Accounting and Auditing Update April 2015 · 2020-06-24 · Schemes of Amalgamation: Compatibility...

April 2015

ACCOUNTINGAND AUDITINGUPDATE

In this issue

Schemes of Amalgamation: Compatibility with GAAP p1

Accounting for investments in associates and joint ventures p3

ICDS- A new paradigm for computing taxable income p5

ICAI provides much awaited guidance on fraud reporting p10

Common errors in Statement of Cash Flows under U.S. GAAP financials p14

Aggregation of related party transactions while seeking approval of shareholders under Clause 49 (VII) of the equity listing agreement p16

Year-end reminders p18

Regulatory updates p32

To be updated soon...

Editorial

© 2015 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The end of March tends to have a surprise (or a sting in the tail!) for companies in India. This year is no different, with the Government of India issuing the long awaited ‘Income Computation and Disclosure Standards’ (ICDS). The Ministry has issued 10 ICDS that are applicable from 1 April 2015 and will affect all companies, whether or not they apply Ind AS. Companies would need to immediately start working with the ICDS and evaluate their impact on their taxable income. In this issue of the Accounting and Auditing Update, we provide an overview of these standards and key areas where they differ from the accounting standards.

In India, for mergers and acquisitions, many companies tend to follow the amalgamation route through a court scheme. These schemes sometimes may require companies to follow certain accounting treatments that are not in line with the generally accepted accounting principles. In this month’s issue, we explain the disclosure requirements of the accounting standards and the Equity Listing Agreement on the formulation of an amalgamation scheme.

Continuing with our series on Ind AS, this month we highlight the major changes that are expected to be introduced with the

implementation of Indian Accounting Standards (Ind AS) in India with respect to investments in associates and joint ventures.

The Companies Act, 2013 introduced stringent requirements on auditors on fraud reporting. The Institute of Chartered Accountants of India has recently issued some guidance in this regard. We capture in this issue, an overview of the guidance note on fraud reporting.

Clause 49 of the Equity Listing Agreement has been amended by the Securities and Exchange Board of India (SEBI) to require all material related party transactions to be approved through a special resolution of the shareholders. In this issue, we discuss whether all types of related party transactions should be aggregated for the purpose of seeking approval of shareholders.

Finally, we also highlight the key amendments for the year ending 31 March 2015 introduced under the Indian GAAP, IFRS and U.S. GAAP by the respective regulatory bodies in addition to our regular round up of regulatory updates.

As always, we would like to remind you that in case you have any suggestions or inputs on topics we cover, we would be delighted to hear from you.

Jamil Khatri

Head of Audit, KPMG in IndiaGlobal Head of Accounting Advisory Services

Sai Venkateshwaran

Partner and Head,Accounting Advisory Services, KPMG in India


Schemes of Amalgamation: Compatibility with GAAP

Mergers and acquisitions are commonly used forms of restructuring and expansion exercised by corporates. Companies carry-out mergers and acquisitions with various objectives; including, drawing synergies, enhancing capacities, in-organic growth, tax benefits, consolidation of operations, etc. The accounting for mergers and acquisitions pose special challenges based on arrangements between parties, form of purchase consideration exchanged, valuation of assets and liabilities taken over, recognition of goodwill/capital reserve, etc. This is an area where Indian Generally Accepted Accounting Principles (GAAP) are significantly different from International GAAP, not only due to different accounting literature (primarily, AS 14, Accounting for

Amalgamations), but also due to accounting treatments specified in the schemes of amalgamation by Indian companies.

In the Indian context, the proposed schemes of amalgamations are required to be approved by courts under the provisions of the Companies Act, 1956. These schemes contain accounting treatment to be followed by the transferee as well as transferor companies. In practice, certain companies have specified accounting treatments in their schemes of amalgamations that are is not consistent with the relevant accounting standards and Indian GAAP e.g.:

• Transfer of revaluation reserve of the transferor company into general reserve of the transferee company

• Adjustment of post merger period expenses (such as brand building,

marketing expenses) to securities premium account

• In an amalgamation in the nature of merger where ‘pooling of interests’ method of accounting is required to be followed, transfer of difference between net assets assumed and consideration to goodwill instead of reserves

• In an amalgamation in the nature of purchase, assets and liabilities are restated/fair valued but difference is taken to general reserve

• Adjustment of goodwill against securities premium account

• Expenses incurred on merger debited directly to general reserve.

This article aims to:

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• Explain the disclosure requirements of the AS 14 and the Equity Listing Agreement when a company formulates a scheme of amalgamation.

There may be several other examples. It may be noted that once approved by the court(s), the accounting treatment specified in the scheme becomes binding on the companies even if it is inconsistent with the relevant accounting standards. This creates a peculiar situation in India whereby the companies can follow an accounting treatment through a scheme of amalgamation which is not otherwise permitted under Indian GAAP. This has not only resulted in divergent practices in India as compared to international practices but, in some cases, led to misuse of such schemes of amalgamations.

Recognising the above peculiar situation and with a view to ensure comparability and greater transparency, the Institute of Chartered Accountants of India (ICAI), made a limited revision to AS 14 way back in 2004. As a result of limited revision, AS 14 requires that if a scheme of amalgamation sanctioned under a statute prescribes a different treatment to be given to the reserves of the transferor company after amalgamation as compared to the requirements of AS 14 that would have been followed had no treatment been prescribed by the scheme, then the following disclosures should be made in the first financial statements following the amalgamation:

• A description of the accounting treatment given to the reserves and the reasons for following the treatment different from that prescribed in AS 14

• Deviations in the accounting treatment given to the reserves as prescribed by the scheme of amalgamation sanctioned under the statute as compared to the requirements of AS 14 that would have been followed had no treatment been prescribed by the scheme

• The financial effect, if any, arising due to such deviation.

The ICAI also issued a general announcement requiring disclosures, similar to the above, in case an item in the financial statement of a company is treated differently pursuant to an order made by the Court/Tribunal, as compared to the treatment required by an Accounting Standard.

Since the accounting treatment specified in the scheme is approved by the Court, based on the facts and circumstances of each case, an

auditor should assess the impact of the deviation in the accounting treatment followed by the company in the financial statements. If such impact is material, the auditor should include an ‘emphasis of matter’ paragraph in the audit report to draw attention of the users.

