IFRS Q & ANS

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CHAPTER 2

International Financial ReportingStandards, their Interpretations and

US GAAPs - An Overview

BASIC CONCEPTS

IFRS are considered a "principles-based" set of standards. In fact, they establish broad rules

rather than dictating specific treatments.

International Financial Reporting Standards comprise:

International Financial Reporting Standards (IFRS) - standards issued after 2001 International Accounting Standards (IAS) - standards issued before 2001 Interpretations originated from the International Financial Reporting Interpretations

Committee (IFRIC) - issued after 2001

Standing Interpretations Committee (SIC) - issued before 2001 Framework for the Preparation and Presentation of Financial Statements

Question 1

Briefly explain the following terms:

(i) IFRS

(ii) Convergence of Accounting Standards with IFRS

(iii) Need for IFRS.

An sw er

(i) IFRS: The term IFRS refers to the International Financial Reporting Standards issued by

International Accounting Standard Board (IASB). IFRS is a set of international accountingstandards stating how particular types of transactions and other events should be

reported in financial statements.

International Financial Reporting Standards (IFRS) are the globally accepted accountingstandards adopted by International Accounting Standard Board (IASB) earlier known

International Accounting Standard Committee (IASC).

IFRSs being principle-based standards have distinct advantage that the transactions can

not be manipulated easily to achieve a particular accounting.

The Institute of Chartered Accountants of India

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IFRS, their Interp retations and US GAAPs- An Overview 2.2

The basic objective of IFRS are as follows:

to develop, in the public interest, a single set of high quality, understandable andenforceable global accounting standards that require high quality, transparent and

comparable information in financial statements and other financial reporting to helpparticipants in the world's capital markets and other users make economic

decisions;

to promotethe use and rigorous application of those standards;It also encompasses the International Accounting Standards (IAS) issued by theInternational Accounting Standard Committee (IASC). Interpretations of IASs and IFRSs

are developed by the International Financial Reporting Interpretations Committee

(IFRIC). IFRIC is the new name for the Standing Interpretations Committee (SIC)approved by the IASC Foundation Trustees in March 2002. IFRS includes these

interpretations also.

(ii) Convergence of Account ing Standards with IFRS: In general, convergence of

Accounting Standards (AS) with International Financial Reporting Standards (IFRS)means to achieve harmony with IFRS. The term convergence can be considered as to

design and maintain national accounting standards in a way that financial statements

prepared in accordance with rational AS are in convergence with IFRS. IAS I requirefinancial statements to comply with all requirements of IFRS. This does not mean that

IFRS should be adopted word by word. The local standard setters can add disclosurerequirements or can remove some requirements which do not create non compliance with

IFRS. Thus, convergence with IFRS means adoption of IFRS with exceptions wherevernecessary. Thus, as today IFRS is being used in over 100 countries and it is expected

that by 2014, all major countries will have adopted IFRS to some extent, so it wasimperative for India also to adopt IFRS to ensure harmony in preparation and

presentation of Financial Statements.

(iii) Indian Accounting Standards and Generally Accepted Accounting Principles (GAAP) are

sufficient, relevant and clear when compared to global standards. But with theglobalization of business requiring foreign capital and investors, there is need forfinancial reporting standards to be acceptable to most of the countries including India.

IFRS are recognised in many parts of the world including the European Union, HongKong, Australia, Russia, South Africa, Singapore and Pakistan. US is also taking steps

to converge its GAAPs with IFRS.It has also been recognised that the use of the IFRS concepts can considerable improve

the quality of financial reporting and boost international investors confidence. IFRS aremore flexible, dynamic and responsive to changes and can be applied to all types of

Industries across many countries.


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2.3 Financial Reporti ng

Question 2

Write short note on some key differences between IFRS, US GAAP and AS (applicable in India)

with respect to:

(i) Fixed Assets

(ii) Changes in Accounting Policy and Prior period items.

(iii) Inventory

An sw er

(i) Fixed Assets

IFRS US GAAPs ASDefinition Tangible Items that are

held for use in the

production or supply ofgoods or service, for

rentals to others, or foradministrative

purpose; and areexpected to be used

during more than one

period.

Fixed assets arecarried at historical

cost. Only downwardrevaluation is

permitted forimpairment.

Exchange fluctuationson loans taken for

purchase of fixedassets are expensed

when incurred.

Fixed Asset is anasset held with the

intention of being usedfor the purpose of

producing or providinggoods or services and

is not held for sale inthe ordinary course of

business.

