1

INDEX

Sr. No. Particulars Page No.

1 Executive Summary 2-3

2 Introduction to IFRS 3-4

3 Introduction to IAS 4

4 Objective of IFRS 5-11

5 Categorization of IFRS as made by ICAI 11-13

6 IFRS 3 – Business combinations 14-27

7 IFRS 4 – Insurance contracts 28-33

8 References 34

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EXECUTIVE SUMMARY

There have been major changes in financial reporting in recent years. Most obvious is the

continuing adoption of IFRS worldwide. Many territories have been using IFRS for some years,

and more are planning to come on stream from 2012. For the latest information on countries’

transition to IFRS, visit pwc.com/usifrs and see ‘Interactive IFRS adoption by country map’. An

important recent development is the extent to which IFRS is affected by politics. The issues with

Greek debt, the problems in the banking sector and the attempts of politicians to resolve these

questions have resulted in pressure on standard-setters to amend their standards, primarily those

on financial instruments. This pressure is unlikely to disappear, at least in the short term. The

IASB is working hard to respond to this; we can therefore expect a continued stream of changes

to the standards in the next few months and years. The IASB has the authority to set IFRSs and

to approve interpretations of those standards. IFRSs are intended to be applied by profit-

orientated entities. These entities’ financial statements give information about performance,

position and cash flow that is useful to a range of users in making financial decisions. These

users include shareholders, creditors, employees and the general public. A complete set of

financial statements includes a: • balance sheet (statement of financial position); • statement of

comprehensive income; • statement of cash flows; • description of accounting policies; and •

notes to the financial statements. The concepts underlying accounting practices under IFRS are

set out in the IASB’s ‘Conceptual Framework for Financial Reporting’ issued in September 2010

(the Framework). It supersedes the ‘Framework for the preparation and presentation of financial

statements’ (the Framework (1989)). The Conceptual Framework covers: • Objectives of general

purpose financial reporting, including information about a reporting entity’s economic resources

and claims. • The reporting entity (in the process of being updated). • Qualitative characteristics

of useful financial information of relevance and faithful representation and the enhancing

qualitative characteristics of comparability, verifiability, timeliness and understandability. The

remaining text of the 1989 Framework (in the process of being updated), which includes: •

Underlying assumption, the going concern convention. • Elements of financial statements,

including financial position (assets, liabilities and equity) and performance (income and

expenses). • Recognition of elements, including probability of future benefit, reliability of

measurement and recognition of assets, liabilities, income and expenses. • Measurement of

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elements, including a discussion on historical cost and its alternatives. Concepts of capital and its

maintenance. For the areas of the Conceptual Framework that are being updated, the IASB has

published an exposure draft on the reporting entity and a discussion paper of the remaining

sections; including elements of financial statements, recognition and derecognition, the

distinction between equity and liabilities, measurement, presentation and disclosure, and

fundamental concepts (including business model, unit of account, going concern and capital

maintenance).

INTRODUCTION TO IFRS

International Financial Reporting Standards (IFRS) are designed as a common global

language for business affairs so that company accounts are understandable and comparable

across international boundaries. They are a consequence of growing international shareholding

and trade and are particularly important for companies that have dealings in several countries.

They are progressively replacing the many different national accounting standards. They are the

rules to be followed by accountants to maintain books of accounts which are comparable,

understandable, reliable and relevant as per the users internal or external.

IFRS, with the exception of IAS 29 Financial Reporting in Hyperinflationary

Economies and IFRIC 7 Applying the Restatement Approach under IAS 29, are authorized in

terms of the historical cost paradigm. IAS 29 and IFRIC 7 are authorized in terms of the units of

constant purchasing power paradigm.

IFRS began as an attempt to harmonize accounting across the European Union but the value of

harmonization quickly made the concept attractive around the world. However, it has been

debated whether or not de facto harmonization has occurred. Standards that were issued by IASC

(the predecessor of IASB) are still within use today and go by the name International Accounting

Standards (IAS), while standards issued by IASB are called IFRS. IAS were issued between

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1973 and 2001 by the Board of the International Accounting Standards Committee (IASC). On 1

April 2001, the new International Accounting Standards Board (IASB) took over from the IASC

the responsibility for setting International Accounting Standards. During its first meeting the new

Board adopted existing IAS and Standing Interpretations Committee standards (SICs). The IASB

has continued to develop standards calling the new standards "International Financial Reporting

Standards".

INTRODUCTION TO IAS

Indian Accounting Standards (abbreviated as India AS) in India accounting standards were

issued under the supervision and control of Accounting Standards Board (ASB), which was

constituted in the year 1977. ASB is a committee under Institute of Chartered Accountants of

India(ICAI). ASB is an independent committee which consist of representatives from

government department, academicians, representatives from ASSOCHAM, CII, FICCI, etc.,

Now India will have two sets of accounting standards viz. existing accounting standards under

Companies (Accounting Standard) Rules, 2006 and IFRS converged Indian Accounting

Standards (Ind AS). The Ind AS are named and numbered in the same way as the corresponding

IFRS. NACAS recommend these standards to the Ministry of Corporate Affairs. The Ministry of

Corporate Affairs has to spell out the accounting standards applicable for companies in India. As

on date the Ministry of Corporate Affairs notified 39 Indian Accounting Standards (Ind AS).

This shall be applied to the companies of financial year 2015-16 voluntarily and from 2016-17

on a mandatory basis. Based on the international consensus, the regulators will separately notify

the date of implementation of AS Ind for the banks, insurance companies etc. Standards for the

computation of Tax would be notified separately.

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OBJECTIVE

The basic objective of Accounting Standards is to remove variations in the treatment of several

accounting aspects and to bring about standardization in presentation. They intent to harmonize

the diverse accounting policies followed in the preparation and presentation of financial

statements by different reporting enterprises so as to facilitate intra-firm and inter-firm

comparison.

