by admin
7. October 2010 03:37
Part 2
SCOPE LIMITATIONS
Intentional omissions have been made in respect of concepts that a professional CA is expected to have mastered and also in respect of concepts which for a mind like mine seems nothing more than Greek and Latin
A) REVENUE RECOGNITION
The broad principles in IFRS are generally followed without any further guidance or exceptions for certain industries
USGAAP guidance on revenue recognition is detailed, extensive and specific to industries
Indian GAAP does not provide a comprehensive guidance, thereby guidance being taken from legal considerations, past practices
A1) SALE OF GOODS - RECOGNITION CRITERIA
Probability of economic benefit, reliable measurement of revenue, transfer of significant risks and rewards associated with ownership, entity does not have any effective control over the goods, reliable measurement of costs – IFRS
Indian GAAP also has similar requirements as in above, except that when costs cannot be reliably measured, it influences the timing of revenue recognition
A2) SALE OF SERVICES - GENERAL
When the outcome of a transaction can be reliably estimated, use percentage of completion method. When the outcome cannot be reliably estimated, then recognize revenue only to the extent of recoverable costs. However, if recovery of costs itself is uncertain, revenue recognition would need to be deferred. Revenue can be recognised on a straight line basis, where services are covered over an indeterminate number of acts over a specified period of time - IFRS
Indian GAAP similar to IFRS, except that completed services contract method are used in certain cases
A3) SALE OF SERVICES - RIGHT OF REFUND
Agreements containing a refund clause should be evaluated to determine if the outcome of the contract can be estimated reliably and if the entity would be able to obtain economic benefit from it. Where reliable estimate is not possible, recognise revenue to the extent of recoverable costs incurred - IFRS
Indian GAAP does not provide any specific guidance. However, in practice, the evaluation would be similar to that in IFRS, but a zero profit model is not used
A4) MUTIPLE ELEMENT ARRANGEMENTS
Though revenue recognition is done separately for each transaction, in certain cases, it becomes necessary to split a transaction into components or to combine two or more transactions so that they reflect the substance of the transaction. Evidence for fair value in such cases can either be the normal price that is charged or cost plus mark up - IFRS
Indian GAAP does not provide any specific guidance
A5) MULTIPLE DELIVERABLE AGREEMENTS - CONTINGENCIES
When a portion of the amount allocable to a delivered items is contingent upon the delivery of additional items, then IFRS imposes limitations on the amount allocable to the delivered item. A thorough consideration of all factors is necessary to draw a conclusion
Indian GAAP does not provide any specific guidance
A6) MULTIPLE ELEMENT ARRANGEMENT - CUSTOMER LOYALTY PROGRAM
IFRS requires that awards/credits earned by the Customer would need to be accounted on the basis of multiple element arrangement
Indian GAAP has no specific guidance on the issue. Generally, revenue is not split and only an estimated liability for redemption of goods or services is recorded
A7) COMBINING AND SEGMENTING CONTRACTS
Under IFRS, a group of contracts are combined and treated as single, when they are negotiated as part of a package and other specified conditions are met. Further, where a contract consists of construction of more than one asset, each asset is to be viewed as a separate construction contract, if acceptance and rejection of proposal can take place asset wise and costs&revenue cane be measured asset wise
Indian GAAP – Similar to IFRS
A8) BARTER TRANSACTIONS
IFRS – A non monetary barter transaction of similar goods and services is not considered to have commercial substance and hence, the profit or loss is not recognised. In non advertising barter transactions, measurement is based on the fair value of items/services received or else on basis of fair value of items/services rendered (where fair value of receipts cannot be reliably determined). In case of advertising barter transactions, recognition is with reference to fair value of services provided
Indian GAAP – No specific guidance, hence practice is to either not record the transaction or record it at cost or fair value
A9) EXTENDED WARRANTY
In case of IFRS, revenue from sale should be deferred and recognised over the period of warranty.
No specific guidance in Indian GAAP
A10) DISCOUNTING OF REVENUE
Discounting of revenue under IFRS is done when revenue inflow is deferred. An imputed interest rate is used for determining the amount of revenue to be recognised and now and the interest income that has to be recognised over the period of time
Discounting not required under Indian GAAP
B) EXPENSE RECOGNITION - SHARE BASED PAYMENTS
B1) SCOPE
IFRS includes accounting for all employee and non employee arrangements.
SEBI guidelines apply only to listed entities and ICAI GN is recommendatory in nature. There is no guidance for awards issued to non employees
B2) CLASSIFICATION
Under IFRS, classification is as – Equity settled, cash settled share based payment transaction and share based payment transaction with choice of settlement
Sebi guidelines cover only Employee Stock Option Scheme and Employee Share Purchase Scheme – similar to equity settled award. ICAI GN is similar to IFRS.
Under IFRS, share settled awards are classified as equity awards even if there is variability in number of shares due to a fixed monetary value to be achieved. ICAI prescribed treatment is similar to IFRS.