Initial

Measurement

of cost

Initial measurement of

cost also includes

a) Fair value gains orlosses on qualifying

cash flow hedgesrelating to thepurchase of Property,

Plant and Equipment

(PPE) in a foreigncurrency

b) Cost ofdismantling and

removing the item orrestoring the site on

which PPE is located.

Similar to IFRSexcept hedge gainsor losses on

qualifying cash flow

hedges are notincluded

No specific guidelineon the Measurement ofgains/ losses on

qualifying cash flow

hedges andcapitalization ofdismantling and site

restoration cost

Capitalization It mandates

componentAccounting. Each

Does not require a

component approach

for depreciation

AS 10 does not require

full adoption ofcomponent


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major part of the plantto be depreciated

separately

Accounting. It isstated that accountingof asset may be

improved throughallocation of cost to

various parts of the

asset

Determinationof

Depreciation

The depreciationamount of an item of

PPE is allocated on asystematic basis over

its useful life.

Similar to IFRS. Higher of the following:

a) Depreciation as

per the rate specifiedin the Schedule XIV of

the Companies Act.

b) Depreciation asdetermined based onestimated useful life of

the assets

Depreciation

Method

A variety ofdepreciation methods

can be used toallocate the

depreciable amount onsystematic basis over

its useful life.

Similar to IFRS. Either SLM or WDV

can be followed.

Change inDepreciation

Method

Changes in thedepreciation methodare considered as

change in accountingestimate. Prospective

effect in current period

is made.

Similar to IFRS. Changes in thedepreciation methodare considered as

change in accountingPolicies and effects to

be quantified anddisclosed.

Retrospective effect incomputation of

depreciation is given.

Review ofUseful Lifeand Residual

Value

Re-assessment ofuseful life and residualvalue is required at

least at each financial

year end

Similar to IFRS. AS 10 does not specifyany such requirement.

Subsequent

Costs

Cost of replacement is

to be capitalized. The

Similar to IFRS. Replacement cost is

expensed. No


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carrying amounts ofthose parts that arereplaced is to be

derecognized.

requirement fordecapitalizing thecarrying amount of

replaced items

Major

inspectioncost andoverhaul

expenditure

The cost of major

inspection andoverhaul expenses are

to be capitalized.

Similar to IFRS. The expenditure thatincreases the benefit

over previouslyassessed capacity is

capitalized. Theinspection cost and

overhaul expenses areexpensed.

Revaluation If an entity adopts the

revaluation model, revaluation is required tobe made with regular

period to ensure that

the carrying amountdoes not differ

materially from thatwhich would be

determined using fairvalue at the end of the

reporting period.

Similar to IFRS. No specific

requirement onfrequency of

revaluation.

Group

Revaluation

If an item of PPE isrevalued, then the

entire class of PPE to

which that assetbelongs to be

revalued.

Similar to IFRS. Revaluation Approach

is adhoc in nature.

Depreciationon revaluation

Depreciation onrevalued portion

cannot be recouped

out of revaluationreserve.

Depreciation onrevalued portion can

be recouped out of

revaluation reserve.


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(ii) Changes in Accoun ting Policy and Prior period items

IFRS US GAAPs AS

Definition ofPrior Period

Errors

Broad definition ofPrior Period items

includes all the itemsin the financial

statements.

AS 5 covers onlyIncome and Expenses

in the definition of prior

period items.

Prior PeriodErrors

Prior Period errors areto be correctedretrospectively and

restate the openingbalances of assets,

liability and equity

Reported as a priorperiod adjustment incurrent year results.

Comparatives are notrequired to restate.

Similar to IFRS.

Extraordinary

Item

It prohibits disclosureof any items as

Extraordinary Items.

Separate disclosure is

required as per AS 5.

Impending

Changes

It requires disclosureof any impending

change in accountingpolicy.

Similar to IFRS. It does not require

such Disclosure.

Ab sence ofstandard or

interpretation

It provides specificguidance on theselection of accounting

policies where there isno IFRS or

interpretation thatspecifically applies to

a transaction.

No specific guidanceunder AS 5.

(iii) Inventory

IFRS US GAAPs AS

Scope IAS 2 includesprovisions relating to

the work in progress of

a service provider.

Similar to IndianGAAP. AS 2 excludes work inprogress arising in the

normal course of

business of serviceprovider. Hence thereis no guidance for the

same.


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Ap pl icabil i ty IAS 2 does not applyto inventories held by

commodity traders.

