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.

Optional (exemptions from application of other Ind AS)

• Business combination: Ind AS 103 need not be applied to combinations before date of transition. But, if one combination is restated, all subsequent combinations are restated.
  When the exemption is used:
  *There won’t be any change in classification.
  *Assets and liabilities of past combination measured at carrying amount (deemed cost).
  *Assets and liabilities measured at fair value restated at date of transition- adjusted retained earnings.
  Note: If an asset acquired, or liability assumed, in a past business combination was not recognized in accordance with previous GAAP, it does not have a deemed cost of  zero in the opening Ind AS Balance Sheet. Instead, the acquirer shall recognize and measure it in its Consolidated Balance Sheet on the basis that Ind AS would be required in the Balance Sheet of the acquiree.
• Insurance contracts: Ind AS 104 will apply for annual periods beginning on or after date of transition to Ind AS. If an insurer changes its accounting policies for insurance liabilities, it is permitted to reclassify some or all of its financial assets as FVTPL (fair value through profit or loss).
• Share based payment transactions: Apply Ind AS 102, Share-based Payment, to equity instruments that vested before date of transition to Ind AS. However, a first-time adopter may apply Ind AS 102 to equity instruments, if it has disclosed publicly the fair value of those equity instruments, determined at the measurement date. It is encouraged to apply Ind AS 102 to liabilities arising from share-based payment transactions that were settled before the date of transition to Ind AS.
• Deemed cost for PPE and intangible assets: If an entity uses fair value in its opening Ind AS Balance Sheet as deemed cost for an item of property, plant and equipment, an intangible asset or a right-of-use asset,  the entity’s first Ind AS financial statements shall disclose, for each line item in the opening Ind AS Balance Sheet:
  The aggregate of those fair values; and
  The aggregate adjustment to the carrying amounts reported under previous GAAP.
  A first-time adopter may elect to use a previous GAAP revaluation of an item of property,  plant and equipment at, or before, the date of transition to Ind AS as deemed cost at the date of the revaluation, if the revaluation was, at the date of the revaluation, broadly comparable to: fair value; or cost or depreciated cost in accordance with Ind AS, adjusted to reflect, for example, changes in a general or specific price index.
  For Investment Property: Ind AS 40, Investment Property permits only the cost model. Therefore, option of availing fair value as deemed cost for investment property is not available for first time adopters of Ind AS for its financial statements.
• Cumulative translation difference:
  No need to:
  Recognize some translation differences in other comprehensive income.
  Reclassify cumulative translation differences for foreign operation from entity to profit or loss as part of gain or loss on its disposal.
  If first time adopter uses this exemption:
  Cumulative translation differences set to zero for all foreign operations. Gain/ loss on subsequent disposal of a foreign operation shall exclude these differences that arose before transition. A first time adopter may continue the policy adopted for accounting for exchange differences arising from long term monetary foreign currency items, as per previous GAAP.
• Investment in subsidiaries, joint ventures and associates: It is measured at cost, the cost may be : Cost determined in accordance with Ind AS 27 or Deemed cost (which may be fair value or previous GAAP carrying amount).
• Compound financial instruments: A first time adopter need not split the compound financial instruments into separate liability and equity component, if liability component is not outstanding as at transition date.
• Fair value measurement of financial assets or financial liabilities: An entity may apply requirement of Ind AS 109 prospectively to transactions entered into on or after the date of transition.
• Decommissioning liabilities included in Property Plant Equipment: An entity need not comply with the requirement for changes in such liabilities that accounted before the date of transition. However, entity may measure liability as at the transition date as per Ind AS 37 and recognize its effect.
• Designation of previously recognized financial instruments: An entity may designate any financial liability or asset at fair value through profit or loss at transition date. Investment in equity may be  designated at fair value through other comprehensive income at transition date. If retrospectively application of effective interest method or impairment requirement is impracticable – fair value shall be new amortised cost of financial asset on the date of transition.
• Existing financial liabilities with equity instruments: A first time adopter may apply Ind AS 109 from the date of transition to Ind AS.
• Severe Hyperinflation: In hyper-inflationary economy, when an  entity’s date of  transition to Ind AS, is on, or after,  the functional currency normalization date, then all assets and liabilities held before the functional currency normalization date may be measured at fair value on the date of  transition. This fair value may be used as  deemed cost of those assets and liabilities in the opening Ind AS statement of financial position.
• Leases: A first time adopter may determine whether an arrangement existing at the date of transition to Ind AS contain a lease (including classification of each land and building element as finance or an operating lease) on the basis of facts and circumstances existing on the date of transition.
  
  A lessee which is a first-time adopter of Ind AS shall recognize lease liabilities and right-of-use assets, by applying the following approach to all of its leases at the date of transition to Ind AS:
  (a) measure a lease liability at the present value of the remaining lease payments discounted using the lessee’s incremental borrowing rate at the date of transition to Ind AS;
  (b) measure a right-of-use asset on a lease-by-lease basis either at: its carrying amount as if Ind AS 116 had been applied since the commencement date of the lease, but discounted using the lessee’s incremental borrowing rate at the date of transition to Ind AS; or an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognized in the Balance Sheet immediately before the date of transition to Ind AS.
  (c) apply Ind AS 36 to right-of-use assets.
  