Objective of financial statements

Financial statements are a structured representation of the financial positions and financial

performance of an entity. The objective of financial statements is to provide information about

the financial position, financial performance and cash flows of an entity that is useful to a wide

range of users in making economic decisions. Financial statements also show the results of the

management's stewardship of the resources entrusted to it.

To meet this objective, financial statements provide information about an entity's:

a. assets;

b. liabilities;

c. equity;

d. income and expenses, including gains and losses;

e. contributions by and distributions to owners in their capacity as owners; and

f. cash flows.

This information, along with other information in the notes, assists users of financial statements

in predicting the entity's future cash flows and, in particular, their timing and certainty.

The following are the general features in IFRS:

Fair presentation and compliance with IFRS: Fair presentation requires the faithful

representation of the effects of the transactions, other events and conditions in accordance

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with the definitions and recognition criteria for assets, liabilities, income and expenses set

out in the Framework of IFRS.

Going concern: Financial statements are present on a going concern basis unless

management either intends to liquidate the entity or to cease trading, or has no realistic

alternative but to do so.

Accrual basis of accounting: An entity shall recognise items as assets, liabilities, equity,

income and expenses when they satisfy the definition and recognition criteria for those

elements in the Framework of IFRS.

Materiality and aggregation: Every material class of similar items has to be presented

separately. Items that are of a dissimilar nature or function shall be presented separately

unless they are immaterial.

Offsetting: Offsetting is generally forbidden in IFRS. However certain standards require

offsetting when specific conditions are satisfied (such as in case of the accounting for

defined benefit liabilities in IAS 19 and the net presentation of deferred tax liabilities and

deferred tax assets in IAS 12).

Frequency of reporting: IFRS requires that at least annually a complete set of financial

statements is presented. However listed companies generally also publish interim

financial statements (for which the accounting is fully IFRS compliant)for which the

presentation is in accordance with IAS 34 Interim Financing Reporting.

Comparative information: IFRS requires entities to present comparative information in

respect of the preceding period for all amounts reported in the current period's financial

statements. In addition comparative information shall also be provided for narrative and

descriptive information if it is relevant to understanding the current period's financial

statements.The standard IAS 1 also requires an additional statement of financial position

(also called a third balance sheet) when an entity applies an accounting policy

retrospectively or makes a retrospective restatement of items in its financial statements,

or when it reclassifies items in its financial statements. This for example occurred with

the adoption of the revised standard IAS 19 (as of 1 January 2013) or when the new

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consolidation standards IFRS 10-11-12 were adopted (as of 1 January 2013 or 2014 for

companies in the European Union)

Consistency of presentation: IFRS requires that the presentation and classification of

items in the financial statements is retained from one period to the next unless:

a. it is apparent, following a significant change in the nature of the entity's

operations or a review of its financial statements, that another presentation or

classification would be more appropriate having regard to the criteria for the

selection and application of accounting policies in IAS 8; or

b. an IFRS standard requires a change in presentation.

Qualitative characteristics of financial information

Fundamental qualitative characteristics of financial information include:

Relevance

Faithful representation

Enhancing qualitative characteristics include:

Comparability

Verifiability

Timeliness

Understandability

Elements of financial statements

The elements directly related to the measurement of the statement of financial position

include:

Asset: An asset is a resource controlled by the entity as a result of past events and from

which future economic benefits are expected to flow to the entity.

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Liability: A liability is a present obligation of the entity arising from the past events, the

settlement of which is expected to result in an outflow from the entity of resources

embodying economic benefits, i.e. assets.

Equity: Nominal equity is the nominal residual interest in the nominal assets of the entity

after deducting all its liabilities in nominal value.

The financial performance of an entity is presented in the statement of comprehensive

income, which consists of the income statement (Statement of Profit/Loss) and the statement of

other comprehensive income (usually presented in two separate statements). Financial

performance includes the following elements (which are recognised in the income statement or

other comprehensive income as required by the applicable IFRS standard):

Revenues: increases in economic benefit during an accounting period in the form of

inflows or enhancements of assets, or decrease of liabilities that result in increases in

equity. However, it does not include the contributions made by the equity participants

(for example owners, partners or shareholders).

Expenses: decreases in economic benefits during an accounting period in the form of

outflows, or depletions of assets or incurrences of liabilities that result in decreases in

equity. However, these don't include the distributions made to the equity participants.

Results recognised in other comprehensive income are limited to the following specific

circumstances:

Remeasurements of defined benefit assets or liabilities (as defined in the standard IAS

19)

Increases or decreases in the fair value of financial assets classified as available for sale

(with the exception of impairment losses) (as defined in the standard IAS 39)

Increases or decreases resulting from the application of a revaluation of property, plant

and equipment or intangible assets

Exchange differences resulting from the translation of foreign operations (subsidiary,

associate, joint arrangement or branch of a reporting entity, the activities of which are

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conducted in a country or currency other than those of the reporting entity) according to

the standard IAS 21.

the portion of the gain or loss on the hedging instrument in a cash flow hedge (or a hedge

of a net investment in a foreign operation, as this is accounted similarly) that is

determined to be an effective hedge

The statement of changes in equity consists of a reconciliation of the changes in equity in

which the following information is provided:

total comprehensive income for the period, showing separately the total amounts

attributable to owners of the parent and to non-controlling interests;

for each component of equity, the effects of retrospective application or retrospective

restatement recognised in accordance with IAS 8; and

for each component of equity, a reconciliation between the carrying amount at the

beginning and the end of the period, separately disclosing changes resulting from:

o profit or loss;

o other comprehensive income; and

o transactions with owners in their capacity as owners, showing separately

contributions by and distributions to owners and changes in ownership interests in

subsidiaries that do not result in a loss of control.

Statement of Cash Flows

Operating cash flows: the principal revenue-producing activities of the entity and are

generally calculated by applying the indirect method, whereby profit or loss is adjusted

for the effects of transaction of a non-cash nature, any deferrals or accruals of past or

future cash receipts or payments, and items of income or expense associated with

investing or financing cash flows.

