The Ministry of Corporate Affairs (MCA), through its notification dated 16 February 2015, issued the Indian Accounting Standards (Ind AS), which are converged with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB).
The Ministry of Corporate Affairs (MCA), through its notification dated 16 February 2015, issued the Indian Accounting Standards (Ind AS), which are converged with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). Ind AS is applicable from 1 April 2016 to companies covered in phase I of the Ind AS corporate road map.
Entities adopting Ind AS for the first time are required to apply Ind AS 101, First-time Adoption of Indian Accounting Standards. Ind AS 101 sets out the procedures that an entity would follow when it adopts Ind AS for the first time as the basis for preparing its financial statements. Ind AS 101, allows entities to measure the Property, Plant and Equipment (PPE), at the date of transition to Ind AS at ‘deemed cost’. Under this exemption, an entity may measure its PPE at the date of transition by electing to apply any one of the following approaches to compute the ‘deemed cost’:
(The above options can also be availed for intangible assets covered by Ind AS 38, Intangible Assets and investment property, covered by Ind AS 40, Investment Property.)
The carrying value of PPE approach is a carve-in in Ind AS. IFRS does not specify this approach.
Current application of ‘carrying value of PPE’ approach
As per Ind AS 101, an entity, on transition to Ind AS, assesses that there is no change in its functional currency, it may elect to continue with the carrying value for all of its PPE, measured as per the previous GAAP and use that as the ‘deemed cost’. Necessary adjustments, however, would be required to be made in this deemed cost for the changes in the decommissioning, restoration or similar liabilities pertaining to the PPE.
It is specifically mentioned in Ind AS 101 that where an entity elects carrying value of PPE approach, it cannot make any further adjustments to the deemed cost of the PPE for transition adjustments that might arise from the application of other Ind AS (apart from the adjustment mentioned above).
The Institute of Chartered Accountants of India (ICAI) on 27 April 2017 issued an Exposure Draft (ED) for limited amendment to Ind AS 101 with regard to carrying value of deemed cost approach. The ED proposes the following Para D7AA of Ind AS 101:
‘Where there is no change in its functional currency on the date of transition to Ind ASs, a first-time adopter to Ind ASs may elect to continue with the carrying value for a class of its property, plant and equipment as recognised in the financial statements as at the date of transition to Ind ASs, measured as per the previous GAAP and use that as its deemed cost as at the date of transition after making necessary adjustments in accordance with paragraph D21 and D21A, of this Ind AS. For this purpose, if the financial statements are consolidated financial statements, the previous GAAP amount of the subsidiary shall be that amount used in preparing and presenting consolidated financial statements. Where a subsidiary was not consolidated under previous GAAP, the amount required to be reported by the subsidiary as per previous GAAP in its individual financial statements shall be the previous GAAP amount. This option can also be availed for intangible assets covered by Ind AS 38, Intangible Assets and investment property covered by Ind AS 40, Investment Property.’
The proposed amendment would result in the following:
An entity would apply the amendments relating to paragraph D7AA for annual periods beginning on or after 1 April 2017.
Cherry picking by class of PPE is permitted under IFRS at the time of applying the fair value as the deemed cost. The MCA originally did not choose to provide this option to Indian companies if they chose the deemed cost exemption based on the previous GAAP carrying value. The ED now provides an option to cherry pick by class of PPE even for deemed cost exemption based on previous GAAP carrying value. Therefore, it represents a shift from an earlier position.
The effective date of the limited amendment to Ind AS 101 is 1 April 2017 and it would apply to entities covered under phase II of the corporate road map issued by the MCA on 15 February 2015. This, however, would pose a question whether companies who are covered in phase I of the Ind AS corporate road map be eligible to avail the benefit of this amendment.
Therefore, we encourage stakeholders to actively participate and provide their comments on the ED issued by the ICAI by 19 May 2017.
To access the text of the ED issued by ICAI, please click here.
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