The limited revision to AS 14, announcement issued by the ICAI and the requirement relating to emphasis of matter paragraph in the audit report only ensured certain disclosures for the information of the users of the financial statements. However, these disclosure requirements do not preclude the companies to adopt the treatment as prescribed in the scheme of amalgamation. To address the instances wherein the accounting treatment prescribed in the proposed scheme of amalgamation is significantly different from the one which is prescribed by the accounting standards, the Securities and Exchange Board of India (SEBI) requires all listed companies to file with the stock exchanges, for approval, any scheme/petition proposed to be filed before any Court or Tribunal under relevant sections of the Companies Act, 1956, at least one month before it is presented to the Court or Tribunal. The Equity Listing Agreement further requires that the company, while filing for approval of any draft scheme of amalgamation/merger/reconstruction, etc. with the stock exchange shall also file an auditors’ certificate to the effect that the accounting treatment contained in the scheme is in compliance with all the accounting standards specified by the Central Government in Section 211(3C) of the Companies Act, 1956. The SEBI has also prescribed a format of the auditors’ certificate in this regard vide its circular dated 25 March 2014.

In this context, it becomes imperative for the listed companies to carefully draft their proposed scheme of amalgamation so as to help ensure compliance of proposed accounting treatment specified in the scheme with GAAP.

It may also be noted that presently the requirement to obtain certificate from the auditors is applicable only for the listed companies. While there are disclosure requirements for unlisted companies, there is no requirement which can preclude such entities from proposing accounting treatment to the Courts which is not in compliance with GAAP.

The Companies Act, 2013, has introduced a requirement that no compromise or arrangement should be sanctioned by the Tribunal unless a certificate by the company’s auditor has been filed with the Tribunal to the effect that the accounting treatment, if any, proposed in the scheme of compromise or arrangement is in conformity with the accounting standards prescribed under Section 133 of the Companies Act, 2013. However, the above requirement has not been made effective as yet. Once made effective, this section would bring in the same level of compliance by unlisted companies as has been introduced by the SEBI for listed companies.

From the above it may be noted that, from a regulatory perspective, compliance with accounting standards is increasingly becoming a focus area even to the accounting treatment specified under the schemes of amalgamation. Accordingly, companies and their auditors need to examine the accounting treatment specified in such scheme carefully so as to ensure compliance with the generally accepted accounting principles.

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Accounting for investments in associates and joint ventures

Background In recent years, with the advent of globalisation more number of companies are looking out for avenues to extend their footprint across the world and thereby the accounting treatment for subsidiaries, associates and joint ventures has gained significant prominence. With respect to associates and joint ventures, the current accounting standards under Generally Accepted Accounting Principles in India (Indian GAAP) are AS 23, Accounting for Investments in Associates in Consolidated Financial Statements and AS 27, Financial Reporting of Interests in Joint Ventures.

Under Ind AS, the corresponding standards for these topics are Ind

AS 28, Investments in Associates and Joint Ventures and Ind AS 111, Joint Arrangements.

There are certain significant differences between the current accounting practices under Indian GAAP and the requirements under Ind AS which are discussed in this article.

Key impact areas on Ind AS implementationClassification With respect to associates, while both standards base the classification on the concept of significant influence, Ind AS also requires consideration of the presently exercisable potential voting rights through instruments such as share warrants, share call options, debt or equity instruments to ascertain if the criteria is met. Indian

GAAP currently does not consider the potential voting rights to determine classification of significant influence.

Currently under Indian GAAP, the accounting standard discusses three types of arrangements and they are jointly controlled operations, jointly controlled entities and jointly controlled assets. The accounting of the three arrangements depends on their legal form. Under Ind AS, joint arrangements could either be a joint operation or a joint venture, the accounting is determined based on the rights and obligations of the parties rather than the legal form of the arrangement.

Additionally, under Indian GAAP, majority owned entities are generally classified as subsidiaries without giving due consideration to the contractual arrangements that may exist between the investors or the rights of the investors which may at times demonstrate joint control and hence, the classification as a subsidiary may not be appropriate.

On account of the above differences, the classification of an investment as a subsidiary/associate/ joint venture would need to be revisited once Ind AS is implemented in India.


• Provide an overview of the changes that are proposed to be introduced with Ind AS implementation in India with respect to investments in associates and joint ventures

• Highlight the areas of differences between Ind AS and the requirements under International Financial Reporting Standards (IFRS).

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Method of accountingCurrently, under Indian GAAP, in case of a company that has an investment in an associate and/or joint venture but does not have a subsidiary, preparation of consolidated financial statements is not mandatory. Under Ind AS, consolidated financial statements are considered as the primary financial statements. Hence irrespective of whether an entity has a subsidiary or not, consolidation of investment in associates and joint ventures would be required while preparing consolidated financial statements. This requirement would become mandatory even under current Indian GAAP from financial year (FY) 2015-16 on account of the requirements under the Companies Act, 2013.

Under the current accounting practices under Indian GAAP, associates are required to be accounted using the equity method of accounting, whereas for joint ventures, the standard requires that the proportionate consolidation method of accounting should be followed. Under Ind AS, an investor is required to account its investments in both associates and joint ventures by using only the equity method of accounting.

Under Indian GAAP, the difference between the acquisition cost of the investment and the share of the book value of the net assets acquired is considered as goodwill or capital reserve (as the case may be) which is included in the carrying amount of the investment and is also disclosed separately. Under Ind AS, the goodwill or capital reserve is computed by comparing the acquisition cost of the investment with the share of the net fair value of the identifiable assets and liabilities rather than its book value. While the goodwill is included in the carrying value of the investment like Indian GAAP, the capital reserve is required to be shown in equity under Ind AS.

Loss of significant influence

Currently under Indian GAAP, on loss of significant influence or joint control in an associate or joint venture respectively, the carrying value of the remaining shareholding in the consolidated financial statements should be based on the value as per equity method in consolidated financial statements as on the date the investor divests a part of the investment. However under Ind AS,

a loss of significant influence or joint control is treated as a change in the nature of the investment and requires recognition of a profit or loss on sale measured as the difference between

a. the fair value of any retained interest, any proceeds from disposing of a part interest in the associate or joint venture and the amount reclassified from other comprehensive income and

b. the carrying amount of the investment at the date the equity method was discontinued.

Share of lossesUnder Indian GAAP, recognition of an entity’s share of losses in an associate or a joint venture are restricted to its interest in the associate or joint venture unless the investor has a binding obligation to make good the losses. While Ind AS also provides similar guidance, it requires restriction of the share of losses to its interest in the associate or joint venture which would also include any long-term interests that, in substance, form part of the entity’s net investment in the associate or joint venture in addition to the carrying amount of the investment in the associate or joint venture determined using the equity method.