Investing cash flows: the acquisition and disposal of long-term assets and other

investments not included in cash equivalents. These represent the extent to which

expenditures have been made for resources intended to generate future income and cash

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flows. Only expenditures that result in a recognised asset in the statement of financial

position are eligible for classification as investing activities.

Financing cash flows: activities that result in changes in the size and composition of the

contributed equity and borrowings of the entity. These are important because they are

useful in predicting claims on future cash flows by providers of capital to the entity.

Notes to the Financial Statements: These shall (a) present information about the basis of

preparation of the financial statements and the specific accounting policies used; (b) disclose

the information required by IFRSs that is not presented elsewhere in the financial statements;

and (c) provide information that is not presented elsewhere in the financial statements, but is

relevant to an understanding of any of them

Recognition of elements of financial statements

An item is recognized in the financial statements when.

it is probable future economic benefit will flow to or from an entity.

the resource can be reliably measured

In some cases, specific standards add additional conditions before recognition is possible or

prohibit recognition altogether.

An example is the recognition of internally generated brands, mastheads, publishing titles,

customer lists and items similar in substance, for which recognition is prohibited by IAS 38. In

addition, research and development expenses can only be recognised as an intangible asset if

they cross the threshold of being classified as 'development cost'.

Whilst the standard on provisions, IAS 37, prohibits the recognition of a provision for contingent

liabilities, this prohibition is not applicable to the accounting for contingent liabilities in a

business combination. In that case the acquirer shall recognise a contingent liability even if it is

not probable that an outflow of resources embodying economic benefits will be required.

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International Financial Reporting Standards (IFRS) are designed as a common global language

for business affairs so that company accounts are understandable and comparable across

international boundaries. They are a consequence of growing international.

CATEGORIZATION OF IFRS MADE BY ICAI

1. Accounting Standards are written documents, policy documents issued

by expert accounting Body, governments and other regulatory bodies

covering the aspects of

- recognition

- measurement

- treatment

- presentation and

- disclosure of accounting transaction in the financial statements.

Accounting Standard in India is issued by Accounting Standard Board of ICAI, which is

one of the expert accounting body in India.

Duties imposed on Auditors and Managerial Personnel under various law for

compliance with Accounting Standards are as follows:

Section 211 of the Companies Act 1956 imposes duties on the company to

comply with accounting standards.

Section 217(2AA) of the Companies Act 1956 imposes duties on directors

to comply with the accounting standards and to include Director’s

Responsibility Statement regarding accounting standards in board’s report.

Section 227(3) of the Companies Act 1956 imposes duties on the auditors.

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2. Statutes governing the requirement of compliance with Indian Accounting Standards:

S.No. Nature of organization Statutes/Law/provision1. Companies Section 211(3c) of Companies Act 1956.2. Partnership, Proprietorship,

Societies, Trust, HUF and

AOP

Liability imposed by the ICAI to the members to

examine the Financial Statement with reference to

the Accounting Standards.4. List of Accounting standards and corresponding IAS/IFRS.

Accounting Standards IAS/IFRSAS-1, Disclosure of Accounting Policies IAS-1, Presentation of Financial Statements

AS-2, Inventories Valuation IAS-2, Inventories

AS-3, Cash Flow Statement IAS-7, Cash Flow Statements

AS-4, Events occurring after Balance sheet date IAS-10, Events after the Balance Sheet

dateAS-5, Net Profit or Loss for the period, prior

period items and change in accounting policies

IAS-8, Accounting policies, change

in accounting estimates and errorsAS-6, Depreciation Accounting IAS-16, Property, plant and equipment

AS-7, Construction contracts IAS-11, Construction contracts

AS-9, Revenue recognition IAS-18, Revenue

AS-10, Accounting For Fixed Assets IAS-16, Property, plant and equipment

AS-11, Effects of changes in Foreign

Exchange Rates

IAS-21, The Effects of changes in

Foreign Exchange RatesAS-12, Accounting for Government Grants IAS-20, Government Grants

AS-13, Accounting for Investments IAS-32, 39 & 40*

AS-14, Amalgamation IFRS-3, Business Combinations

AS-15, Employee Benefits IAS-19 & 26*

AS-16, Borrowings Costs IAS-23, Borrowing Costs

AS-17, Segment Reporting IFRS-8, Operating Segments

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AS-18, Related Party Disclosure IAS-24, Related Parties

AS-19, Accounting for Leases IAS-17, Leases

AS-20, Earning per share IAS-33, Earning per share

AS-21, Consolidated Financial Statements IAS-27, Consolidated and separate

financial statementsAS-22, Taxes on Income IAS-12, Income Taxes

AS-23, Accounting for Investments in

Associates in consolidated financial statements

IAS-28, Investments in Associates

AS-24, Discontinuing operation IFRS-5, Non-current Assets held for

sale and discontinued operationsAS-25, Interim Financial Reporting IAS-34, Interim Financial Reporting

AS-26, Intangible Assets IAS-38, Intangible Assets

AS-27, Financial Reporting of Interest in

Joint Venture

IAS-31, Interest in Joint ventures

AS-28, Impairment of Assets IAS-36, Impairment of Assets

AS-29, Provision, Contingent Liability

and Contingent Assets

IAS-37, Provision, Contingent Liability

and Contingent AssetsAS-30,31 & 32, Financial Instruments IAS-32, IAS-39, IFRS-7 *

*

IAS-19, Employee Benefits

IAS-26, Accounting and reporting by

retirement benefits plans IAS-32,

Financial Instruments- Disclosures

IAS-39, Financial Instruments-

Recognition and measurements IAS-40,

Investment Property

IFRS-7, Financial Instruments- Disclosures

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IFRS 3 – BUSINESS COMBINATION

Key differences

1. Ind AS 103 Business Combinations applies to most business combinations,

including amalgamations (where the acquiree loses its existence) and

acquisitions (where the acquiree continues its existence). Under current

Indian GAAP, there is no comprehensive standard dealing with all business

combinations. AS 14 Accounting for Amalgamation14s applies only to

amalgamations. i.e., when acquiree loses its existence and AS 10 Accounting

for Fixed Assets applies when a business is acquired on a lump-sum basis by

another entity. AS 21 Consolidated Financial Statements, AS 23 Accounting

for Investments in Associates in Consolidated Financial Statements and AS

27 Financial Reporting of Interests in Joint Ventures apply to subsidiaries,

associates and joint ventures, respectively.

