Ind AS Exemptions & Exceptions- Indian Accounting Standard Applicability

Indian Accounting Standards largely converge with the International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board (IASB). In order to assist prepares to overcome the practical difficulties of applying IFRS for the first time, IFRS 1 provides the basis on which entities will convert their financial statements. It lays down the ground rules and prescribes the accounting policies to be followed in an entity’s first set of IFRS financial statements and prepares its opening IFRS balance sheet, which serves as the starting point of its future accounting under IFRS.

After its issuance, IFRS 1 was amended many times to accommodate first-time adoption issues and difficulties resulting from new or amended IFRSs and various recommendations from industry and otherwise. As a result, IFRS 1 became more complex and less clear. To address these complexities, the IASB issued a revised version of IFRS 1 in 2008. The revised version of IFRS 1 issued in 2008, retains the substance of the previous version, but with a changed structure.

Ind AS 101 is the standard issued in India corresponding to the revised IFRS 1. Ind AS 101 provides numerous mandatory Ind AS exceptions and optional Ind AS exemptions. Ind AS 101(like IFRS 1) goes some way to reduce the burden of historical accounting information, but it does not turn the transition process into a hassle-free job. Even under Ind AS 101, the transition process remains complex and time-consuming for most entities. It places demands on companies in areas such as staff training, data collection and new or modified information system requirements.

Another challenge relates to Ind AS Exemptions and Exceptions available in the preparation of the transition date balance sheet. The biggest challenge will be the alignment with various legislations including direct and indirect tax legislations or RBI accounting norms. The standard includes both optional and mandatory Ind AS Exemptions and Exceptions, companies are required to make judgments and decisions about which optional exemptions to apply and comply with mandatory exceptions in the first set of Ind AS financial statements it is essential for everyone involved in the conversion process to understand the issue and to know how these can be resolved.

Entities adopting Ind AS for the first time, especially converting from their current Indian GAAP (2006 Accounting Standards), both of which are issued by the Institute of Chartered Accountants of India (“ICAI”) and notified by the Ministry of Corporate Affairs (“MCA”) through the Companies (Indian Accounting Standards) Rules, 2015 amended from time to time, possess a distinct set of problems that can be summarized as -

• The sheer magnitude of the effort involved in adopting a large number of new accounting standards;
• The requirements of individual Ind AS differ significantly from those under Indian GAAP; and
• The large amount of information that needs to be collected, is not previously required under Indian GAAP.

The underlying principle of Ind AS 101 is that a first-time adopter should prepare financial statements as if they had always applied Ind AS, subject to a number of Ind AS exemptions and exceptions, whereby, a first-time adopter is allowed to deviate from this general rule. The objective of Ind AS 101 is to ensure that an entity’s first-time Ind AS financial statements, and its interim financial reports for a part of the period covered by those financial statements, contain high-quality information that:

• Is transparent for users and compares bills over all periods presented
• Provides a suitable starting point for accounting under Ind AS and
• Can be generated at a cost that does not exceed the benefits to users

A first-time adopter needs to use the same accounting policy in its opening Ind AS balance sheet as those used in all periods presented in its first Ind AS financial statements. The fundamental principle of Ind AS 101 is to require the full retrospective application of the standards in force at an entity reporting date with limited exceptions.

For the transition from Indian GAAP to Ind AS its opening Ind AS balance sheet, subject to mandatory Ind AS exceptions and exemptions an entity should

• not recognize items as assets or liabilities if Ind AS does not permit such recognition
• recognize all assets and liabilities whose transition is required by Ind AS and reclassify assets, liabilities, and items of equity as per the requirements of Ind AS
• measure all assets and liabilities in accordance with Ind AS

Optional Ind AS exemptions from the requirements of certain Ind AS

Ind AS 101 grants limited optional Ind AS exemptions from the general requirements of full retrospective application of Ind AS where the cost of complying with them would be likely to exceed the benefits to users of financial statements. These Ind AS exemptions (of specific paragraphs in corresponding Ind AS) relate to:

1. Share-based payment transactions
2. Insurance contracts
3. Deemed cost
4. Leases
5. Cumulative translation differences
6. Business Combinations
7. Investments in Subsidiaries Joint Ventures and Associates
8. Assets and Liabilities of Subsidiaries Associates and Joint Ventures
9. Compound financial instruments (Business Combination)
10. Designation of previously recognized financial statements
11. Fair value measurement of Financial Assets or Financial liabilities at initial recognition
12. Decommissioning Liabilities included in the cost of Property Plant and Equipment
13. Service Concession Arrangements
14. Borrowing Costs
15. Extinguishing Financial Liabilities with Equity Instruments
16. Severe Hyperinflation
17. Joint Arrangements
18. Stripping costs in the production phase of a surface mine
19. Designation of contracts to buy or sell non-financial items
20. Foreign currency transactions in advance consideration
21. Revenue and
22. Non-current assets held for sale and discontinued operations

Application of these Ind AS exemptions is entirely optional i.e. a first-timer adopter can pick and choose the Ind AS exemptions that it wants to apply. It is important to note that Ind AS 101 does not establish a hierarchy for exemptions. Therefore, when an item is covered by more than one Ind AS exemption, a first-time adopter has a free choice in determining the order in which it applies for the exemptions. Ind AS, however, prohibits explicitly applying for these Ind AS exemptions by analogy to other items.

Mandatory Exceptions to retrospective application of Ind AS

Ind AS 101 prohibits retrospective application of Ind AS in some areas; particularly when the retrospective application would require judgments by management about past conditions after the outcome of a particular transaction is already known. These exceptions relate to:

• Estimates
• The recognition of Financial Assets and Liabilities
• Hedge Accounting
• Non-Controlling interest
• Classification and measurement of Financial Assets
• Impairment of Financial Assets
• Embedded Derivatives
• Government Loans

Conclusively, all Ind AS are mandatory to apply, irrespective of their retrospective or prospective impact, however, Ind AS 101 provides an option to limit the work needed to implement certain specific requirements of Ind AS bucket, retrospectively. Opting for such Ind AS exemptions will reduce the burden on the company while implementing Ind AS, to an extent. Only, limitations of retrospective implementations are given in the previous paragraph.

If you have any queries regarding Ind AS applicability, Exemptions & Exceptions, or any other clarification associated with Ind AS, please feel free to contact the ASC Group.

Also Read: Ind AS Applicability and Compliances Guide

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