Difference in reporting periods

With respect to the difference in the reporting periods between the associate/joint venture and the investor’s financial statements, Ind AS prescribes a maximum period of three months. While Indian GAAP does not prescribe any such periods with respect to associates, it requires adjustment for the effect of any significant transactions or events that may have occurred between the reporting date of the associate and the investor. For joint ventures, Indian GAAP requires that the difference between the reporting date of the investor and the joint venture should not exceed six months.

Exemption from application of the method of accounting prescribed

The current accounting principles under Indian GAAP exempt application of the equity method for associates and proportional consolidation method for joint ventures in case the associate/ joint venture is acquired and held exclusively with a view to dispose in the near future or if they operate

under severe long term restrictions. While no such exemptions are provided under Ind AS, equity method needs to be discontinued once the investment is classified as held for sale under Ind AS 105, Non-current Assets Held for Sale and Discontinued Operations. Further, venture capital organisations/ mutual fund/ unit trust and similar entities are permitted to fair value their investment under Ind AS 109, Financial Instruments (fair value through profit or loss category) instead of applying the equity method of accounting.

Separate financial statements of the investor

Under Indian GAAP, investments in associates/joint ventures are carried at cost in the separate financial statements of the investor. Under Ind AS, in addition to carrying the investment at cost, the investors are also permitted to fair value the investment in accordance with Ind AS 109, Financial Instruments.

Key differences between Ind AS and IFRSWhile Ind AS is largely based on IFRS, there are a few critical carve - outs which are discussed below:

• Under IFRS, in case the investor’s share of net assets in an associate or a joint venture is more than its acquisition cost, the excess is recognised as a gain in the statement of profit and loss. Under Ind AS, the excess is treated as capital reserve which would be recognised as part of equity

• Under IFRS, an investor in its separate financial statements is permitted to account for its investment in associate or a joint venture at cost, fair value or using the equity method1. Under Ind AS, the equity method is not permitted.

• IFRS requires the financial statements of the associate/joint venture to be prepared on the basis of the accounting policies which are in conformity with the accounting policies of the investor with no exemptions for impractability. While Ind AS also requires application of uniform accounting policies, it provides an exemption to the investor for impractability.

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1. Applicable from accounting periods beginning on or after 1 January 2016


ICDS- A new paradigm for computing taxable income

The Ministry of Finance has issued ten Income Computation and Disclosure Standards (ICDS), operationalising a new framework for computation of taxable income by all assessees in relation to their income under the heads ‘Profit and gains of business or profession’ and ‘Income from other sources’. The Central Board of Direct Taxes (CBDT) notified these standards under section 145(2) of the Income tax Act, 1961 (the IT Act) vide ‘Notification No. 33/2015 [F. No. 134/48/2010-TPL] / SO 892(E) dated 31 March 2015’. The notification of these standards comes as a follow up to the announcement made by the Finance Minister in his maiden budget speech in July 2014 of the intent to notify standards for computation of tax.

ICDS are expected to fill up some gaps that existed in the current taxation set up by bringing in consistency and clarity in computation of taxable income and providing stability in tax treatments of various items. ICDS also address the significant issue relating to taxability of assessees when companies in India move their financial reporting to Indian Accounting Standards (Ind AS) that are converged with International Financial Reporting Standards (IFRS) in a phased manner commencing 1 April 2015.


• Provide an overview of key matters and roadmap for implementation of ICDS, along with our brief comments.

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The genesis of ICDSIn 2010, when Ministry of Corporate Affairs had announced a roadmap for converging Indian financial reporting with IFRS in a phased manner, one of the biggest challenges faced by corporate sector was how this change in financial reporting would impact taxable income, as many companies would report using Ind AS while others would report using the older Accounting Standards (AS).

In response, the CBDT set up a committee in 2010 to look at the taxation related aspects of Ind AS implementation. They also recognised it as an opportunity to address certain accounting issues that have been a subject matter of tax litigation due to either diversity in accounting practices or divergence in views between tax payers and tax authorities.

While globally different approaches have been adopted to deal with the tax issues arising from IFRS adoption, the CBDT has chosen to go down the path of prescribing a separate framework for computation of taxable income, which is independent of the financial reporting framework followed by the company.

The CBDT Committee as part of their report issued in October 2012, also put out 14 draft tax accounting standards for public comments. Over two years since, and close on the heels of the press release notifying the roadmap for Ind AS convergence on 2 January 2015, the Ministry of Finance also published a revised set of 12 draft ICDS on 8 January 2015 for final comments. The comment period ended on 8 February 2015. Finally, the notification with ten ICDS has now been issued. With the notification of ICDS, there is certainty on the path that has been chosen by the CBDT. With the adoption of ICDS, irrespective of whether the company reports its financial results as per Ind AS or the existing AS, they would compute their taxable income in accordance with ICDS, ensuring horizontal equity, although not necessarily tax neutrality vis-à-vis the earlier basis.

Facilitates Ind AS adoptionThe notification of these ICDS is quite timely and important, especially considering that the timelines for adoption of Ind AS have also been notified, which permits voluntary adoption for financial year

2015-16. Providing a tax neutral framework for transition to Ind AS was a prerequisite for smooth implementation of Ind AS from this year. With the adoption of ICDS, irrespective of whether the company reports its financial results as per Ind AS or the existing AS, they would compute their taxable income in accordance with ICDS, ensuring horizontal equity, although not necessarily tax neutrality vis-à-vis the earlier basis.

These standards were developed prior to the notification of Ind AS and used the existing AS as a base, and included modifications to make them suitable for tax purposes. Now that Ind AS has been notified, and most large companies would switch to Ind AS reporting from the year 2016-17, they will find significant differences between the principles used in ICDS and those in Ind AS. As a result, the resultant computations of taxable income and net income as per financial statements could be significantly different.

ApplicabilityThese standards are applicable for computation of income chargeable under the head ‘Profits and gains of business or profession’ or ‘Income from other sources’ to all assessees following the mercantile system of accounting. These standards are applicable for assessment year 2016-2017 (previous year 2015-2016) i.e. applicable immediately with effect from 1 April 2015.

Taxable profits would now be determined after making appropriate adjustments to the financial statements (whether prepared under existing AS or Ind AS) to bring them in conformity with ICDS. Considering that these standards are already effective, it could have an immediate impact on companies, who would need to take this into account when paying their advance taxes for the first quarter of FY 2015-2016 as well as for accounting of tax expense in the quarterly results.

ICDS also provides transitional provisions to facilitate first time adoption and consideration of the resultant impact.

What you need to consider?The adoption of ICDS could significantly alter the way companies compute their taxable income, as many of the concepts from existing

AS have been modified. These ICDS have also been developed with a view to minimise tax related disputes by bringing greater consistency in the application of accounting principles governing the computation of income.

