This GAAP takes the viewer through the differences between Indian GAAP and IFRS under to IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors

1. Lets begin our Story titled CA Sandesh Mundra, sandeshmundra@gmail.com

2. Our Hero – MrKarkar has just got an assignment from M/s Change the World Ltd This is his first big break after facing very very stiff competition from MrChintan and Mr Manish. He is very happy to accept the assignment. CA Sandesh Mundra, sandeshmundra@gmail.com

3. But since MrKarkar reached late at the client place, he was asked to give an explanation to which he replied:- Everything went wrong this morning, sir. My wife decided to drive me to the station. She changed her clothes in ten minutes, but then it was raining heavily, so I had to swim. Rather than let you down, I swam across the river -- look, my suit's still wet -- ran out to the near by airport, got a ride on a friend’s helicopter, landed on top of our building and then came by rope on our floor." “I believe everything," said the boss, obviously disappointed. “But no woman can change in ten minutes." CA Sandesh Mundra, sandeshmundra@gmail.com

4. But he finally gets to meet the CFO of the company Mr IASB who greets him and welcomes him to the campus. CA Sandesh Mundra, sandeshmundra@gmail.com

5. CFO Says – MrKarkar, our organisation shall complete its 10th year in a few days. We voluntary adopted IFRS last year, this is the second year of IFRS. This year we have ventured into certain new businesses for which you need to guide us regarding selection of accounting policies. Please tell us which standard do we need to look into for this. MrKarkar smiles and Nods..and says, Yes sir, Its my pleasure. CA Sandesh Mundra, sandeshmundra@gmail.com

6. Sir, we would be referring to IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors for the basic guidelines :-As the name goes by the standard covers following areas:- - Selecting and applying accounting policies. - Accounting for changes in accounting policies as well as in accounting estimates. - Corrections in prior period errors. CA Sandesh Mundra, sandeshmundra@gmail.com

7. CFO – Ok, Great. See our organisation implemented IFRS a few years back but I am still not so conversant with IFRS. So whereever possible, please also highlight the differences as compared to Indian GAAP. In this case the corresponding Indian Standard is ??? CA Sandesh Mundra, sandeshmundra@gmail.com

8. MrKarkar – Sir Its AS-5. But sir, for that we would raise a separate bill.CFO – Oh, definitely, It’s a pleasure to pay for the real knowledge. CA Sandesh Mundra, sandeshmundra@gmail.com

9. Whenever we are selecting accounting policy, there are two options:- If IFRS exists we need to follow that IFRS CA Sandesh Mundra, sandeshmundra@gmail.com

11. Guidance in standard and interpretations dealing with similar and related issues.

12. The definitions, recognition criteria and measurement concepts in the framework.

13. IAS 8 also permits management to consider the most recent pronouncements of other standard setting bodies that use a similar conceptual framework in making this judgement.Sir, this is precisely the FIRST differenceAs against this,AS 5 gives no guidance on selection of accounting policies. CA Sandesh Mundra, sandeshmundra@gmail.com

14. Further to this note SECOND difference on accounting policies:- Existing AS 5 restricts the definition of accounting policies to specific accounting principles and the methods of applying those principles while IAS 8 broadens the definition to include bases, conventions, rules and practices (in addition to principles) applied by an entity in the preparation and presentation of financial statements. CA Sandesh Mundra, sandeshmundra@gmail.com

15. CFO – You mean the accounting policy chosen should be - Relevent to decision making needs of the user - & ReliableMrKarkar – Absolutely Sir, Reliable just like me. You are now geared up to choose your accounting policies CA Sandesh Mundra, sandeshmundra@gmail.com

16. CFO – Well that’s ok but I am faced with a problem. This year we have implemented SAP which permits only weighted average formula for inventory valuation. Till date we were doing FIFO valuation. What do we do? CA Sandesh Mundra, sandeshmundra@gmail.com

17. Sir, there are two ways that the change in policy takes place CA Sandesh Mundra, sandeshmundra@gmail.com

18. Change as per IFRS Change has to be accounted for as per the transitional provisions of IFRS. IF there is no transitional provision in IFRS, then the change has to be accounted for retrospectively. This means that the opening balance of the retained earnings for the earliest period presented and other comparative amounts disclosed for each prior period presented shall be adjusted as if the new policy had always been in use CA Sandesh Mundra, sandeshmundra@gmail.com

19. So, sir that’s the THIRD difference In IFRS comparative information is restated and the amount of adjustment relating to prior periods is adjusted against the opening balance of the retained earnings of the earliest year presented. As against this in AS-5, Financial impact of the Change has to be disclosed in the year in which change is done and no restatement is required. CA Sandesh Mundra, sandeshmundra@gmail.com

