IFRS All about Debit and Credit By CS

IFRS All about Debit and Credit By CS. Rajkumar S Adukia B. Com(Hons. ) FCA, ACS, MBA, AICWA, LLB , Dip IFRS(UK) DLL& LW rajkumarfca@gmail. com www. carajkumarradukia. com 09820061049/09323061049 www. carrajkumarradukia. com 1

DE PAUL CATTS “He is able , who thinks he is able. ”Buddha www. carajkumarradukia. com 2

“Not much happens without a dream. And for something great to happen, there must be a great dream. ” – Robert Greenleaf ( ICSI Journal – July 2011) www. carajkumarradukia. com 3

Agenda of our Session n We will study about IFRS GAAP/I GAAP MY DREAM FOR THIS SESSION Make IFRS as a whole very simple for all of us Overview /principles of IFRS Making clear the practical application of IFRS n The whole gamut on IFRS n How to get work on IFRS n www. carajkumarradukia. com 4

Professional Opportunities in IFRS 1. 2. 3. 4. 5. 6. 7. 8. Consultation Convergence in 123 countries Internal audit of Convergence Training India/abroad Writer of Technical Material Training for IPSAS in UN bodies and other NPO Research work for various trade bodies like IBA/IRDA/RBI To become Trustees or assist other countries 5 www. carajkumarradukia. com

CONCEPTS IN IFRS It is a GAAP n There can be 192 GAAP or more n IFRS is global GAAP n We can compare with FEMA or FERA , Income tax Act , 1961 or Direct tax code etc. n

What is IFRS? IFRS Defined in (IAS 1. 7, IAS 8. 5 , IFRS 1 Appendix A) Standards and Interpretations adopted by the International Accounting Standards Board (IASB). They comprise n International Financial Reporting Standards n International Accounting Standards; and n Interpretations developed by the International Financial Reporting Interpretations Committee (IFRIC) and n Former Standing Interpretations Committee (SIC) www. carajkumarradukia. com 7

IFRS Complete Literature Three groups n Preface , Conceptual Framework & Glossary n IFRS Foundation Constitution, due process Handbook of IASB & due process Handbook of IFRS Interpretation Committee n 65 IFRSs PLUS SME IFRS www. carajkumarradukia. com 8

Working of IASB Approves trustees IFRS Monitoring foundation Board Reports to Monitors Reviews appoints effectiveness Informs funds IFRS advisory committee appoints IFRS interpretation committee IASB creates IFRS Creates 9 www. carajkumarradukia. com

Accounting n n n Accounting consists of two things Systems and methods -systems are of two types Single entry book keeping/double entry book keeping Method of accounting Cash, Accrual, Mixed 1494 Italian Economist Luca Pacioli introduced double entry principals Every debit has to have equal credit Fair value baring bank 1995 Nick (nicholas) Leeson www. carajkumarradukia. com 10

Principles of Accounting All account heads have to fall in 3 types n Personal, Real and Nominal n Golden Rules n Personal -Debit the Receiver , Credit the Giver n Real -Debit what comes in, Credit what goes out n Nominal -Debit all expenses and losses, Credit all gains and income n www. carajkumarradukia. com 11

Major principles of IFRSs Type of asset / liability Initial Measurement Subsequent measurement Inventories IAS 2 Cost Lower of cost and net realizable value Property, Plant and Equipment IAS 16 Cost model or revaluation model Investment property IAS 40 Cost Fair value model or cost model Intangible assets IAS 38 Cost model or revaluation model Exploration and Evaluation of mineral assets IFRS 6 Cost model or revaluation model Non Monetary Government grants IAS 20 Fair Value or Nominal Value Non-current assets held for sale & Disposal groups IFRS 5 lower of carrying value and fair value less costs to sell Biological Assets IAS 41 Fair value less costs to sell www. carajkumarradukia. com 12

