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A. Applicability

1. What are the two sets of Accounting Standards under Section 211 (3C)?

The two sets of Accounting Standards are:

  1. The Indian Accounting Standards, which have to be converged with the IFRS, and made applicable to the specified class of companies.
  2. The second set would comprise the existing Indian Accounting Standards. They would be applicable to other companies, including Small and Medium Companies (SMCs).

2. What is status of Indian Accounting Standards convergence with IFRS?

As per the press release dated 22nd January 2010, the Chairman of the Accounting Standards Board of ICAI will submit the converged version of the Accounting Standards to NACAS from time to time for recommendations and onward submission to the Ministry. However, convergence of all accounting standards has to be competed by ICAI by 31st March 2010. The NACAS will submit its recommendations to the Ministry by 30th April 2010. The same can be accessed from the link http://www.icai.org/post.html?post_id=410

3. To which class of companies will the converged accounting standards be applicable and by when?

The converged accounting standards will be applicable in phases as mentioned:

  1. Phase I: The following categories of companies will convert their opening balance sheets as at 1st April, 2011 if the financial year commences on or after 1st April 2011 in compliance with the notified accounting standards that are convergent with IFRS. These companies are:
    1. Companies, which are part of NSE – Nifty 50.
    2. Companies, which are part of BSE – Sensex 30.
    3. Companies whose shares or other securities are listed on stock exchanges outside India.
    4. Companies, whether listed or not, which have a net worth in excess of Rs.1,000 crores.

  2. Phase II Companies, whether listed or not, having a net worth exceeding Rs. 500 crores but not exceeding Rs. 1,000 crores will convert their opening balance sheet as at 1st April, 2013 if the financial year commences on or after 1st April, 2013 in compliance with the notified accounting standards that are convergent with IFRS.

  3. Phase III: Listed companies which have a net worth of Rs. 500 crores or less will convert their opening balance sheet as at 1st April, 2014 if the financial year commences on or after 1st April, 2014, whichever is later, in compliance with the notified accounting standards that are convergent with IFRS

4. When the accounting year ends on a date other than 31st March, when can the conversion of opening Balance Sheet be made?

When the accounting year ends on a date other than 31st March, the conversion of the opening Balance Sheet will be made in relation to the first Balance Sheet, which is made on a date after 31st March.

5. Which of the companies need not follow the notified, converged accounting standards?

Companies, which fall in the following categories, will not be required to follow the notified accounting standards that are converged with the IFRS, though they may voluntarily opt to do so. But they need to follow only the notified accounting standards, which are not converged with the IFRS. These companies are:

  1. Non-listed companies, which have a net worth of Rs. 500 crores or less, and whose shares or other securities are not listed on Stock Exchanges outside India.
  2. Small and Medium Companies (SMCs).

B. Net Worth

6. What are the rules for calculation of the qualifying net worth to be recommended for companies in order to determine their applicability for applying the first set of Accounting Standards, that is, converged accounting standards?

For the purpose of calculating qualifying net worth of companies, the following rules will apply:

  1. The net worth will be calculated as per the audited balance sheet of the company as at 31st March 2009 or the first balance sheet for accounting periods, which end after that date.
  2. The net worth will be calculated as the Share Capital plus Reserves less Revaluation Reserve, Miscellaneous Expenditure and Debit Balance of the Profit and Loss Account.
  3. For companies, which are not in existence on 31st March 2009, the net worth will be calculated on the basis of the first balance sheet ending after that date.

The calculation of net worth is for the purpose of the criteria only since "net worth" is a part of the criteria.

7. How is net worth computed?

The press release does not provide guidelines for computing the net worth. However, presumably, ‘net worth’ could be construed as defined under the Companies Act, 1956 (Act) [Section 2(29A)], which states: “net worth” means the sum total of the paid-up capital and free reserves after deducting the provisions or expenses as may be prescribed.

Explanation – For the purposes of this clause, “free reserves” mean all reserves created out of the profits and share premium account. But they do not include reserves created out of revaluation of assets, write back of depreciation provisions and amalgamation.