ICDS in general do not have prudence as a fundamental assumption, and accordingly in several situations this would result in earlier recognition of income or gains or later recognition of expenses or losses as compared to that under the accounting standards; this would potentially have a direct impact on the timing of tax related cash outflows.

This article provides an overview of key matters and roadmap for implementation of ICDS, along with our brief comments. There are several areas which differ from the current accounting and computation practices followed under existing AS which would require careful consideration.

Key impact areasSome of these significant impact areas and differences from existing AS are discussed under the following heads:

Borrowing Costs

ICDS on borrowing costs prescribe following key changes from the current accounting:

• Unlike Accounting Standard (AS) 16, Borrowing Costs, ICDS does not define any minimum period for classification of an asset as a qualifying asset (with the exception of inventories). Borrowing cost, would need to be capitalised even if an asset does not take substantial period of time to construct

• Unlike, AS 16, exchange differences arising from foreign currency borrowings to the extent they are regarded as interest cost are not considered as borrowing cost under ICDS

• ICDS has also prescribed a new formula for capitalisation of borrowing cost on general borrowings which involves allocating the total general borrowing cost incurred in the ratio of average cost of qualifying assets on the first day and last day of the previous year and the average cost of the total assets on the first and last day of the previous year (other than those assets which are

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directly funded out of specific borrowings). The current formula may require further clarification

• ICDS states that, in case of a specific borrowing, capitalisation of borrowing cost should commence from the date of the borrowing and in case of general borrowing, from the date of the utilisation of funds

• Further, ICDS require capitalisation even if active development of a qualifying asset is interrupted. Also, in case of qualifying assets other than inventories, capitalisation of borrowing cost should cease when the asset is put to use

• In addition, under ICDS, income from temporary deployment of unutilised borrowed funds would not be deducted from the borrowing cost to be capitalised. Rather, these will be treated as income.

Accounting policies

• ICDS does not recognise the concept of prudence. Hence, it disallows recognition of expected losses or mark-to-market losses unless specifically permitted by any other ICDS. However, ICDS remain silent on the treatment of mark-to-market unrealised gains

• Further, the concept of materiality which is an important consideration in preparing financial statements has not been considered under ICDS. This could pose implementation challenges, for instance, the treatment of unadjusted audit differences in the financial statements may need to be considered while computing taxable income.

• ICDS does not permit changes in accounting policies without ‘reasonable cause’ where reasonable cause has not been defined by the ICDS and hence, would involve exercise of judgement by the management and the tax authorities.

Construction contracts and revenue recognition

• ICDS does not permit accounting under the completed contract method, and mandates that only the percentage of completion method should be applied for recognition of revenue from rendering of services or construction contracts

• ICDS prescribe non-recognition of margins during the early stages of the contract and thus allows contract revenue to be recognised only to the extent of costs incurred. It prohibits such deferral if the stage of completion exceeds 25 per cent

• ICDS does not contain detailed guidance on recognition of revenue as a principal or agent (gross vs. net) which would impact turnover computation under section 44AB of the IT Act

• In addition, ICDS on construction contracts and revenue does not permit the recognition of expected losses on onerous contracts

• The transitional provisions under notified ICDS provide that ICDS would apply to all open contracts as at 31 March 2015. Cumulative revenue and costs recognised in the prior years have to be considered for revenue recognition of these contracts from the transition date.

Government grants

• ICDS does not permit the capital approach for recording of the government grants

• Accordingly, ICDS requires accounting of all grants either to be reduced from cost of assets or recognised as income either immediately or over a period of time, depending on the nature of grants

• Initial recognition of government grants can not be postponed beyond the date of actual receipt even though all the recognition conditions in accordance with AS has not been met.

Effects of changes in foreign exchange rates

• ICDS requires premium, discount or exchange difference on forward contracts that are intended for trading or speculation purposes, or that are entered into to hedge the foreign currency risk of a firm commitment or a highly probable forecast transaction to be recognised at the time of settlement. This is different from the current practice under existing AS of either recognition of gains and losses on mark-to-market basis or recognition of only losses in line with the principle of prudence

• Further, ICDS prescribe that accounting for foreign currency option contracts and other similar contracts should be similar to forward exchange contracts. When these contracts are entered to hedge recognised assets or liabilities, the premium or discount is amortised over the life of the contract and the spot exchange differences are recognised in the computation of taxable income

• ICDS provides that the exchange differences on translation of non-integral foreign operations should be recognised as an income or expense unlike under existing AS.

Provisions, contingent liabilities and contingent assets

• Unlike existing AS, ICDS require recognition of provisions only if it is ̀ reasonably certain’. It excludes from its ambit onerous contracts.

• In addition, ICDS also require recognition of contingent assets when the inflow of economic benefits is reasonably certain.

• These changes presumably have been made with the intention to bring in consistency to the tax treatment of losses and gains.

Other areas

The key areas of differences for the other notified ICDS are summarised below:

• Existing AS states that techniques for the measurement of the cost of the inventories such as the standard cost method may be used for convenience if the results approximate to the actual cost. However, ICDS does not permit use of the standard cost method

• Existing AS permits capitalisation of foreign exchange differences along with the underlying asset under certain circumstances. ICDS reiterates the fact that capitalisation of exchange differences relating to fixed assets shall be in accordance with section 43A and other similar provisions of the IT Act

• Unlike existing AS, ICDS only covers securities held as stock - in- trade. ICDS requires the comparison of cost and net realisable value for securities held as stock-in-trade to be assessed category wise and not for each individual security. ICDS also provides that securities that are

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not quoted or are quoted irregularly shall be valued at cost.

This could also represent a change in practice for some entities. There could be many other areas of differences for specific transactions and may vary from assessees to assessees.

Transitional provisionsThe overarching principles of the transitional provisions are that no income would escape taxation nor would it suffer double taxation as a result of the transition to this new framework. As per the transitional provisions, the assessees will be required to do a retrospective catch up at the date of transition in certain cases, whereas in certain other cases, the provisions apply only on a prospective basis.

Our viewsThe much awaited ICDS is now a reality, and India Inc. needs to gear up for this change.

