Difference between mandatory exceptions and optional exemptions
What is the difference between mandatory exceptions and optional exemptions?
Whenever an entity follows an accounting standard as prescribed by Ind AS, then the entity is required to comply with the standard from the inception of the entity and make necessary changes in its financial statements so as to comply with Ind AS. This may sometimes be impractical and even if practical, may cause enormous hardship on the part of the entity resulting in additional cost and effort that may not match the benefits from such implementation. For such cases, Ind AS 101 comes to the rescue with several exceptions and exemptions from retrospective application of these standards. It should be noted that the first-time adoption can be availed by an entity once and only once in the lifetime of the company. The various options that are provided in Ind AS 101 will have to be more carefully examined by an entity before applying the same as these may have permanent repercussions in the financial statements on a year-on-year basis.
The effect of retrospective application of the standard should be adjusted against the retained earnings of the company while preparing the entity’s opening balance sheet as per Ind AS. Broadly, the two categories of adjustments that are provided in Ind AS 101 are:
Mandatory exceptions which specifically prohibit retrospective application of some aspects of several Ind ASs.
The following are mandatory exceptions in respect of financial instruments:
- Derecognition of financial assets/liabilities
- Hedge accounting
- Classification and measurement of financial assets
- Embedded derivatives
- Optional exemptions that grant relief by way of exemption from some requirements of other Ind ASs.
Following are optional exemptions regarding financial instruments:
- Compound financial instruments
- Designation of previously recognised financial instruments
- Fair value of financial assets/financial liabilities at initial recognition
- Extinguishing financial liabilities with equity instruments
- Designation of contracts to buy or sell a non-financial item