20. CFO – Like in our case how would we disclose:- Change in accounting policy in this year w.r.t. valuation of inventories. The impact on inventory valuation was determined to be – At December 31, 2008 :an increase of Rs 10,000 At December 31, 2009 :an increase of Rs 15,000 At December 31, 2010 :an increase of Rs 20,000 CA Sandesh Mundra, sandeshmundra@gmail.com

21. Change……. The income statements prior to adjustments are – 20102009 Revenue 2,50,000 2,00,000 Cost of sales 1,00,000 80,000 Gross profit 1,50,000 1,20,000 Administration costs 60,000 50,000 Selling & distribution costs 25,000 15,000 Net profit 65,000 55,000 Retained earnings as on January 1, 2009 amounted to Rs 3,00,000. So how are we going to Present the change in accounting policy in the Income Statement and the Statement of changes in Equity in accordance with requirements of IAS – 8. CA Sandesh Mundra, sandeshmundra@gmail.com

22. The solution for change…… M/s Change the World Ltd INCOME STATEMENT For the year ended December 31, 2010 CA Sandesh Mundra, sandeshmundra@gmail.com

23. M/s Change the World Ltd STATEMENT OF CHANGES IN EQUITY For the year ended December 31, 2010 CA Sandesh Mundra, sandeshmundra@gmail.com

24. CFO - But what if its not practicable to identify the exact period to which the change pertains?MrKarkar - Where it is not practicable to determine either the specific effect in a particular period or the cumulative effect of applying a new policy to past periods, the new policy should be applied from the earliest date that it is practicable to do so. CA Sandesh Mundra, sandeshmundra@gmail.com

25. During 2010, X Co. has changed its accounting policy for depreciatingP&M, so as to apply useful life method on the basis of the number of production orsimilar units expected to be obtained from the use of the asset CA Sandesh Mundra, sandeshmundra@gmail.com

27. Voluntary Change in policies.. Possible :- If it results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity’s financial position, financial performance or cash flows. CA Sandesh Mundra, sandeshmundra@gmail.com

28. FOURTH difference In addition to the situations allowed under IAS 8 for change in accounting policy, existing AS 5 allows the situation where change in accounting policy is required by statute. But that has not been perceived by IAS 8 to be a situation requiring change. CA Sandesh Mundra, sandeshmundra@gmail.com

29. CFO - But, we would be adopting some IFRS on “Agriculture” for the Bio division where we have massive sales of Rs. 150 Lacs this year. Last year we had sales of only Rs. 2 Lacs so we did not adopt the standard. Would that be a change in accounting policy? CA Sandesh Mundra, sandeshmundra@gmail.com

30. Mr Karkar – Sir, the following are not changes in accounting policies: (a) the application of an accounting policy for transactions that differ in substance from those previously occurring; and (b) the application of a new accounting policy for transactions, that did not occur previously or were immaterial. CA Sandesh Mundra, sandeshmundra@gmail.com

31. CFO – What are the disclosure norms…. CA Sandesh Mundra, sandeshmundra@gmail.com

32. DISCLOSURES FOR CHANGES IN ACCOUNTING POLICIES The title of IFRS. Details of transitional provisions, if any. The nature of change in policy. If retrospective application is impracticable- The circumstances that led to existence of that condition, and Description of how and from when the change in policy has been applied. The amounts of adjustments relating to periods before those presented, to the extent practicable. For the current period and each prior period presented, the amount of adjustment – For each financial statement line item affected, and If IAS-33 “Earning Per Share” applies to the entity, for basic and diluted EPS. CA Sandesh Mundra, sandeshmundra@gmail.com

33. Sir, Check out the FIFTH difference Disclosure requirements given in IAS 8 are more detailed as compared to the disclosure requirements given in the existing AS 5. Para 32 of AS – 5 says, Any change in an accounting policy which has a material effect Either in present or if expected in future should be disclosed. The impact of, and the adjustments resulting from, such change, if material, should be shown in the financial statements of the period in which such change is made, to reflect the effect of such change. Where the effect of such change is not ascertainable, wholly or in part, the fact should be indicated. CA Sandesh Mundra, sandeshmundra@gmail.com

34. And the SIXTH one.. As regards disclosures are concerned IAS 8 requires disclosure of impact of a future change in accounting policy when an entity is yet to implement a new standard or Interpretation that has been issued but has not come into effect. As against this:- Under AS-5 there is no such specific requirement. CA Sandesh Mundra, sandeshmundra@gmail.com

35. Sir, now the next issue is a very critical…. CA Sandesh Mundra, sandeshmundra@gmail.com

36. Changes in accounting estimates Many items in financial statements cannot be measured with accuracy and hence estimated – e.g. bad debts, inventory obsolescence, useful lives of property, plant & equipments, fair value of financial assets/liabilities, warranty obligations etc. A change in estimate does not warrant restating the financial statements of prior period since it is not a correction of an error. A change in the measurement basis applied is a change in an accounting policy, and not a change in an accounting estimate. CA Sandesh Mundra, sandeshmundra@gmail.com