2. IFRS 3 requires bargain purchase gain rising on business combination to be

recognized in profit or loss. Ind AS 103 requires the same to be recognized as

other comprehensive income and accumulated in equity as capital reserve, unless

there is no clear evidence for classifying the business combination as a bargain

purchase. In this case, it is to be recognized directly in equity as capital reserve.

3. Consequent to the changes made in Ind AS 1, it has been provided in the

definition of ‘Events after the reporting period’ that in case of breach of a

material provision of a long- term loan arrangement on or before the end of

the reporting period with the effect that the liability becomes payable on

demand on the reporting date, if the lender, before the approval of the

financial statements for issue, agrees to waive the breach, it shall be

considered as an adjusting event. Under IFRS, these breaches will result in

classification of loan as current instead of non-current.

4. Ind AS 103 requires all business combinations within its scope to be

accounted under the purchase method, excluding business combinations of

entities or businesses under common control, which are to be accounted using

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the pooling of interest method. Current Indian GAAP permits both the

purchase method and the pooling of interest method in the case of

amalgamation. The pooling of interest method is allowed only if the

amalgamation satisfies certain specified conditions.

5. Ind AS 103 permits the net assets taken over, including contingent liabilities

and intangible assets, to be recorded at fair value. Indian GAAP permits the

recording of net assets at carrying value. Contingent liabilities of the acquiree

are not recorded as liabilities under Indian GAAP.

6. Ind AS 103 prohibits amortization of goodwill arising on business

combinations, and requires it to be tested for impairment annually. Indian

GAAP requires amortization of goodwill in the case of amalgamations.

With reference to goodwill arising on acquisition through equity, no

guidance is provided in Indian GAAP.

7. Under Ind AS 103, acquisition accounting is based on substance. Reverse

acquisition is accounted assuming the legal acquirer is the acquiree. In

Indian GAAP, acquisition accounting is based on form. Indian GAAP

does not deal with reverse acquisitions.

8. Ind AS 103 requires that contingent consideration in a business combination

be measured at fair value at the date of acquisition, and that this is recognized

in the computation of goodwill/negative goodwill. Subsequent changes in the

value of contingent consideration depend on whether they are equity

instruments, assets or liabilities. If they are assets or liabilities, subsequent

changes are generally recognized in profit or loss for the period. Under Indian

GAAP, AS 14 requires that where the scheme of amalgamation provides for

an adjustment to the consideration contingent on one or more future events,

the amount of the additional payment is included in the consideration and

consequently goodwill, if payment is probable and a reasonable estimate of the

amount can be made. In all other cases, the adjustment is recognized as soon

as the amount is determinable. No guidance is available for contingent

consideration arising under other types of business combinations.

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9. Ind AS 103 specifically deals with accounting for pre-existing relationships

between acquirer and acquiree, and for re-acquired rights by the acquirer in a

business combination. Indian GAAP does not provide guidance for such

situations.

10. Ind AS 103 provides an option to measure any non-controlling (minority)

interest in an acquiree at its fair value, or at the non-controlling interest’s

proportionate share of the acquiree’s net identifiable assets. Under Indian

GAAP, AS 21 does not provide the first option. It requires minority

interest in a subsidiary to be measured at the proportionate share of net

assets at book value.

11. Ind AS 103 requires that, in a business combination achieved in stages, the

acquirer remeasures its previously-held equity interest in the acquiree at its

acquisition date fair value. The acquirer is to recognize the resulting gain or

loss, if any, in profit or loss. There is

no such requirement under Indian GAAP. Under AS 21, if two or more

investments are made in a subsidiary over a period of time, the equity of the

subsidiary at the date of investment is generally determined on a step-by-step

basis.

Impact on financial reporting

The changes brought in by Ind AS 103 are going to affect all stages of the

acquisition process — from planning to the presentation of the post-deal results. The

implications primarily involve providing greater transparency and insight into what

has been acquired, and allowing the market to evaluate the management’s

explanations of the rationale behind a transaction. The key impact of Ind AS 103 is

summarized below:

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Depiction of more appropriate value of an acquisition

Following an acquisition, financial statements will look very different. Assets and

liabilities will be recognized at fair value. Contingent liabilities and intangible assets

that are not recorded in the acquiree’s balance sheet are likely to be recorded at fair

value in the acquirer’s balance sheet. In a business combination achieved in stages,

the acquirer shall remeasure its previously-held equity interest in the acquiree at its

acquisition date fair value. The acquirer shall also have an option to measure non-

controlling interest at fair value. These changes in the recognition of net assets, and

the measurement of previously- held equity interests and non-controlling interests,

will significantly change the value of goodwill recorded in financial statements.

Goodwill reflected in financial statements will project actual premium paid by an

entity for the acquisition.

Greater transparency

Significant new disclosures are required regarding the cost of the acquisition, the

values of the main classes of assets and liabilities, and the justification for the amount

allocated to goodwill. All stakeholders will be able to evaluate the actual worth of an

acquisition and its impact on the future cash flow of the entity.

Significant impact on post-acquisition profits

Under Indian GAAP, net assets taken over are normally recorded at book value, and

hence, the charges to the profit and loss account for amortization and depreciation

expenses are based on carrying value. However, net assets taken over will be recorded

at fair value under Ind AS 103. This will result in a charge to the profit and loss

account for amortization and depreciation based on fair value, which is the true price

paid by the acquirer for those assets. Goodwill is not required to be amortized, but is

required to be tested annually for impairment under Ind AS 103. Negative goodwill is

required to be credited to capital reserve. In a business combination achieved in

stages, the previously-held equity interest in the acquiree is measured at its

acquisition date fair value. The resulting gain or loss, if any, is recognized in the

profit and loss account. These items will increase volatility in the income statement.

