a significant increase in credit risk since the initial recognition of a financial instrument would require undue cost or effort, an entity shall recognize a loss allowance at an amount equal to lifetime expected credit losses at each reporting date until that financial instrument is derecognised, unless that financial instrument is low credit risk at a reporting date.
• Embedded derivatives: A first-time adopter shall assess whether an embedded derivative is required to be separated from the host contract and accounted for as a derivative on the basis of the conditions that existed at the later of the date it first became a party to the contract and the date a reassessment is required by Ind AS 109.
• Government loans: A first-time adopter shall classify all government loans received as a financial liability or an equity instrument in accordance with Ind AS 32, Financial Instruments: Presentation.A first-time adopter shall apply the requirements in Ind AS 109, Financial Instruments, and  Ind AS 20, Accounting for Government Grants and Disclosure of Government Assistance, prospectively to government loans existing at the date of transition to Ind AS and shall not recognize the corresponding benefit of the government loan at a below-market rate of interest as a government grant.
  Note: An entity may apply the requirements in Ind AS 109 and Ind AS 20 retrospectively to any government loan originated before the date of transition to Ind AS, provided that the information needed to do so had been obtained at the time of initially accounting for  that loan.