Measurement of Financial Assets Nature of Financial Assets Initial recognition Subsequent measurement Held for trading At fair value (through profit or loss) Available for sale At fair value plus directly At fair value (through attributable transaction equity) costs Held to maturity At fair value plus directly At amortised cost attributable transaction costs Loans and Receivables At fair value plus directly At amortised cost attributable transaction costs www. carajkumarradukia. com 13

Measurement of Financial Liability Nature of Financial Liability Initial recognition Financial liabilities at fair value through profit and loss includes derivative liability At fair value directly At fair value attributable transaction cost is charged to profit and loss account Financial liability arising out of continuing involvement asset Measured at amortised cost or fair value Financial guarantee contract less cumulative amortisation recognised Other financial liabilities including debentures, bonds, preference shares classified as Subsequent measurement Higher of the 1. Amount initial recognition 2. Valuation as per IAS 37 At fair value directly attributable transactions cost is included in the fair www. carajkumarradukia. com value At amortised cost 14 14

Components of Financial Statements IAS 1 defines a complete set of Financial Statements to be comprised of the following: 1. 2. 3. 4. 5. 6. a statement of financial position as at the end of the period a statement of comprehensive income for the period; a statement of changes in equity for the period; a statement of cash flows for the period; notes, comprising a summary of significant accounting policies and other explanatory information; and a statement of financial position as at the beginning of the earliest comparative period 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 15 www. carajkumarradukia. com

Elements of Financial Statements n n n The elements of financial statements Financial position – assets, liabilities and equity Performance – income, expense Income – Revenue and gains Revenue - sales, fees, interest, dividends, royalties and rent Gains – disposal of non current assets, revaluation of marketable securities, unrealised gains 16 www. carajkumarradukia. com

Assets Conceptual Framework for financial reporting n Definition 4. 4(a) n n 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 . 17 www. carajkumarradukia. com

Liability 4. 4(b) n Definition – A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits 18 www. carajkumarradukia. com

Income 4. 25(a) n Definitionn Income is increases in economic benefits during the accounting period in the form of inflows or enhancement of assets or decreases of liabilities that result in increases in equity other than those relating to contributions from equity participants. 19 www. carajkumarradukia. com

Expenses 4. 25(b) n Definition – Decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence of liabilities that result in decreases in equity, other than those relating to distributions to equity participants. 20 www. carajkumarradukia. com

Elements of Financial Position 4. 4(c) Equity is the residual interest in the assets of the entity after deducting all the liabilities n There is no IFRS on equity n 21 www. carajkumarradukia. com

Measurement of Elements of Financial Statements n 4. 55 (a) Historical Cost (b) Current Cost (c) Realisable Value ( Settlement) (d) Present Value 22 www. carajkumarradukia. com

Fair Value Measurement – IFRS 13 The IFRS explains how to measure fair value for financial reporting. n Some IFRSs require or permit entities to measure or disclose the fair value of assets, liabilities or their own equity instruments. n Fair value is a market-based measurement, not an entity-specific measurement. n www. carajkumarradukia. com 23

Barings Bank n n n Barings Bank - 1762 to 26 th February 1995 ING, a Dutch bank, purchased Barings Bank in 1995 for the nominal sum of £ 1 and assumed all of Barings' liabilities, forming the subsidiary ING Barings The bank lost £ 827 million ($1. 3 billion) the loss is twice the banks available trading capital It was due to speculative investing, primarily in futures contracts, at the bank's Singapore office. Nick Leeson Key Personnel in the Baring Bank (Born on 25 th. February 1967 ) (age 44) 24 www. carajkumarradukia. com

PPE Asset Value Rs. 100, 000 n Depreciation SLM over a period of 5 years n At the end of the 4 th year it was re-determined at a further period of 5 years n Carrying amount of Rs. 40, 000 will be depreciated at Rs. 8, 000 every year for the next 5 years Depreciation A/c Dr 8, 000 To PPE A/c 8, 000 n www. carajkumarradukia. com 25