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Accounting for business combinations vis-à-vis High Court order

In India, ‘law overrides Accounting Standards’ is an accepted principle. Hence,

accounting is based on the treatment prescribed by the High Court in its approval,

even though it may not be in accordance with Accounting Standards. However, the

Companies Act 2013 specifically requires accounting treatment prescribed in the

amalgamation or demerger schemes to be in accordance with accounting standards.

Going forward, entities to which Ind AS will be applicable will need to ensure that

schemes filed with the High Court do not prescribe any treatment, or that the

treatment prescribed is in accordance with Ind AS 103.

Impact on an organization and its processes

Use of experts

The acquisition process should become more rigorous, from planning to execution.

More thorough evaluation of targets and structuring of deals will be required to

withstand greater market scrutiny. Expert valuation assistance may be needed to

establish values for items such as new intangible assets and contingent liabilities.

Purchase price allocation

Under Indian GAAP, no emphasis was given to purchase price allocation, as net assets

were generally recorded based on the carrying value in the acquiree’s balance sheet. Ind

AS 103 places significant importance on the purchase price allocation process. All

identifiable assets of the acquired business must be recorded at their fair values. Many

intangible assets that would previously have been included within goodwill must be

separately identified and valued. Explicit guidance is provided for the recognition of

such intangible assets. Contingent liabilities are also required to be fair valued and

recognized in the acquirer’s balance sheet.

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Deal terms

Closer scrutiny of contingent payments to employees or selling shareholders in a

business combination may be required to assess if they would form part of the

acquisition consideration or were payments in lieu or compensation for future

employment and hence needed to be expensed. No detailed guidance is currently

available in the current Indian standards for such an evaluation.

The necessity of a standard on Business Combinations in India assumes importance considering

the fact that Indian companies are increasingly stretching their business in foreign countries for

best-fi business combinations. At present in India, though the AS 14 lays out specifi treatment

for Amalgamation, it is not matching the global reporting standards requirements. So ICAI has

converged the present standard AS 14 to Ind AS 103 Business combination which is in line

with IFRS 3. The transition to Ind AS, as and when it happens, is likely to have impact on the

accounts of companies involved in such acquisitions and mergers. With reference to this

convergence, this article provides an insight on the treatment of goodwill and its impairment,

bargain purchase, non-controlling interests, reverse acquisitions and identifi net assets &

liabilities at fair value through various examples. Also, Ind AS 103 is more stringent about the

accounting method to be used. This article also shows the major difference between IND AS

103 and As 14 Amalgamation with the help of different case studies as well as carves outs of Ind

AS 103 from IFRS 3 and its reasons.

With the integrated global economies and cross border mergers and acquisitions, it would be

imperative for the Indian corporate to bridge the gap between Indian GAAP and IFRS. In

order to harmonise with the Financial Reporting worldwide the ICAI (Institute of Chartered

Accountants of India) has issued 35 Ind AS –the converged accounting standards which are

in line with IFRS subject to certain carve outs (differences) due to tax related issues, as

notified by the Ministry of Corporate Affairs (MCA). The Ind AS will be applicable to the

entities in a phased manner at a future date as notified by the MCA. With the

implementation of Revised Schedule VI in India, the ICAI has definitely taken a positive step

towards IFRS implementation in India.

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Need of converged IND AS 103 Business Combination

The necessity of a standard on Business Combinations in India assumes importance

considering the fact that Indian companies are increasingly stretching their business in

foreign countries for best-fit business combinations. When Vodafone took over

Hutchison Essar, there were a number of tax related issues in India. Despite that, it triggered

the interest of small and medium sized companies for such acquisitions. With the cross

border mergers and acquisitions, the compatibility of Indian accounting standards with the

IFRS is challenging but necessary for a true and fair view of the financial statements

worldwide.

The following difference between As 14 Amalgamation and Ind AS 103 Business Combination

justifies the convergence and the need to match the global reporting standards.

Particulars AS 14 Ind AS 103Scope The scope of the existing AS 14 is

confined only to amalgamation. It

stays silent for the issues of common

control transactions.

Ind AS 103 has a wider scope ie it

also includes common control

transactions

and additional guidance (APPENDIX

C) provides that business combination

transactions for such entities should be

accounted for using the “pooling of

interest” method.

Method

of

Accounti

Under the existing AS 14 there are

two methods of accounting for

amalgamation. The pooling of

Ind AS 103 prescribes only the

Acquisition method (purchase method)

for each business combinationValuatio

n of

Assets

and

liabilities

AS–14 requires valuation at carrying

value in the case of pooling method.

In the case of purchase method either

carrying value or fair value may

Ind AS 103 requires the acquired

identifiable assets, liabilities and non-

controlling interest to be recognised at

fair value under acquisition method.

(See Case study 2-Table 2)

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Non-

controlling

interest

The existing AS 14 states that the

minority interest is the amount of

equity attributable to minorities at

the date on which investment in a

subsidiary is made and it is shown

as outside shareholders’ equity.

Ind AS 103 requires that for each

business combination, the acquirer

shall measure any non- controlling

interest in the acquiree company either

at fair value or at the non-controlling

interest’s proportionate share of the

acquiree’s identifiable net assets (See

Case study 2-Table 2)

Goodwill Any excess of the amount of the

consideration over the value of the

net assets of the transferor company

acquired by the transferee company

is recognised in the financial

statements as goodwill arising on

amalgamation.

Measured as the difference between the

aggregate of

(a) the acquisition date fair

value of the consideration

transferred

(b) the amount of any non-controlling

interest and

(c) in a business combination achieved

in stages, the acquisition date fair

value of the acquirers previously held

equity interest in the acquirer and

• The net of the acquisition-date fair

values of the identifiable assets

acquired and the liabilities assumed.