Under IFRS, awards that offer the employees the choice of settlement in stock or in cash should be treated as a compound instrument. ICAI GN is similar
B3) AWARD FOR GOODS OR NON EMPLOYEE TYPE SERVICES
IFRS requires measurement of fair value to occur when the goods are received or as non employee type services are rendered. Awards can be valued by reference to the fair value of the goods or services received by the entity. However, if the fair value of equity instruments is greater than the fair value of goods or services received, that difference is an indication that unidentified goods or services have been or will be received and need to be accounted for. Immediate recognition of expense related to them would be appropriat
Indian GAAP does not provide any specific guidance on the subject matter
B4) MEASUREMENT METHODS
Measure fair value of employee services received by reference to 1) grant date fair value of equity instruments issued, intrinsic value used in rare cases 2) fair value of liability incurred (cash settled) – IFRS
Both SG and GN provide an option to use either fair value or intrinsic value method
C) ASSETS NON FINANCIAL ASSETS
Non financial assets refer to intangible assets, plant and equipment etc
Under IFRS, replacement of parts may be capitalised when general recognition criteria are met.
Indian GAAP charges replaced components to income
C1) FREQUENCY OF REVALUATIONS
Under IFRS, revaluations have to be kept sufficiently up to date to ensure that the carrying amount does not differ materially from fair value
Under Indian GAAP, frequency of revaluation is not specified
US GAAP does not permit revaluation
C2) RATE OF DEPRECIATION
As per IFRS, depreciation is charged over the useful life of the asset. If the useful life of major components of the asset vary, then they are charged to depreciation separately
Under Indian GAAP, the statute prescribes minimum rates of depreciation. However, where useful life determined by the management is shorter than as envisaged by the statute, then the higher rates would be used. Generally, Component wise approach is not followed
Under IFRS, depreciation on revalued portion cannot be recouped from the revaluation reserve.
Indian GAAP permits it
C3) CHANGE IN DEP METHOD OR LIFE
Change in depreciation method and life of asset is considered as change in accounting estimates and are reflected in the charge for the current and prospective period – IFRS
Under Indian GAAP, change in depreciation method is given a retrospective effect and the impact is recorded in the period of change. On revision of life, the unamortised amount is charged prospectively
C4) PERIODIC REVIEW OF ESTIMATES
Periodic review of depreciation method, residual value and useful life at each balance sheet date are required in IFRS.
Indian GAAP does not specifically call for such periodic review
C5) CAPITALISATION OF DISMANTLING AND RESTORATION COSTS
IFRS requires the capitalisation of costs of dismantling and removing the items or restoring the site, based on managements best estimate, when an obligation exists. The standard also prescribes a per tax discount rate for this purpose
Indian GAAP requirements are similar except that there is no need for discounting and there is no specific requirement for capitalisation. An indirect reference is provided through the standard dealing with Provisions
D) TREATMENT OF GOVERNMENT GRANTS
Under IFRS, Grants in the form of non depreciable assets are taken to income on a systematic basis taking into consideration the costs incurred to meet the obligation. Specific prohibition in taking the amount to Shareholders Funds
Indian GAAP is similar to IFRS, except that it provides an alternative treatment to take the amount to Capital Reserve as part of Shareholders Funds
Under IFRS, on refund of grant relating to a depreciable asset, the revised depreciation is to be computed retrospectively and charged to expense immediately
Indian GAAP does not require a retrospective effect to depreciation. Prospective effect would suffice
E) INTANGIBLE ASSETS
Under IFRS, Intangible assets are accounted using either the cost model or the revaluation model as per the policy choice of the Company
Indian GAAP prohibits Revaluation model
Under IFRS, if the asset has a finite life, then they are amortised from the date when the asset is available for use, else the asset with an indefinite life are tested at least annually for impairment
Under Indian GAAP, all intangible assets are amortised over their estimated useful life, with a rebuttable presumption that the useful life does not exceed ten years
F) INVESTMENT PROPERTY
Under IFRS the subject matter includes Property (land and/or building) held in order to earn rentals and/or for capital appreciation. The definition does not include owner occupied property or property held for sale in ordinary course of business
Indian GAAP defined the subject matter as Property (land and building) not intended to be occupied substantially for use by or in the operations of the investing enterprises
Under IFRS, the entity can choose between the fair value and depreciated cost models for all investment property
Under Indian GAAP, investment property is treated as long term investment and carried at cost less depreciation and provision for diminution in value of investment
IFRS provides detailed guidance in cases of transfers/reclassification from Investment Property to Inventories or Owner occupied property
No specific guidance is available under Indian GAAP
G) IMPAIRMENT OF LONG LIVED ASSETS
IFRS requires an impairment test for intangible assets with indefinite useful lives or not yet ready for use.
Indian GAAP requires annual test for impairment only for intangible assets that are amortised for a period longer than ten years and for intangible assets not yet ready for use
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