• The taxable income now might be visibly delinked from the accounting income as both will be computed under different set of standards and principles. The areas of significant differences between the existing AS and the corresponding tax positions would be the key areas that assessees would need to consider while implementing ICDS

• ICDS has been drafted keeping the existing AS as a base. There are significant differences between Ind AS and existing AS. With Indian companies moving into Ind AS in phases from 1 April 2015 onwards, there would be additional adjustments required to be made to the accounting profit calculated using Ind AS to arrive at the taxable income as per the IT Act

• ICDS has not adequately addressed certain areas such as financial instruments, share based payments, etc., which are quite prevalent in today’s business environment. The standards have generally excluded those topics where there is specific guidance under the income tax law. However, if there is a conflict between the provisions of the IT Act and ICDS, then the provisions of the IT Act would prevail. The interplay between judicial precedents and the requirements of these standards needs to be

seen, and there could be several instances, where there are conflicting positions

• In addition, some of the judicial pronouncements which were in favour of the assessees might no longer be operative. Suitable amendments would also be required to the IT Act to provide certainty on some of these issues

• ICDS has only considered the existing AS currently. For accounting purposes, companies have also been relying upon numerous other pieces of literature issued by the Institute of Chartered Accountants of India such as Guidance Notes, Accounting Standard Interpretations, etc. These areas needs to be carefully evaluated as it has significant impacts on reporting of numbers for covered entities. They may impact computation of taxable income going forward

• Considering the current status and divergent practices that are in existence, the implementation of new standards could result in significant variations in tax outflow. In many cases, the timing of taxable income under the new standards would differ from the timing of recognition under accounting standards

• Appropriate modifications needs to be made to the Income tax return and Form No. 3CD to determine taxable income computed as per provision of ICDS

• Another area that needs the regulator’s attention are the Minimum Alternate Tax (MAT) provisions. Once Ind AS comes in, some companies would report based on Ind AS whereas others would report based on existing Indian GAAP, therefore, the accounting profits based on which MAT is to be calculated would need to be clarified, and may require consideration of suitable adjustments to Ind AS accounting profit. The CBDT Committee did not address this issue in its Final Report released in October 2012, citing uncertainty around the implementation date for Ind AS. The Committee had earlier recommended that transition to Ind AS should be closely monitored and appropriate amendments relating to MAT should be considered in the future based on these developments.

Regulators would need to address this matter shortly

• While standard setters have clarified that additional set of books of account will not be required for ICDS, there would be several additional records which might need to be prepared and kept available going forward. The differences between the two standards may give rise to additional computations and reconciliations, which in essence could result in the need for maintaining additional set of records especially for large and multi-location companies

• Considering the magnitude of the changes involved, all the stakeholders including assessees, management and regulatory officers would need to be trained and educated on the new framework. This is important to ensure that there is a fair process of assessment, and the objective of minimising tax disputes is met.

Summary of major changes in notified ICDS vis-à-vis draft ICDS issued in January 2015The notified ICDS has certain changes as compared to the draft ICDS issued in January 2015. We have summarised some of the significant changes below:

• ICDS on leases and intangible assets which were earlier issued has now been excluded from the final list of notified ICDS. This would come as a big relief for many assessees. The draft ICDS on leases was in line with the current accounting practice as per AS 19, Leases. ICDS proposed that the depreciation on finance leases to be claimed by the lessee as against by the legal owner of the asset. Similarly, the draft ICDS on intangible assets has not been notified. The IT Act already contains guidance on intangible assets and this exclusion should not impact assessees in a big way. The treatment of leases and intangible assets would continue to be as per the IT Act

• Another major relief has been provided in the notified ICDS on tangible assets. The draft ICDS required a Fixed Asset Register (FAR) to be maintained for all assets for all years. That would

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have required additional records to be maintained by assessees for Income tax purposes and to keep ready a reconciliation of FAR per ICDS requirements with previous submissions to IT departments. This requirement has been removed in the notified ICDS and would be a welcome change for the assessees

• Some changes in ICDS on securities have been made for making it consistent with other ICDS. These are exchange of securities (in line with ICDS on Tangible Assets) and valuation of securities held as stock-in-trade for business commenced during the previous year (in line with ICDS on Valuation of inventories)

• One more change in the notified ICDS has been made in ICDS relating to borrowing costs. The earlier draft of ICDS appeared to have missed out borrowings for the purposes of construction or production of qualifying asset in para 5 and para 6 of ICDS which dealt with measurement of specific and general borrowing cost eligible for capitalisation.

There are similar inconsistencies which have been rectified in the notified ICDS.

Making it ‘business as usual’From a corporate perspective, as a first step, companies should carry out an impact assessment. The impact assessment would provide clarity on both the extent of impact on taxable income, as well as the system and process changes that would be required to compute taxable income each period in an efficient manner. A thorough impact assessment would then serve as a blue print and drive the plan for implementation.

Considering the extent of differences between Ind AS and ICDS, most large corporate would need to consider the process and system changes that may be warranted to implement ICDS and maintain records as per these two sets of standards. Considering that the information computed using ICDS would be subject to audit through the tax audit process, it becomes all the more important for companies to maintain information in a manner that provides an audit trail.

ICDS is now a reality, and certainly a step in the right direction to enable smooth implementation of Ind AS, and reduce tax litigation in the medium term. As with any new

framework, its implementation is expected to throw up challenges. With the extent of changes in financial, corporate and tax reporting regulations, corporates in India, certainly have their task cut out for 2015.

(Source: KPMG’s First Notes dated 4 April 2015)

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ICAI provides much awaited guidance on fraud reporting

Fraud risk is often considered as a stumbling block in an economy’s growth as it has the capability to shake the trust and confidence of various stakeholders towards the corporate world. The consideration of fraud in financial reporting and the auditors’ responsibility on reporting on fraud has been an integral part of an audit of financial statements carried out in accordance with Standards on Auditing. SA 240, The Auditors’ Responsibilities relating to Frauds in An Audit of Financial Statements, deals with the auditor’s

responsibilities relating to fraud in an audit of financial statements. As per SA 240, the auditor is required to consider fraud as a risk that could cause a material misstatement in the financial statements and plan and perform such procedures that mitigate the risk of material misstatement due to fraud.

With this view, Section 143(12) of the Companies Act, (2013 Act), which is effective from 1 April 2014 introduced the requirement for the statutory auditors to report to the Central Government about the fraud/suspected fraud committed

against the company by the officers or employees of the company. With the introduction of this section, the Central Government seems to be seeking the support of the auditors in bringing in greater transparency and discipline in the corporate world to protect the interests of the shareholders and also the public, at large.


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• Provide an overview on the requirements of Section 143(12) of the Companies Act, 2013 relating to reporting on fraud by auditors

• Discuss key requirements of the recently issued Guidance Note on Reporting of Fraud under Section 143(12) of the Companies Act, 2013 by the Institute of Chartered Accountants of India (ICAI).