Similar to Indian

GAAP.

There is no scope

exemption in AS 2 forany inventory held by

commodity traders.

Inventory

Valuation

Inventories are carriedat the lower of cost or

net realizable value.

Lower of cost ormarket subject to

upper/lower limit of

NRV.

Inventories are carriedat the lower of cost or

net realizable value.

Frequency ofAssessm ent

of NRV

A new assessment ofNet Realizable Valueis required to be made

in each Reporting

period

No specific guidance inAS 2.

Write Down Reversal is requiredfor a subsequentincrease in value of

inventory previously

written down.

Reversal of write

down of inventory is

not permitted.

Reversal is required for

a subsequent increasein value of inventory

previously write down.

Cost Formula

Ap pl icati on

The following costformula allowed :

a) FIFO Methodb) Weighted

Average Cost

LIFO method is not

allowed.



Average

Cost

c) LIFO Method



Average Cost

LIFO method is not

allowed.

Consistencyin cost

formula

application

The same cost formulais used for allinventories that have a

similar nature and useto the entity.

The same costformula is used for allinventories that have

a similar nature anduse to the entity.

Not specified. Howeverconsistency is afundamental principle.

Cost of

Inventory

Cost of inventoryexcludes only Selling

Cost, not Distribution

Cost.

Similar to AS 2. Cost of inventory doesnot include Selling &

Distribution Cost as

per AS 2.


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PurchaseunderDeferredSettlementTerms

Difference between thepurchase price ofinventory for normalcredit terms and theamount paid fordeferred settlementterms is recognized asinterest Expense.

Inventories purchasedon deferred settlementterms are not explicitlydealt within theaccounting standardon inventories.

Disclosure

Requirements

Disclosurerequirements are sameexcept the following :

a) Any write downand reversal of anywrite down

b) Circumstancesthey led to reversal ofa write down

c) Carrying amountof inventory that arepledged as securities.

No specificrequirements fordisclosure.

Question 3

State the treatment of the following items with reference to Accounting Standards (ASapplicable in India) and International Financial Reporting Standards (IFRS):

(i) Extra ordinary items

(ii) Contingencies.

An sw er

Acco unt ing Standard s International Financial ReportingStandards

Extraordinary Items

Events or transactions, clearly distinct from theordinary activities of the entity, which are not expected

to recur frequently and regularly, are termed as extra-ordinary items. Disclosure of the nature and amount ofsuch item is required in the income statement toperceive the impact of current and future profits.

Not allowed.

Contingencies

Contingent Liabilities are disclosed unless theprobability of outflows is remote.

Contingent gains are neither recognized nor disclosed.

Unrecognized possible losses andpossible gains are disclosed.


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Question 4

State the treatment of the following items with reference to Accounting Standards (applicable

in India) and IFRS:

(i) Discontinued operations definition and measurement

(ii) Acquired intangible assets.

An sw er

Treatment und er Indian Acco untin g Standard and IFRS

Acco unt ing Standards IFRS

(i) Discontinuingoperation-definition

and measurement

Operations and cash flowsthat can be clearlydistinguished for financial

reporting and represent majorline of business or

geographical area of

operations are discontinuedoperations. Measurement ofdiscontinued operations is

based on AS 24.

Definition of discontinuedoperations under IFRS issimilar to Indian Accounting

Standards. However, it alsoincludes a subsidiary

acquired exclusively with a

view to resale. Discontinuedoperations are measured atlower of carrying amount and

fair value less cost to sell.

(ii) Acqui red in tang ib leassets

If recognition criteria aresatisfied then it can becapitalized. All intangibles areamortized over useful life with

rebuttable presumption of not

exceeding 10 years.Revaluations are not

permitted.

If recognition criteria aresatisfied then it can becapitalized. It is amortizedover useful life. Intangibles

assigned an indefinite useful

life are not amortized butreviewed at least annually for

impairment. Revaluations arepermitted in rare

circumstances.

Question 5

State the treatment of the following items with reference to Accounting Standards AS(applicable in India), IFRS and US GAAPs:

(i) Impairment of Assets

(ii) Business Combinations


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An sw er

Treatment under Indian A S, IFRS and US GAAPs

(i) Impairment of assets

AS IFRS US GAAPs

Timing ofimpairmentreview

Annually Annually Whenever events orchanges incircumstances indicatethat the carrying amountmay not be recovered.

Asset is

impaired if

Recoverable amount

Documents

IFRS Q & ANS