Measuring

the

goodwill

The existing AS 14 requires that the

goodwill arising on amalgamation in

the nature of purchase is amortised

to the statement of profit

or loss over a period not exceeding

Under Ind AS 103, the goodwill is not

amortised but tested for impairment

on annual basis in accordance with

Ind AS 36.

22

Gain on

bargain

Purchase

Under existing AS 14 the excess

amount of net assets over

consideration is treated as capital

reserve (paragraph 34 of Ind AS 103

and paragraph 17 of the existing AS

14).

Gain on bargain purchase is recognised

in Other comprehensive Income (OCI)

and accumulated in equity as capital

reserve.(See Case study 3-Table 3)

Acquisiti

on

related

Acquisition related costs are

accounted for as expenses in the

period in which costs are incurred

No specific guidance is provided.

Reverse

Transacti

ons

The existing AS 14 does not deal with

the same.

Ind AS 103 deals with reverse

acquisitions

IND AS 103 Business Combination

1. Objective:

The objective of the Indian Accounting Standard

103 is to improve the relevance, reliability and comparability of the information that a

reporting entity provides in its financial statements about a business combination and its

effects. To accomplish that, this Indian Accounting Standard establishes principles and

requirements for how the acquirer:

recognises and measures in its financial statements the identifiable assets acquired, the

liabilities assumed and any non-controlling interest in the acquiree

recognises and measures the goodwill acquired in the business combination or a gain from a

bargain purchase

determines what information to disclose to enable users of the financial statements to

evaluate the nature and financial effects of the business combination.

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2. Scope:

Ind AS 103 defines business combination which has a wider scope. It includes both

amalgamation and acquisition including common control transactions

2.1 Inclusion of Common Control transactions

• Assume A and B are subsidiary companies that are owned by the same parent entity D.

Does the transaction constitute a business combination within the scope of IFRS 3 and

Ind AS 103?

• Here A and B are under common control of D. Business combinations involving

entities under common control are excluded from the scope of IFRS 3 but in Ind AS

103, Common control transactions are included in the scope

2.2 Reverse Acquisition

• Reverse acquisition takes place when a private entity wants to become a public entity but

does not want to register its equity shares. In such case, private entity approaches a public

entity, i.e. the one which is listed, to acquire its (private entity’s) equity interests in

exchange for the equity interests of the public entity.

• In a reverse acquisition, the entity issuing equity interests is legally the acquirer, but for

accounting purposes is considered the acquiree. Accounting for business combination is

done from the perspective of accounting acquirer and not legal acquirer.

• Accounting for reverse acquisition are a bit complex, but Ind AS 103 deals with

reverse acquisitions unlike AS 14 which is silent on treatment of reverse acquisitions.

2.3 Exclusions

However, IND AS 103 excludes:

1. Formation of a joint venture

2. Acquisition of an asset or group of assets not constituting a business combination of

entities.

3. Business combination

A business combination is a transaction or other event in which an acquirer obtains

control of one or more businesses

Identifying a Business Combination: If the assets acquired are not a business, the

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reporting entity shall account for the transaction or other event as an asset acquisition.

For example, acquisition of a “shell” or “shelf” company is not a business

combination because no business is being acquired.

4. Business:

The Standard defines the business as an integrated set of activities and assets from which

economic benefits are gained by the investor or other owners. It also explains that, for

determining whether a group of assets and liabilities is a business, one must examine the three

ingredients, viz. Inputs, Process and Outputs. In other words a business consists of inputs and

processes applied to those inputs that have the ability to create outputs.

5. Acquirer

An acquirer is the entity that obtains control of the entity–the acquiree.

6. Control

In the above definition control means the power to govern the financial and operating

policies of an entity so as to obtain benefits from its activities.

7. Acquiree

The business or businesses that the acquirer obtains control of in a business combination.

8. Method of Accounting

Under Ind AS 103 only acquisition method is used for business combination. The Standard

eliminates the now-optional pooling-of-interests method and mandates the Purchase Method

in accounting for a Business Combination.

Purchase method requires the Acquiring Company to fair value all the identified Assets

and Liabilities and also recognise additional liabilities if any, at fair values on balance sheet.

It requires allocating the Purchase Price to all the items on the balance sheet and also

off the balance sheet

i.e. contingent liabilities. Under this method, the Acquirer has to recognise various

components of business combination like non-controlling interest, consideration and the

25

goodwill or bargain purchase on the date of acquisition.

9. Fair value

The International Accounting Standards Board (IASB) defines fair value as "... an amount at

which an asset could be exchanged between knowledgeable and willing parties in an arms

length transaction".

Steps in Acquisition Method

Step 1: Identifying the acquirer:

For each business combination, one of the combining entities shall be identified as the

acquirer.The entity that issues equity shares in exchange for the net assets of other entity is

usually identified as acquirer

Step 2: Determining the acquisition date Measurement of assets, liabilities, intangible

assets, non-controlling interest, recognition of goodwill etc. in case of business combination

is acquisition-date sensitive. Hence, it is very critical to determine the acquisition date.

Acquisition date is the date on which the acquirer obtains effective control of the

acquiree. Usually, the date on which the acquirer legally transfers the consideration,

acquires the assets, and assumes the liabilities of the acquiree - the “closing date”. (See

26

CASE STUDY 2)

Step 3 : Identifying and measuring consideration (See CASE STUDY 1)

• Consideration is the sum of the acquisition-date fair values of:

– the assets transferred

– the liabilities incurred by the acquirer

– the equity interests issued

• Acquisition-related costs

Consideration should be measured at fair value.

Acquisition-related costs are costs the acquirer incurs to effect a business combination. They

are as under:

Finder’s fees

Advisory, legal, accounting, valuation and other professional or consulting fees

General administrative costs, including the costs of maintaining an internal acquisitions

department

Costs of registering and issuing debt and equity securities.

The acquirer shall account for acquisition-related costs as expenses in the periods in

which the costs are incurred and the services are received, with one exception. The costs to

issue debt or equity securities shall be recognised in accordance with Ind AS 32 and Ind AS

39.