Reporting of fraudsIn case an auditor has sufficient reason to believe that an offence involving fraud, is being or has been committed against the company by officers or employees of the company, he is required to report the matter to the Central Government immediately but not later than 60 days of his knowledge in the following manner:

• He will forward his report to the board or the audit committee, as the case may be, immediately after instance involving fraud comes to his knowledge in order to seek their reply or observations within 45 days

• On receipt of such reply or observations, the auditor is required to forward his report and the reply or observations to the board or the audit committee along with his comments (on such reply or observations of the board or the audit committee) to the Central Government within 15 days of receipt of such reply or observations

• If the auditor fails to get any reply or observations from the board or audit committee within the stipulated period of 45 days, he should forward his report to the Central Government along with a note containing the details of his report that was earlier forwarded to the board or the audit committee for which he failed to receive any reply or observations within the stipulated time

• The report is required to be sent to the Secretary, Ministry of Corporate Affairs in Form ADT - 4.

The intention behind increasing the reporting requirements of auditors is to ensure that such matters are brought to the attention of the government/regulatory authorities. However, the construct of the Rules make these reporting requirements very challenging. For instance, the auditor is required to comment not only on confirmed frauds but also on suspected frauds.

In many instances where fraud or suspected fraud exists, the auditor may struggle to have adequate or timely information to comply with these reporting requirements. Additionally, the current construct of the Rules may push auditors to report earlier than what may be prudent/appropriate mainly to avoid the risk that the auditor

is non-compliant and subject to penalty provisions under the 2013 Act. In the case of entities with large and widespread customer base (e.g., electricity supply companies) instances of frauds can not be totally avoided and such situations could lead to repetitive reports being sent to the Central Government.

Keeping in view the challenges being faced by auditors and considering their onerous responsibility for reporting frauds, the ICAI issued the much awaited guidance note on Reporting on Fraud under Section 143(12) of the 2013 Act. The guidance note intends to address various open issues in Section 143(12) to provide appropriate guidance to members. The following section of the article aims to provide an overview of the requirements of the guidance note.

Persons covered for reporting on fraud under Section 143(12) of the 2013 ActThe guidance note clarifies that the following persons are required to report under this section:

• Statutory auditors of the company

• Cost accountant in practice conducting cost audit under Section 148 of the 2013 Act

• Company secretary in practice conducting secretarial audit under Section 204 of the 2013 Act

• Branch auditor appointed under Section 139 of the 2013 Act to the extent it relates to the concerned branch.

However, the provisions of Section 143(12) do not apply to other professionals who are rendering other services to the company such as tax auditor appointed under Income Tax Act, Sales tax or VAT auditor appointed under respective legislations. It may also be noted that internal auditors covered under Section 138 of the 2013 Act are also not specified as persons to report under Section 143(12).

Auditors’ responsible to report fraud identified during the course of performance of his duties Section 143(12) requires an auditor to report on fraud if in the course of performance of his duties as an auditor, the auditor has reason to

believe that an offence involving fraud is being or has been committed against the company by its officers or employees. The duty of an auditor is to comply with the Standards on Auditing (SAs) as per Section 143(9) read with Section 143(10) of the 2013 Act. Therefore, according to the guidance note, the term in the course of performance of his duties as an auditor, herein implies, in the course of performing an audit as per the SAs.

The definition of fraud as per SA 240 and the explanation of fraud as per section 447 of the 2013 Act are similar, except that under section 447, fraud includes ‘acts with an intent to injure the interests of the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss.’ However, an auditor may not be able to detect acts that have an intent to injure the interests of the company or cause wrongful gain or wrongful loss, unless the financial effects of such acts are reflected in the books of account/financial statements of the company. For example, an auditor may not be able to detect if an employee has received any pay-offs for favouring a specific vendor, which is a fraudulent act, since such pay-offs would not be recorded in the books of account of the company.

Therefore, the auditor is required to consider the requirements of SAs, insofar as they relates to the risk of fraud, including the definition of fraud as stated in SA 240, in planning and performing his audit procedures in an audit of financial statements to address the risk of material misstatement due to fraud.

Auditors’ to report fraud under Section 143(12) even if reported under any other statuteThe guidance note clarifies that the requirements for reporting by auditors under Section 143(12) would apply even if the fraud is required to be or has been reported under any other statute or to any other regulator. For example, in case of a fraud identified in a bank, the auditor of the bank should report the fraud to the Reserve Bank of India (RBI) as per the requirements of the RBI regulations on audit of bank. If the bank is a company and is governed by the provisions of the 2013 Act, in addition to the reporting to the RBI,

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the auditor may also be required to report the offence involving fraud to the Central Government if such instance is covered under section 143(12) of the 2013 Act.

Materiality threshold for reporting on fraudCurrently, the 2013 Act does not provide any threshold for reporting of frauds by auditors. Enabling provisions have been proposed to prescribe thresholds beyond which fraud should be reported to the Central Government through the Companies (Amendments) Bill, 2014 (Bill). The Bill has been introduced and approved by the Lok Sabha. The Bill includes an amendment to the provisions of section 143(12) relating to auditor reporting on frauds according to which, in case of a fraud involving lesser than a specified amount, the auditor shall report the matter to the audit committee constituted under Section 177 or to the board in other cases within such time and in such manner as may be prescribed. Accordingly, as per the guidance note, only those frauds, where the amount exceeds the specified amount, should be reported to the Central Government. However, in the case of frauds that are reported by the auditors only to the audit committee or the board of directors, where the amounts involved are less than the threshold that may be specified by the MCA , the details of such fraud will need to be disclosed in the board’s report in such manner as may be prescribed.

The guidance note recognises that materiality is fundamental for setting up an appropriate system of internal control, preparation of financial statements and its audit. It also reiterates the responsibility of an auditor to comply with SA 240. It further states that the guidance given with respect to reporting to the Central Government will become applicable only for those frauds that are in excess of the specified threshold. Though the proposal specifies a threshold for reporting, if the auditor identifies a fraud wherein management is involved, the auditor should evaluate its impact on the nature, timing and extent of audit procedures in accordance with the requirements of SA 240. In other words, auditor should exercise professional judgement in deciding as

to whether fraud involving immaterial amounts is required to be reported under section 143(12) in view of its nature and impact on the financial statements.

Reporting requirement under different scenariosIt is to be noted that the primary responsibility for prevention and detection of fraud rests with the management and those charged with governance. The Board of directors are required to include a statement in the director’s responsibility statement for taking proper and sufficient care for preventing and detecting fraud.

