OUR ANALYSIS AND VIEWS
Through this publication we share our analysis and views on the above- mentioned changes.
Amendment to Ind AS 1 – Presentation of Financial Statements
Ind AS 1 required disclosure of accounting policies. However, it did not define ‘accounting policies’ as such. The amendments are aimed at ensuring that entities now provide more relevant accounting policy disclosures:
- Entities are now required to disclose ‘material’ accounting policies in place of ‘significant’ accounting policies; and
- Providing guidance on how entities need to identify material accounting policy disclosures.
To address this, there are two significant themes addressed by the amendment:
- Issue of boiler plate disclosures
- Replacing the term “significant” with material
Amendment to Ind AS 8 – Accounting Policies, Changes in Accounting Estimates and Errors
Ind AS 8 defines accounting policies, however the existing Ind AS 8 did not define accounting estimates. The current guidance given in the standard made it difficult to clearly demarcate the difference between accounting policy and accounting estimates under many scenarios. It should be noted that changes to estimates are applied prospectively compared to changes in accounting policies which are applied retrospectively, and thus require a restatement.
The amendment defines accounting estimate as “monetary amounts in financial statements that are subject to measurement uncertainty”.
The standard now provides examples of accounting estimates:
- “A loss allowance for expected credit losses, applying Ind AS 109, Financial Instruments;
- The net realisable value of an item of inventory, applying Ind AS 2, Inventories;
- The fair value of an asset or liability, applying Ind AS 113, Fair Value Measurement;
- The depreciation expense for an item of property, plant and equipment, applying Ind AS 16; and
- A provision for warranty obligations, applying Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets.”
Amendment to Ind AS 12 – Income Taxes
The existing standard contains exceptions from recognising the deferred tax effects of certain temporary differences arising on the initial recognition of some assets and liabilities. These exceptions are usually referred to as ‘initial recognition exemption’.
A transaction, other than a business combination transaction, may lead to the initial recognition of an asset and a liability and at the same time doesn’t affect either the accounting or the taxable profit at the time of initial recognition. “For example, at the commencement date of a lease, a lessee typically recognises a lease liability and the corresponding amount as part of the cost of a right-of-use asset. Depending on the applicable tax law, equal taxable and deductible temporary differences may arise on initial recognition of the asset and liability in such a transaction”.
The amendment has been brought in response to divergence in practice in relation to application of the initial recognition exemption to transactions and events, such as leases, that lead to the recognition of an asset and a liability.
The amendments address this issue and limit the scope of the recognition exemption to exclude transactions that, upon initial recognition, generate equal taxable and deductible temporary differences.
NEXT STEPS
These are important changes brought in by the MCA and align Ind AS with the IFRS as issued by the IASB. We are of the view, that entities must assess implication of these changes so that relevant disclosures can be made in the financial statements for the year ended March 31, 2023, with respect to standards issued but not effective. Further, listed companies and their group entities need to determine the impact for their Q1 reporting.
1. Re-drafting the accounting policy
The replacement of ”significant” with “material” accounting policy information under Ind AS 1 will impact the accounting policy disclosures. Identification of what is material requires greater use of judgement. Therefore, we recommend that entities review their accounting policy information disclosures to ensure consistency with the amended standard.
It has been observed that boilerplate disclosures are used for providing accounting policy information. While the conceptual framework assumes that the primary user of financial statements have a reasonable level of financial knowledge, the framework also acknowledges, that not all users of the financial statements are accounting experts.
Entities should carefully consider whether “standardised information, or information that only duplicates or summarises the requirements of the Ind ASs” is material information and, if not, whether it should be removed from the accounting policies disclosures to enhance the usefulness of the financial statements.
The change in disclosure of accounting policies requires detailed evaluation by companies and may require judgement. Although the change to eliminate unnecessary disclosure is welcome, companies will need to be careful to ensure that useful accounting policy disclosure isn’t excluded from financial statements.
2. Clearer demarcation between Accounting Policy and Accounting Estimate
The amendments are clarificatory in nature, and defining an accounting estimate has now made it easier to understand the demarcation between accounting policies and accounting estimate.
In our view, there is no significant impact on the financial statements of the company. The amendments will enable companies to make better judgement on whether a change is a change in accounting policy or change in accounting estimate or correction of prior period error.
The companies need to understand the interplay between accounting policy and accounting estimate here. Accounting policies may require items in financial statements to be measured in a way that involves measurement uncertainty, which means that accounting policy may require such items to be measured at monetary amounts that cannot be observed directly and instead require estimation. In these cases, entities are required to develop an accounting estimate to meet the requirement of the accounting policy. Companies are required to use judgement and assumptions to develop accounting estimates, which should always be based on latest available information.