Further, as per Schedule VI to the Act and the Department (Letter No 8/16(1)/61-PR dated 09-May-1961), the debit balance of profit and loss account carried forward needs to be deducted from uncommitted reserves. Similarly, in order to reflect the true and fair view of the state of affairs of the company, it is necessary to deduct miscellaneous expenditure not written off, if any, from the free reserves.

As per an MCA press release dated May 5, 2010, Issue 7, the net worth will be calculated as:

Share Capital
Add : Reserves
Less: Revaluation Reserve
Miscellaneous Expenditure
Debit Balance of the P&L Account

8. Where the audit report includes qualifications, should the impact of qualifications be considered in computing net worth?

Though not addressed by the press release, it may be appropriate to adjust the net worth for the impact of qualifications, if any.

9. As at what date should the net worth be computed?

The net worth will be calculated as per the audited balance sheet of the company as at 31st March 2009 or the first balance sheet for accounting periods, which end after that date.

10. When a parent company falls under Phase 1 of applicability of converged standards and its Joint Venture/Subsidiary is not covered under Phase 1, will it have a consolidated or stand alone financial statements?

The companies covered in a particular phase having subsidiaries, joint ventures or associates not covered in those phase or phases will prepare their consolidated financial statements according to the first set of Accounting Standards, that is, the Converged Accounting Standards)

11. Whether determination of net worth to identify the phases of applicability is a one-time exercise or should be determined at the beginning of each year with effect from April 1, 2011?

Currently, the net worth assessment appears to be a one-time assessment.

The date for determination of the criteria is the Balance Sheet as at 31st March 2009 or the first Balance Sheet prepared thereafter when the accounting year ends on another date.

12. Whether a newly incorporated company with an initial net worth of less than Rs.500 crores will fall under the category of companies, which are not required to apply the Indian Accounting Standards converged with IFRS?

For companies, which are not in existence on 31st March 2009, the net worth will be calculated on the basis of the first balance sheet ending after that date.

C. Other Applicability Issues:

13. What will be the applicability date if the company has a year-end other than March 31?

The date for determination of the criteria is the Balance Sheet as at 31st March 2009 or the first Balance Sheet prepared thereafter when the accounting year ends on another date

14. At what date the criteria for inclusion in Phase 1 is to be considered for BES 30 and NSE 50 companies?

For all phase 1 companies, the date for determination of the criteria is the Balance Sheet as at 31st March 2009 or the first Balance Sheet prepared thereafter when the accounting year ends on another date.

15. Whether listing on a stock exchange outside India include GDRs, FCCBs and/or other debt securities?

Yes. The press release clearly specifies ‘shares and other securities’, which indicates that even debt securities should be considered for evaluating this criteria.

16. What will be the requirements with respect to financial statements of subsidiaries, joint ventures and associates?

The companies covered in a particular phase having subsidiaries, joint ventures or associates not covered in that phase or phases will prepare their consolidated financial statements according to the first set of Accounting Standards, that is, the Converged Accounting Standards.

17. Is early adoption of Indian Accounting Standards converged with IFRS allowed? If yes, by whom?

When one or more companies in a group fall in a phase other than the phase applicable to the parent company, they will continue to prepare standalone accounts according to the phase applicable to them. But the parent may need to make amendments to these accounts for the purposes of consolidation as per the Converged Accounting Standards. Such subsidiaries, joint ventures or associate companies may have the option for early adoption of the Converged Accounting Standards.

D. Comparatives

18. For companies under each of the phases, will there be a requirement to present comparative information as per the Indian Accounting Standards converged with IFRS? For example, for Phase I companies –the previous year comparatives for the year ended March 31, 2012, which is March 31, 2011)?

The companies, covered in Phase I, would be required to convert their opening
balance sheet as at 1st April 2011 in compliance with the first set of Accounting Standards, that is, the Converged Accounting Standards). Accordingly, companies are not required to provide comparative figures for the year 2010-11 as the first set of Accounting Standards, that is, the Converged Accounting Standards.

E. Formats

19. Will alternative formats be prescribed under Schedule VI to the Companies Act or any other relevant statute, which currently prescribes the format of financial statements like for electricity companies?