The guidance note has highlighted ways and extent of reporting required by auditors in key cases. They are summarised as below:

Reporting on suspected offence involving frauds noted during audit/limited review of interim period financial statements/results, other attest services and permitted non-attest services

While Section 143 deals with auditors’ duties and responsibilities under the 2013 Act with respect to financial statements prepared under the 2013 Act, the auditors also perform certain other attest services as auditors of the company. For example, clause 41 of the Equity Listing Agreement requires auditor to perform limited review of the quarterly financial statements published by the listed companies. Performance of tax audit, issuing certificates and audit of interim financial statements as per AS 25, Interim Financial Reporting, could be other examples of attest services provided by an auditor.

As per the guidance note:

• Wherever a statute or regulation requires such attest services to be performed by an auditor, the provisions of Section 143(12) should be complied with since any such work carried out by the auditor during such attest services could be construed as being in the course of performing his duties as an auditor, albeit not under the 2013 Act

• Fraud against the company by its officers or employees that is identified by an auditor during the course of providing such

attest or non-attest services becomes reportable only if the amount involved is considered to be material to the financial statements of the company prepared under the 2013 Act or if the auditor uses or intends to use the information that is obtained in the course of performing such attest or non-attest services when performing the audit under the 2013 Act. This would also require exercise of professional judgement on the part of an auditor if the amount involved is material to the financial statements to be prepared under the 2013 Act.

Reporting on frauds detected by the management or other persons and already reported under section 143(12) by such other person

The guidance note states that Section 143(12) envisages the auditor to report an offence involving fraud only if he is the first person to identify/note such instance in the course of performance of his duties as an auditor.

If fraud has already been detected by the management through company’s vigil or whistle blower mechanism and being remediated/dealt with by them, then auditor will not be required to report it as he has not identified it.

Similarly, if instances of fraud have already been reported by the cost auditor or the company secretary and the auditor becomes aware of such suspected offence involving fraud, he need not have to report it as he has not identified the offence involving fraud.

But in both the above mentioned cases, auditor is required to review the steps that have been taken by the management with respect to such offence involving fraud and if he is not satisfied with such steps, he should state the reasons for his dissatisfaction and should request the management to perform additional procedures to enable the auditor to satisfy that the matter has been addressed appropriately. If, however, the management failed to undertake additional procedures within 45 days of his request, then he should consider as to whether he should report the matter to the Central Government.

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Reporting on frauds/suspected offence involving fraud in case of consolidated financial statements

Section 129(4) of the 2013 Act requires that the provisions relating to audit of standalone financial statements of the holding company should also apply to the audit of the consolidated financial statements. The audit of consolidated financial statements is also the duty of an auditor (if so appointed). The guidance note states that the auditor of the parent company is not required to report on frauds if the offence involving frauds relates to:

a component of a parent company, which is an Indian company since the auditor of that Indian company is required to report it:

• a foreign corporate component or a component that is not a company since the component auditors’ of such components are not covered under section 143(12). The guidance note further states that the auditor of the parent company in India is required to report instances of frauds in the component only if:

• the suspected offence involving fraud in the component is being or has been committed by employees or officers of the parent company, and

• if such offence is against the parent company.

Reporting when the suspected offence involving fraud relates to periods prior to coming into effect of the 2013 Act

The guidance note states that in cases where the fraud identified by auditor relates to years to which the Companies Act, 1956 was applicable, reporting under Section 143(12) will arise only if the suspected offence involving fraud is identified during the financial years beginning on or after 1 April 2014 and to the extent it was not dealt with in prior financial years either in the financial statements or in the audit report or in the board’s report under the Companies Act, 1956.

Reporting by auditor triggered based on suspicion or reason to believe or knowledge or on determination of offence

The guidance note states that based on a harmonious reading of Section 143(12), Rule 13 of the Companies (Audit and Auditors) Rules, 2014 and Form ADT - 4, reporting on fraud in the course of performance of duties as an auditor, is applicable only when the auditor has sufficient reason to believe and has knowledge that a fraud has occurred or is occurring i.e., when the auditor has evidence that a fraud exists.

The guidance note provides a clarity to the auditors in case of suspected frauds. It sets out that reporting requirements are triggered only when auditor has evidence that a fraud exists.

Reporting in case of corruption, bribery, money laundering and non-compliance with other laws and regulations

The guidance note states that while reporting cases consequent to corruption, bribery, money laundering and other intentional non-compliance with other laws and regulations, the auditor should consider whether such acts have been carried out by officers or employees of the company and also take into account the requirements of SA 250, Consideration of Laws and Regulations in an audit of financial statements.

Illustrative formats given by the ICAI Guidance Note The guidance note provides illustrative format for reporting to Board or the audit committee on fraud. It also includes an illustrative management representation letter, illustrative checklist for inquiries with board/audit committee, management and internal auditor, illustrative fraud risk factors, illustrative possible audit procedures to address the assessed risks of material misstatement due to fraud.

Conclusion Reporting of frauds is a sensitive area, which any company aims to avoid. The auditor is expected to exercise significant judgement and professional skepticism to conclude that a fraud has been committed especially considering significant resistance and justification that the management may try to frame. The role could become more onerous in cases of management colluded frauds which may not be easy to discover. The provision is a welcome improvement if the same is implemented appropriately. Failure to report frauds will be punishable with imprisonment for a term which may extend to one year and with minimum penalty of INR1 lakh which may extend up to INR25 lakhs.

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Common errors in Statement of Cash Flows under US GAAP financials

In the AICPA National Conference on Current SEC and PCAOB Developments, held in December 2014, T. Kirk Crews, Staff of the SEC’s Office of the Chief Accountant (OCA) commented that restatements of the statement of cash flows continue to increase each year and many of the restatements are in areas considered to be less complex in nature such as failure to appropriately account for capital expenditures purchased on credit.

Given the increasing instances of cash flow restatement, the OCA staff suggested that entities consider three factors when evaluating their

processes and controls related to the statement of cash flows, namely:

• Information – Entities should evaluate how they collect the data necessary to prepare the statement of cash flows, identify what controls they have to ensure the data is complete and accurate especially in respect of new or non-recurring transactions that have occurred.

• People – Entities should determine whether the professionals responsible for preparing the statement of cash flows have the appropriate understanding and requisite training to apply FASB ASC Topic 230, Statement of Cash Flows and professionals reviewing

the statement of cash flows have required expertise to prevent misstatements.

• Timing – Entities should consider ways in which to accelerate preparing the statement of cash flows, which could allow additional review time.


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• Highlight the common instances of errors in the statement of cash flows in practice.