Major Carve out of Ind AS 103 Business Combinations from IFRS 3

Carve out: Treatment of bargain purchase

As per IFRS 3, it is recognised in the profit and loss at the acquisition date in the books

of acquirer. It is pertinent to note that the Ministry of Corporate Affairs has carved

out the treatment of bargain purchase, while converging Indian Standards towards

IFRS 3. It will create a GAAP difference in which Converged Indian AS 103 will

recognise the bargain purchase in other comprehensive income (OCI) and

accumulated in equity as capital reserve if there is a clear evidence of the

underlying reason for classification of the business combination as a bargain

purchase; otherwise, the resulting gain is recognised directly in equity as capital

27

reserve.

Reasons for such treatment of bargain purchase in IND AS 103

IND AS 103 recognises it in OCI or as capital reserve because recognition of such

gains in profit or loss would result into recognition of unrealised gains as the value of

net assets is determined on the basis of fair value of net assets acquired.

CONCLUSION

Over and above the findings in Table 2, the following apparent conclusions can be made

from the above converged standard Ind AS 103:

Ind AS 103 will require disclosure of information to assist the users of the financial

statements with the understanding of the nature and financial effect of a business

combination.

Even though IND AS 101 provides exemptions regarding retrospective application of

IND AS 103 for the first time adopter, the standard will pose many challenges for the

Chartered Accountants.

Also IND AS 103 is associated to the measurement of many other standards like Ind

AS 37, 39, 19 individually so, the understanding and applicability in India will require

lots of deliberation which need to be weighed in view of facts and circumstances.

It adopts a “business fair value” measurement approach as opposed to the traditional “cost-

based” approach.The concept of fair value is debatable and its implementation will

question the financial statements results.

Lastly, Indian companies are listed on overseas stock exchanges and have to recast their

accounts to be compliant with GAAP requirements of those countries. Foreign companies

h a v i n g subsidiaries in India, are having to recast their accounts to meet Indian & overseas

reporting requirements which are different. Also, Foreign Investors will be attracted to

economies where IFRS compliant financial statements are the norms. So, the robust change

of converged IND AS which are in line with IFRS is probably the most complicated issue

28

for the current Indian accounting scenario, but necessary for authentic financial reporting

worldwide.

IFRS 4 – INSURANCE CONTRACTS

Background

IFRS 4 is the first guidance from the IASB on accounting for insurance contracts – but not the

last. A comprehensive project on insurance contracts is under way. The Board issued IFRS 4

because it saw an urgent need for improved disclosures for insurance contracts, and some

improvements to recognition and measurement practices, in time for the adoption of IFRS by

listed companies throughout Europe and elsewhere in 2005.

Objective

The objective of this IFRS is to specify the financial reporting for insurance contracts by any

entity that issues such contracts (described in this IFRS as an insurer) until the Board completes

the second phase of its project on insurance contracts. In particular, this IFRS requires:

(a) limited improvements to accounting by insurers for insurance contracts.

(b) disclosure that identifies and explains the amounts in an insurer’s financial statements arising

from insurance contracts and helps users of those financial statements understand the amount,

timing and uncertainty of future cash flows from insurance contracts.

An insurance contract is a contract under which one party (the insurer) accepts significant

insurance risk from another party (the policyholder) by agreeing to compensate the policyholder

if a specified uncertain future event (the insured event) adversely affects the policyholder.

29

The IFRS applies to all insurance contracts (including reinsurance contracts) that an entity issues

and to reinsurance contracts that it holds, except for specified contracts covered by other IFRSs.

It does not apply to other assets and liabilities of an insurer, such as financial assets and financial

liabilities within the scope of IFRS 9 Financial Instruments. Furthermore, it does not address

accounting by policyholders.

The IFRS exempts an insurer temporarily (ie during phase I of this project) from some

requirements of other IFRSs, including the requirement to consider the Framework in selecting

accounting policies for insurance contracts. However, the IFRS:

(a) prohibits provisions for possible claims under contracts that are not in existence at the end of

the reporting period (such as catastrophe and equalisation provisions).

(b) requires a test for the adequacy of recognised insurance liabilities and an impairment test for

reinsurance assets. requires an insurer to keep insurance liabilities in its statement of financial

position until they are discharged or cancelled, or expire, and to present insurance liabilities

without offsetting them against

related reinsurance assets.

The IFRS permits an insurer to change its accounting policies for insurance contracts only if, as

a result, its financial statements present information that is more relevant and no less reliable, or

more reliable and no less relevant. In particular, an insurer cannot introduce any of the following

practices, although it may continue using accounting policies that involve them:

(a) measuring insurance liabilities on an undiscounted basis.

(b) measuring contractual rights to future investment management fees at an amount that exceeds

their fair value as implied by a comparison with current fees charged by other market

participants for similar services.

(c) using non-uniform accounting policies for the insurance liabilities of subsidiaries. The IFRS

permits the introduction of an accounting policy that involves remeasuring designated insurance

liabilities consistently in each period to reflect current market interest rates (and, if the insurer so

elects, other current estimates and assumptions). Without this permission, an insurer would have

been required to apply the change in accounting policies consistently to all similar liabilities.

30

The IFRS requires disclosure to help users understand:

(a) the amounts in the insurer’s financial statements that arise from insurance contracts.

(b) the nature and extent of risks arising from insurance contracts.

Scope

IFRS 4 applies to virtually all insurance contracts (including reinsurance contracts) that an entity

issues and to reinsurance contracts that it holds. [IFRS 4.2] It does not apply to other assets and

liabilities of an insurer, such as financial assets and financial liabilities within the scope of IAS

39 Financial Instruments: Recognition and Measurement. [IFRS 4.3] Furthermore, it does not

address accounting by policyholders. [IFRS 4.4(f)]

In 2005, the IASB amended the scope of IAS 39 to include financial guarantee contracts issued.