Financial Instruments A Ltd holds Glaxco Ltd shares purchased at Rs. 50, 000 n A Ltd sell the shares to B Ltd. n The Investment has been sold for Rs. 5, 000 n Fair Value on the date of Sale is Rs. 13, 000 How do we account for the same? n www. carajkumarradukia. com 26

A/c Entry in A Ltd Initial Measurement Fair Value on the date of purchase is Rs. 1, 000 Shares in Glaxco Ltd A/c Dr 1, 000 To Bank A/c 50, 000 To Gain on Purchase 50, 000 www. carajkumarradukia. com 27

A/c Entry in A Ltd n On the date of sale - Revision of Fair Value at Rs. 13, 000 Shares in Glaxco Ltd A/c Dr 12, 000 To Mark to Fair Value 12, 000 Bank A/c Dr 5, 000 Loss on Sale Dr 8, 000 To Shares in Glaxco Ltd A/c 13, 000 www. carajkumarradukia. com 28

A/c Entry in B Ltd On the date of purchase Shares in Glaxco Ltd A/c Dr 13, 000 To Bank A/c 5, 000 To Gain on Purchase 8, 000 www. carajkumarradukia. com 29

Agriculture – IAS 41 Purchase of Livestock n Fair Value – 6000 n Purchase Cost 500 Livestock A/c Dr 6000 To Bank 500 To Gain on Purchase 5500 ( Measurement is at fair value under IAS 41) www. carajkumarradukia. com 30

Income Taxes – IAS 12 An entity’s PPE Carrying Value – Rs. 10, 000 Revalued at Rs. 15, 000 Rate of Tax 20% What is the Deferred Tax Liability and the entry to be passed? www. carajkumarradukia. com 31

Income Tax Carrying Value is Rs. 15, 000 after revaluation. n Tax Liability – 20%*( 15, 000 -10, 000) n Deferred Tax Liability is Rs. 1, 000 n www. carajkumarradukia. com 32

Income Tax PPE A/c Dr Rs. 5, 000 To Revaluation Surplus A/c Rs. 5, 000 Revaluation Surplus A/c Dr Rs. 1, 000 To Deferred Tax Liability A/c Rs. 1, 000 www. carajkumarradukia. com 33

Business Combination Complete merger by payment - Purchase of Business n Fixed Assets 5 crores n Current Assets – 3 crores n Current Liabilities - 2 crores n Contingent Liabilities 1 crores n Payment made 4 crores n Fair Value of Fixed Assets – 4. 5 crores www. carajkumarradukia. com 34

Business Combination Journal Entry for purchase of business Non Current Assets A/c Dr 4. 5 cr Current Assets A/c Dr. 3 cr To Current Liabilities A/c 2 cr To Contingent Liabilities A/c 1 cr To Bank A/c 4 cr To Gain on Purchase . 5 cr n www. carajkumarradukia. com 35

Business Combination Future liability of Rs. 1 crore to be paid to the buyer after two years Non Current Assets A/c Dr 4. 5 cr Current Assets A/c Dr 3 cr Goodwill A/c Dr . 5 cr To Long Term Liability A/c 1 cr To Current Liability A/c 2 cr To Contingent Liability A/c 1 cr To Bank A/c 4 cr n www. carajkumarradukia. com 36

Few other examples Customer loyalty programmes n Service concession arrangements n Part of an item accouting IAS 16. 43 n Cost model /revaluation model n Concept of financial instrument n Conceptual framework n Unwinding of interest n Present value sales, liabilities n

HOW TO GET WORK HAVE A DREAM THAT YOU ARE GLOBAL PRACTITIONER n PROJECT YOURSELF n WRITE ARTICLE IN CHAMBER PERIODICALS, BUSINESS NEWSPAPER, ETC n ADDRESS ON THE SUBJECT n TALK ABOUT IT n WWW n

Questions/ Suggestions/ Comments? ? ? 39 www. carajkumarradukia. com

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