  A first-time adopter that is a lessee may do one or more of the following at the date of transition to Ind AS, applied on a lease-by lease basis:
  1. apply a single discount rate to a portfolio of leases with reasonably similar characteristics.
  2. elect not to apply the above requirements given in (a) to (c) to leases for which the lease term ends within 12 months of the date of transition to Ind AS. Instead, the entity shall account for (including disclosure of information about) these leases as if they were short-term leases accounted as per Ind AS 116.
  3. elect not to apply the above requirements given in (a) to (c) to leases for which the underlying asset is of low value. Instead, the entity shall account  for (including disclosure of information about) these leases as per Ind AS 116.
  4. exclude initial direct costs from the measurement of the right-of-use asset at the date of transition to Ind AS.
  5. Use hindsight, such as in determining the lease term if the contract contains options to extend or terminate the lease.

• Financial asset or intangible assets accounted for service concession arrangements: Change in accounting policy to be  accounted retrospectively except for amortization policy in tangible assets relating to toll roads adopted as per previous GAAP. If impracticable for an operator to apply the requirements of the Ind AS retrospectively at the date of transition to Ind AS, it shall recognize financial assets and intangible assets that existed at the date of transition to Ind AS using the previous carrying amounts.
• Designation of contracts to buy or sell a non-financial item: An Entity may designate at the date of transition to Ind AS, contract that already exist on that date as measured at fair value through profit or loss but they meet the requirements of Ind AS 109 at the date and the entity designate all similar contracts.
• Striping costs in the production of surface mine: A first time adopter may apply appendix to Ind AS 16 stripping costs in the production phase of a surface mine from the date of transition to Ind AS. As at the transition date to Ind AS, any previously recognized asset balance that resulted from stripping activity undertaken during the production phase shall be reclassified as a part of an existing asset to which the stripping activity related, to the extent that there remains an identifiable component of the core body with which the predecessor stripping asset can be associated.
• Non-current assets held for sale and discounted operations:
  A first time adopter can:
  Measure non current assets held for sale or discontinued operation at the lower carrying value and fair value less cost to sell at the date of transition to Ind AS  in accordance with Ind AS 105; and
  Recognize directly in retain earnings any difference between that amount and the carrying amount of those assets at the date of transition to Ind AS determined under the entity’s previous GAAP.
• Assets and liabilities of subsidiaries, associates and joint ventures:
  If a subsidiary becomes a first-time adopter later than its parent, the subsidiary shall measure its assets and liabilities at either:
  *The carrying amounts that would be included in the parent’s consolidated financial statements, based on the parent’s date of transition to Ind AS. or
  *The carrying amounts required by Ind AS 101, based on the subsidiary’s date of transition to Ind AS.
  If an entity becomes first time adopter later than its subsidiary, the entity shall measure the assets and liabilities at the subsidiary at the same carrying amounts as in the financial statements of the subsidiary, after adjusting for consolidation and equity accounting adjustments and for the effects of the business combination in which the entity acquired the subsidy.
• Revenue from Contract with Customers:
  Any of the following exemption may be used in applying Ind AS 115 retrospectively:
  *For completed contracts: Need not restate contracts that begin and end within the same annual reporting period;
  *For completed contracts that have variable consideration: Option to use the transaction price at the date the contract was completed rather than estimating variable consideration amounts in the comparative reporting periods;
  *For all reporting periods presented before the beginning of the first Ind AS reporting period, an entity need not disclose the amount of the transaction price allocated to the remaining performance obligations and an explanation of when the entity expects to recognize that amount as revenue.
• Joint arrangements:
  Transition from Proportionate Consolidation to Equity Method:
  *To measure initial investment at transition date at the aggregate of carrying amount of assets and liabilities that had previously proportionately consolidated including goodwill arising on acquisition.
  *To test the investment for impairment.
  *If aggregate of all previously recognized assets/liabilities results in negative asset and if having legal or constructive obligation than recognize corresponding liability otherwise adjust retained earnings.
  
  Transition from Equity Method to accounting for assets and liabilities:
  *To derecognize previous investment and recognize share of each asset and liability in respect of its interest in joint operation.
  *Difference between amount as per Ind AS and previously recognized;
  (a) If carrying amount of previous investment is lower:
  Offset against goodwill relating to investment and thereafter retained earning
  (b) If carrying amount of previous investment is higher: Adjust against retained earning.
  
  Transitional provisions in entity’s Separate FS:
  *To derecognise the investment and recognize assets and liabilities as per transition  from equity method to accounting for assets and liabilities.
  *Provide reconciliation between amount derecognized, recognized and adjustment to retained earnings.

PRESENTATION AND DISCLOSURE

1. Comparative Information:

• Ind AS does not require historical summaries to comply with the recognition and measurement requirement of Ind AS.
• In any financial statements containing historical summaries or comparative information in accordance with previous GAAP, an entity shall:
  *Label the previous GAAP information prominently as not being prepared in accordance with Ind AS; and
  *Disclose the nature of the  main  adjustments  that  would  make  it  comply  with Ind AS. An entity need not quantify those adjustments.

2. Explanation of transition to Ind AS:

• Reconciliation of:
  Equity from previous GAAP to Ind AS at transition and last year end;
  Last year’s total comprehensive income under previous GAAP to Ind AS.
• Sufficient detail to understand adjustments to each line item.
• Reconciliation to distinguish correction of errors identified during transition from change in accounting policy.
• Fair value as deemed cost and the amount of the adjustment.
• Ind AS 36 disclosures for impairment during transition.
• If adopted first time exemption option, to disclose the fact and accounting policy until such time those PPE, Intangible Assets, investment properties or intangible assets significantly depreciated/impaired/derecognized.
• Interim financial reports to include reconciliation with equity and profit or loss under previous GAAP.
• Further information to comply with Ind AS 34.