The press release specifies that the revised Schedule VI, according to the Indian Accounting Standards converged with IFRS will be submitted by the NACAS to the Ministry by January 31, 2010. We expect that the Schedule VI will then include two separate sets of formats – the existing one to be used by companies following the existing Indian Accounting Standards and a new one to be used by companies following the Indian Accounting Standards convergence with IFRS. Similar changes to other regulations, which prescribe financial reporting formats, can be expected from the relevant governing authority.

F. Other Authorities

20. Will the tax authorities take cognisance of financial statements prepared as per Indian Accounting Standards converged with IFRS for the purposes of filing tax returns?

While the press release does not talk about the consequential impact on taxation laws, it is expected that there will be guidelines/changes in law, which will provide clarity on this aspect. Further, assuming that the regulators will take some time to give cognisance to the Indian Accounting Standards converged with the IFRS under the tax laws, companies may need to maintain parallel sets of records to determine taxable income/book profits as per the current tax laws. Further, it can also be expected that in case of Minimum Alternative Tax (MAT), the law may require certain additional adjustments, say on account of fair value gains or losses and so on.

21. Will SEBI allow filing of financial statements prepared as per the Indian accounting standards converged with IFRS?

While the press release does not specifically address this issue, it is expected that SEBI will allow filing of Indian Accounting Standards converged with IFRS. This is also in line with SEBI’s press release dated November 9, 2009, which allowed voluntary adoption of IFRS by listed entities having subsidiaries

in website http://www.sebi.gov.in/press/2009/3442009.html. Again, it needs to be noted that SEBI has only issued a press release. A notification in this regard, once issued, will be binding on the companies.

22. Will the interim financial statements be prepared under the Indian Accounting Standards converged with IFRS, when the company falls under a specific phase?

Yes, for example, where a company falls under Phase I and has a March 31 as year-end, it would have to prepare its interim financial statements as at June 30, 2011, in accordance with the Indian Accounting Standards converged with IFRS.

23. When the first interim financial statements are prepared under the Indian Accounting Standards converged with IFRS, under which standards will the comparative ones be presented?

Assuming SEBI takes cognisance of the proposed requirements under the Companies Act that there is no requirement to present comparatives for the first annual financial statements as per Indian Accounting Standards converged with IFRS, it would be appropriate to assume that this would hold good for the interim financial statements as well. Accordingly, the comparatives would be as per the interim financial statements prepared in accordance with the existing Indian Accounting Standards.

G. Other Issues

(Based on the Press Release Dated May 4, 2010)

24. Can a company discontinue applying the Indian Accounting Standards converged with IFRS based on reassessment of eligibility criteria on a later date?

Once a company starts following the first set of Accounting Standards, that is, the Converged Accounting Standards on the basis of the eligibility criteria, it will be required to follow such Accounting Standards for all the subsequent financial statements even if any of the eligibility criteria does not subsequently apply to it.

25. Where the Indian Accounting Standards converged with IFRS are not fully consistent with IAS/IFRS issued by IASB, should Indian companies continue to apply Indian Accounting Standards converged with IFRS?

In case the notified Converged Accounting Standard is not fully consistent with the IAS/IFRS, that is, some deviations remains despite the intention to converge, as issued by the IASB, it is presumed that Indian companies will continue to follow the first set of Accounting Standards, that is, the Converged Accounting Standards as notified by the Government of India and will not adopt IFRS in toto.

26. As at what date should the net worth be computed for banks and NBFCs?

The MCA press release dated May 5, 2010 clarifies in Issues 4 and 8 that the date for determination of the criteria is the balance sheet as at March 31, 2011 or the first balance sheet prepared thereafter when the accounting year ends on another date.

27. How should net worth be computed for scheduled commercial banks/urban co-operative banks and NBFCs?

The MCA press release dated May 5, 2010, clarifies in Issue 8 that net worth will be calculated as:
Share Capital
Add : Reserves
Less: Revaluation Reserve
Miscellaneous Expenditure
Debit Balance of the P&L Account

28. When should net worth be computed for scheduled commercial banks/urban co-operative banks and NBFCs, which are not in existence as on March 31, 2011?

The MCA press release dated May 5, 2010 clarifies in Issues 8 that the net worth in such cases will be calculated based on the first balance sheet ending after that date.

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