IFRS for small and medium enterprises, or SMEs, requires them to measure post-employment defined benefit obligation using the projected unit credit method (PUCM). If an SME is unable to do so without undue cost/ effort, the use of a simplified approach is permitted, where future salary increases, future service and possible in-service mortality are ignored. As there is no specific relief from discounting, it appears that the SME will continue to discount the obligation even though it has not considered future salary increases and possible in-service mortality. This is likely to lead to an under-accrual of liability and deferment of expense recognition. The International Accounting Standards Board has initiated a comprehensive review of IFRS for SMEs. The simplification can be extended by removing discounting and, ultimately, it will better inform users of financial statements.

New control concept in IFRS

New IFRS10 (International Financial Reporting Standards) Consolidated Financial Statements and IFRS11 Joint Arrangements are applicable for periods beginning January 1, 2013. According to an Ernst & Young survey of IFRS financial statements of 50 large companies, 93 per cent are likely to be impacted by the standards. The new control concept in IFRS 10 will require a company to re-assess its control over group companies. Special attention will be needed for entities in which the company owns between 40 per cent and 60 per cent. Approximately half of the companies impacted by IFRS11 currently apply proportionate consolidation to their jointly controlled entities. Under IFRS11, they have to determine if these entities are joint operation or joint venture. Joint ventures will mandatorily be equity accounted. Although this will not impact bottom line, the financial statement geography will change significantly.

Value addition to auditor’s report

In June 2012, the International Auditing and Assurance Standards Board (IAASB) released an ‘Invitation to Comment: Improving the Auditor’s Report’, setting out the direction for the board’s future standard-setting proposals to add value to the information communicated in auditors’ reports in accordance with International Standards on Auditing. The board recommends inclusion of additional information to highlight matters that, in the auditor’s judgment, are likely to be most important to users’ understanding of the audited financial statements. The auditor’s report would include a conclusion on the appropriateness of the management’s use of the going concern assumption in preparing the financial statements and an explicit statement on whether material uncertainties have been identified. It mandates auditor’s statement on whether any material inconsistencies between the audited financial statements and other information have been identified.

Accounting for government grant

The Accounting Standards Board of the Institute of Chartered Accountants of India has issued an exposure draft of the proposed limited revisions to AS12 Accounting for Government Grants. Currently, in accordance with AS12, grant related to specific fixed assets are shown as a deduction from their gross value. Alternatively, grants related to depreciable fixed assets are treated as deferred income, which is recognised in the profit-and-loss on a systematic basis over the useful life of the asset. Companies are also required to disclose such grants in the balance sheet after ‘Reserves and Surplus’ but before ‘Secured Loans’ with a suitable description. However, the exposure draft takes the view that deferred government grant is in the nature of unearned income and, therefore, should be classified as a liability with further bifurcation into current and non-current. This may impact the debt-equity ratio of companies having a significant deferred government grant. The final amendment on this aspect has not been issued by the ICAI.

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