37. CFO says – We were planning to change our method of depreciation from WDV to SLM. As per AS-5, we are required to compute the depreciation retrospectively, what about IFRS? CA Sandesh Mundra, sandeshmundra@gmail.com

38. Sir, this is exactly the SEVENTH difference Change in Method of depreciation under IFRS is a change in accounting estimate, hence the effect is only to be given prospectively CA Sandesh Mundra, sandeshmundra@gmail.com

39. SOME ISSUES FOR YOU TO DECIDE WHETHER THE CHANGE IS IN ESTIMATE OR IN ACCOUNTING POLICY? CA Sandesh Mundra, sandeshmundra@gmail.com

40. CFO – So if we have missed to pass an accounting entry in a particular year, Will that be a change in accounting policy or a change in accounting estimate? CA Sandesh Mundra, sandeshmundra@gmail.com

41. MrKarkar –Sir, that’s defined as a Prior Period error. To explain more lets see the definition in IAS 8 Prior period errors Omissions from, and misstatements in, the entity’s financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that: Was available when financial statements for those periods were authorized for issue; and Could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements. CA Sandesh Mundra, sandeshmundra@gmail.com

42. Definition of prior period items is much broader under IAS8 as compared to AS – 5 which covers only items of income and expenses under the definition of prior period items. It does not include balance sheet misclassification which do not have an income statement impact. So, Sir Lets see the EIGTH difference CA Sandesh Mundra, sandeshmundra@gmail.com

43. Further to that….. IAS 8 specifically states that errors include frauds, which is not covered in existing AS 5 CA Sandesh Mundra, sandeshmundra@gmail.com

44. A prior period error shall be corrected by retrospective restatement except to the extent that it is impracticable to determine either the period-specific effects or the cumulative effect of the error. CA Sandesh Mundra, sandeshmundra@gmail.com

45. LIMITATION ON RETROSPECTIVE RESTATEMENT Limitation on cumulative effect When it is impracticable to determine the cumulative effect, at the beginning of the current period, of an error on all prior periods, the entity shall restate the comparative information to correct the error prospectively form the earliest date practicable. Limitation on period specific effect When it is impracticable to determine the period specific effects of an error on comparative information for one or more prior periods presented, the entity shall restate the opening balances of assets, liabilities and equity for the earliest period for which retrospective restatement is practicable (which may be the current period). CA Sandesh Mundra, sandeshmundra@gmail.com

46. So, Sir this is the NINTH difference Prior period errors have to be corrected with the retrospective impact under IAS8 if it is measurable. As against AS – 5 Which does not require restatement of comparatives but only disclosure in the current period. CA Sandesh Mundra, sandeshmundra@gmail.com

47. TENTH difference – Extra-ordinary Items (Not Included) Keeping in view with IAS 1, Presentation of Financial Statements, which prohibits the presentation of any items of income or expense as extraordinary items and deals with Profit or loss for the period, IAS 8 does not deal with the same unlike existing AS 5 which defines “Extraordinary items are income or expenses that arise from events or transactions that are clearly distinct from the ordinary activities of the enterprise and, therefore, are not expected to recur frequently or regularly”. CA Sandesh Mundra, sandeshmundra@gmail.com

48. CFO – MrKarkar, one final question, - Although as an Indian company we have adopted IFRS, I never recollect that we have restated our comparatives. Last year at the time of finalisation we had discovered a prior period error, but it was accounted for in P/L for the year instead of hitting the comparatives. Why is it so? CA Sandesh Mundra, sandeshmundra@gmail.com

49. Conflicting Legal and Regulatory Issues Some of the situations or accounting treatments prescribed in IAS8 may not be in conformity with the present requirements of applicable laws / regulations in India. In such cases, the provisions of the applicable laws/regulations will prevail. Conflicting Issues with Companies Act, 1956 The standard requires application of change in accounting policy with retrospective effect. As per Circular: No.1/2003 dated 13.1.2003 issued by ROC, a company could reopen and revise its accounts even after their adoption in the annual general meeting in order to comply with technical requirements of laws to achieve t he object of exhibiting true and fair view. It implies that the Companies Act does not permit revision and reopening of accounts for such purposes,. Moreover, such financial statements would not deem to be in agreement with books of Accounts, a requirement under Section 227(3) (c), a fact which the auditor has to certify. CA Sandesh Mundra, sandeshmundra@gmail.com

50. CAN YOU GUESS WHO HE IS??? CA Sandesh Mundra, sandeshmundra@gmail.com

51. CAN YOU GUESS WHO HE IS? CA Sandesh Mundra, sandeshmundra@gmail.com

52. 49 CA Sandesh Mundra, sandeshmundra@gmail.com