financial statements under ind as

72 Pages·2016·0.36 MB·English

FINANCIAL STATEMENTS UNDER
IND AS:
OVER ALL CONSIDERATIONS
October 2016
1 Titre de la présentation
CONSTITUENTS OF ‘FINANCIAL STATEMENTS’
• Balance sheet
• Statement of profit and loss (title not entirely representative of contents)
• Statement of changes in equity (new)
• Cash flow statement
• Notes
FORM AND CONTENT OF FINANCIAL STATEMENTS
• Prescribed by newly-inserted Division II of Schedule III to the Companies Act
2013 in respect of
- Balance sheet
- Statement of profit and loss
- Statement of changes in equity
• No format prescribed for cash flow statement
- To be prepared in accordance with Ind AS 7, Cash Flow Statements
- No illustrative format in Ind AS 7 (unlike AS 3)
FORMAT OF BALANCE SHEET
• Vertical form
- First, ‘Assets’
- Then, ‘Equity and Liabilities’
• Current – Non-current classification of assets and liabilities
- Definitions of current and non-current assets and liabilities essentially the
same as in pre-revised Schedule III
• A larger number of items of assets and liabilities required to be presented on the
face of balance sheet, e.g. disclosure also required of
- Goodwill
- Investment Property
- Break-up of financial assets such as investments, trade receivables, loans,
etc.
• ‘Equity’ to be classified on the face of balance sheet into
- Equity share capital
- Other equity
EQUITY OR LIABILITY? (IND AS 32)
• Depends on nature of contractual obligations and rights of issuer rather than
legal form of instrument :
 A preference share could warrant classification as a liability
 Conversely, a debenture could warrant classification as equity
• A single instrument may contain both a liability and an equity component
(‘compound financial instrument’)
• Broadly speaking, the primary determinant is whether contractually, the
issuer is or may be obliged to make payment in cash or other financial asset
(towards principal, interest or dividend) to the holder
 If yes, a liability
 Else, equity
• If a convertible debenture (or other convertible instrument) is convertible into
a variable number of equity instruments of issuer, it is a financial liability
rather than equity
EQUITY OR LIABILITY? (IND AS 32)
Company K issues preference shares to an investor. As per the terms of issue, the
preference shares shall be mandatorily redeemed at the expiry of five years from
the date of their issue. The shares carry a cumulative dividend of 8% per annum and
the terms of issue specifically stipulate that any unpaid dividend shall be paid at the
time of redemption, subject to availability of profits.
Company D issues preference shares to a group of investors. As per the terms of
issue, each preference share shall be mandatorily converted into 5 equity shares at
the expiry of four years from the date of issue. The preference shares carry a non-
cumulative dividend of 8% per annum. In the jurisdiction in which Company D
operates, declaration and payment of dividend on preference shares is at the
discretion of the issuer.
COMPOUND FINANCIAL INSTRUMENTS: SPLIT
ACCOUNTING
A company issues 5,00,000 convertible debentures. The debentures have a three-
year term and are issued at par with a face value of Rs 100 per debenture, giving
total proceeds of Rs 5,00,00,000. Interest is payable at each year-end at an interest
rate of 8% per annum. At the end of the three-year term, each debenture is
convertible, at the option of the holder, into 5 equity shares of the company. When
the debentures are issued, the prevailing market interest rate for similar debt without
conversion feature is 12% per annum.
For simplicity, it is assumed that there are no transaction costs associated with issue
of debentures.
COMPOUND FINANCIAL INSTRUMENTS: SPLIT
ACCOUNTING (contd.)
Maximum potential cash outflows associated with debentures (Rs)
At the end of Year 1 (interest) 40,00,000
At the end of Year 2 (interest) 40,00,000
At the end of Year 3 (interest) 40,00,000
At the end of Year 3 (principal) 5,00,00,000
Liability component
Present value of above cash outflows at 12%
= 4,51,96,340
Equity component (balance)
5,00,00,000 minus 4,51,96,340
= 48,03,660
COMPOUND FINANCIAL INSTRUMENTS: SPLIT
ACCOUNTING (contd.)
Interest would be accrued on the liability component at 12% p.a. as follows:
Opening bal. of
Interest @ 12% Interest paid
liability
Year 1 4,51,96,340 54,23,560 40,00,000
Year 2 4,66,19,900 55,94,390 40,00,000
Year 3 4,82,14,290 57,85,710 40,00,000
EQUITY OR LIABILITY?
• Treatment of interest, dividends, losses and gains relating to a financial
instrument
- Depends on whether it is classified as equity or as liability
 E.g., dividend on preference shares classified as liability will be a charge
in determining profit or loss
• Change in classification from equity to liability (or liability to equity) due to
adoption of Ind ASs may have a significant impact on debt-equity ratio and
reported profits of many companies