However, if an issuer of financial guarantee contracts has previously asserted explicitly that it

regards such contracts as insurance contracts and has used accounting applicable to insurance

contracts, the issuer may elect to apply either IAS 39 or IFRS 4 to such financial guarantee

contracts. [IFRS 4.4(d)]

Definition of insurance contract

An insurance contract is a "contract under which one party (the insurer) accepts significant

insurance risk from another party (the policyholder) by agreeing to compensate the policyholder

if a specified uncertain future event (the insured event) adversely affects the policyholder."

Accounting policies

The IFRS exempts an insurer temporarily (until completion of Phase II of the Insurance Project)

from some requirements of other IFRSs, including the requirement to consider IAS 8

Accounting Policies, Changes in Accounting Estimates and Errors in selecting accounting

policies for insurance contracts. However, the standard:

prohibits provisions for possible claims under contracts that are not in existence at the

reporting date (such as catastrophe and equalisation provisions)

31

requires a test for the adequacy of recognised insurance liabilities and an impairment test

for reinsurance assets

requires an insurer to keep insurance liabilities in its balance sheet until they are

discharged or cancelled, or expire, and prohibits offsetting insurance liabilities against

related reinsurance assets and income or expense from reinsurance contracts against the

expense or income from the related insurance contract.

Changes in accounting policies

IFRS 4 permits an insurer to change its accounting policies for insurance contracts only if, as a

result, its financial statements present information that is more relevant and no less reliable, or

more reliable and no less relevant. In particular, an insurer cannot introduce any of the following

practices, although it may continue using accounting policies that involve them:

measuring insurance liabilities on an undiscounted basis

measuring contractual rights to future investment management fees at an amount that

exceeds their fair value as implied by a comparison with current market-based fees for

similar services

using non-uniform accounting policies for the insurance liabilities of subsidiaries.

Premeasuring insurance liabilities

The IFRS permits the introduction of an accounting policy that involves premeasuring

designated insurance liabilities consistently in each period to reflect current market interest rates

(and, if the insurer so elects, other current estimates and assumptions). Without this permission,

an insurer would have been required to apply the change in accounting policies consistently to

all similar liabilities.

Prudence

An insurer need not change its accounting policies for insurance contracts to eliminate excessive

prudence. However, if an insurer already measures its insurance contracts with sufficient

prudence, it should not introduce additional prudence. [IFRS 4.26]

32

Future investment margins

There is a rebuttable presumption that an insurer's financial statements will become less relevant

and reliable if it introduces an accounting policy that reflects future investment margins in the

measurement of insurance contracts. [IFRS 4.27]

Asset classifications

When an insurer changes its accounting policies for insurance liabilities, it may reclassify some

or all financial assets as 'at fair value through profit or loss'. [IFRS 4.45]

Other issues

The standard:

clarifies that an insurer need not account for an embedded derivative separately at fair

value if the embedded derivative meets the definition of an insurance contract [IFRS 4.7-

8]

requires an insurer to unbundle (that is, to account separately for) deposit components of

some insurance contracts, to avoid the omission of assets and liabilities from its balance

sheet [IFRS 4.10]

clarifies the applicability of the practice sometimes known as 'shadow accounting' [IFRS

4.30]

permits an expanded presentation for insurance contracts acquired in a business

combination or portfolio transfer [IFRS 4.31-33]

addresses limited aspects of discretionary participation features contained in insurance

contracts or financial instruments. [IFRS 4.34-35]

Disclosures

The standard requires disclosure of:

information that helps users understand the amounts in the insurer's financial statements

that arise from insurance contracts: [IFRS 4.36-37]

33

o accounting policies for insurance contracts and related assets, liabilities, income,

and expense

o the recognised assets, liabilities, income, expense, and cash flows arising from

insurance contracts

o if the insurer is a cedant, certain additional disclosures are required

o information about the assumptions that have the greatest effect on the

measurement of assets, liabilities, income, and expense including, if practicable,

quantified disclosure of those assumptions

o the effect of changes in assumptions

o reconciliations of changes in insurance liabilities, reinsurance assets, and, if any,

related deferred acquisition costs

Information that helps users to evaluate the nature and extent of risks arising from

insurance contracts: [IFRS 4.38-39]

o risk management objectives and policies

o those terms and conditions of insurance contracts that have a material effect on the

amount, timing, and uncertainty of the insurer's future cash flows

o information about insurance risk (both before and after risk mitigation by

reinsurance), including information about:

the sensitivity to insurance risk

concentrations of insurance risk

actual claims compared with previous estimates

o the information about credit risk, liquidity risk and market risk that IFRS 7 would

require if the insurance contracts were within the scope of IFRS 7

34

o information about exposures to market risk arising from embedded derivatives

contained in a host insurance contract if the insurer is not required to, and does not,

measure the embedded derivatives at fair value.

REFERENCES

IFRS Convergence in India: Some Progress on Implementation. (2011, March 5).

Economic Times,Opinion. Retrieved from

http://economictimes.Indiatimes.com/opinion/policy/ifrs- convergence-in-India-

some-progress-on-implementation/ articleshow/7631924.cms

Bhattacharyya, A. (2010, February 8). IFRS: transition date will be April 1, 2011.

Retrieved from http://www.business- standard.com/India/news/ifrs-transition-date-

will-be- april-1-2011/384940/

Http://www.mca.gov.in/Ministry/press/press/press_

release_04May2010_06may2010.pdf

Bhattacharyya, A. (2011, July 11). India moves towards IFRS convergence. Retrieved

from www.business-standard.com › Home › Economy & Policy

Concept paper on convergence. Retrieved from www.icai.org/

resource_file/12436announ1186.pdf

Indas-103. Http://www.icai.org/post.html?Post_id=7543. Retrieved from

http://220.227.161.86/23704indas-16.pdf

Mergers and Acquisitions. Retrieved from http://macabacus.

Com/accounting/noncontrolling-interest.

IFRS 4. Http://www.iasplus.com/en/standards/ifrs/ifrs4

35

Objective, https://en.wikipedia.org/wiki/International_Financial_Reporting_Standards