In practice, some of the instances where errors are commonly noted in statement of cash flows are as discussed below:

Gross vs net receipts and payments

ASC 230-45-7 states, ‘Generally, information about the gross amounts of cash receipts and cash payments during a period is more relevant than information about the net amounts of cash receipts and payments’. For statement of cash flow presentation purposes, information about net changes in assets and liabilities during the period may be more meaningful to understand in entity’s operating, investing and financing activities than gross payments and receipts. Generally, original maturity of the asset or liability of three months or less would qualify for net reporting in the statement of cash flows.

For example, an entity enters into buyer’s credit facility with the bank towards purchase of inventory from the vendor, which is repayable to the bank within three months. An entity regularly enters into buyer’s credit facility contract with the bank. In the current case, disclosing net receipts (payments) during the period in the statement of cash flows would be more appropriate than gross receipts (payments) due to its nature of short maturity, amounts being large and turnover being quick.

Settlement of initial measurement of liability-classified contingent consideration arrangements related to a business combination

The portion of payment towards contingent consideration included in the initial purchase price allocation in a business combination transaction is a financing activity (as the arrangement is a method of financing the purchase price) while the payment of contingent consideration in excess of amount included in initial purchase price allocation is recognised in earnings and classified as operating cash flows. However, if the payment of contingent consideration is less than the amount included in the initial purchase price allocation, the payment is classified as financing cash flows. Payment of contingent consideration occurring soon after the acquisition date could be classified as investing cash flows by analogy to payment towards purchase of property, plant, and

equipment occurring soon after purchase to acquire property, plant, and equipment.

Cash receipts and payments for interest

ASC paragraphs 230-10-45-16 and 45-17 state that cash receipts and payments for interest represent cash flows from operating activities.

Effect of non-cash transactions and entries

Some transactions are partly cash and partly non-cash. The effect of non-cash element in a transaction is eliminated in statement of cash flows. Examples of non-cash investing and financing transactions are unpaid purchases of property, plant, and equipment, converting debt to equity; obtaining an asset by entering into a capital lease, issue of equity shares to a creditor towards supply of inventory or purchase of property, plant and equipment, issue of bonus shares etc. Such transactions are reported on the same page as the statement of cash flows or may be disclosed elsewhere in the financial statements, clearly referencing them to the statement of cash flows.

Investments measured at fair value and on interest rate swaps not designated as hedges

Unrealised gains (losses) on investments measured at fair value and on interest rate swaps not designated as hedges should be reported as a reconciling item within cash flows from operations. This is consistent with the FASB ASC paragraphs 230-10-45-28(b) which states that all items whose cash effects are related to investing or financing cash flows, such as gains or losses on sales of property, plant, and equipment and discontinued operations (which relate to investing activities), and gains or losses on extinguishment of debt (which relate to financing activities) are included in net income and net cash flow from operating activities.

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Aggregation of related party transactions while seeking approval of shareholders under Clause 49 (VII) of the Equity Listing Agreement

Clause 49 of the Equity Listing Agreement was amended by the Securities and Exchange Board of India (SEBI) in April and September 2014, and the revised requirements were applicable from 1 October 2014. The amendments contain stricter requirements than the requirements of the Companies Act, 2013.

There are various amendments to Clause 49 and one of the amendment relates to regulations regarding related party transactions. The amendment mainly relates to the definition of related party.

Following are the main changes:

• Clause 49(VII)(B) was revised to include an entity related under section 2(76) of the Companies Act, 2013 or a related party as per applicable Accounting Standards

• Clause 49(VII)(E) requires that all material related party transactions should be approved through a special resolution by the shareholders.

• Clause 49(VII)(C) was also amended to revise the materiality threshold for related party transactions. A transaction with a related party is considered as material if the transaction/

transactions to be entered into individually or taken together with previous transactions during a financial year exceeds ten percent of the annual consolidated turnover of the company as per the last audited financial statements of the company. Prior to the amendment, the materiality threshold was based on 5 per cent of the annual turnover or 20 per cent of the net worth, whichever is higher. Consequent to revision, the criteria of ‘net worth’ has since been deleted.

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• Discuss the issue relating to aggregation of the related party transactions entered into by a company for determining the materiality threshold for shareholders’ approval.


Basically, the essence of the revised Clause 49 (VII)(C) is that it provides a single materiality threshold for transaction and does not make a distinction between transactions recognised in the balance sheet and in the statement of profit and loss.

In this article, we are discussing the issue relating to aggregation of transactions entered into by a company while seeking its approval of shareholders for determining materiality i.e. whether all types of transactions with a related party should be aggregated or transactions of similar (each category/type of transaction) nature with a related party be aggregated for the purpose of seeking approval from shareholders.

The Explanation to Clause 49 (VII) of the Equity Listing Agreement stipulates that a ‘transaction’ with a related party shall be construed to include single transaction or a group of transactions in a contract. The definition of the term ‘transaction’ plays an important role in determining the threshold for seeking approval of shareholders.

The issue is debatable due to lack of clarity in the regulations of the Equity Listing Agreement and there can be two possible views on this matter.

• Aggregation of transaction of similar nature (each category/type of transaction) with a related party: One view is that it would be appropriate to aggregate transactions of a similar nature with a related party, while applying the materiality threshold for seeking the approval of the shareholders. The definition of ‘transaction’ indicates that it refers to a single transaction or a group of transactions in a contract. For example, the company may enter into different contracts for transactions like sale of goods, purchase of fixed assets, loans taken, etc. with a related party. For the purpose of determining materiality, aggregation of each category/type of transactions in a contract with a particular related party should be used to apply the materiality threshold

• Aggregation of all types of transactions with a related party: Another view is that all transactions across all contracts (irrespective of the nature of the transactions i.e. category/type

of transaction) with a related party should be aggregated while applying the materiality threshold for seeking approval of shareholders.

Clause 49(VII)(C) does not clarify the manner of aggregation of related party transactions i.e. by nature/type or aggregation of all types of transactions, for the purpose of determining the materiality threshold.

This requirement of Clause 49 is unlike AS 18, Related Party Disclosures, which clearly states that items of a similar nature may be disclosed in aggregate by type of related party except when separate disclosure is necessary for an understanding of the effects of related party transactions on the financial statements of the reporting enterprise. AS 18 also provides guidance on materiality while providing disclosures for related party transactions. It states that depending on the circumstances, either the nature or the size of the item could be the determining factor. As regards size, for the purpose of applying the test of materiality, ordinarily a related party transaction, the amount of which is in excess of 10 per cent of the total related party transactions of the same type (such as purchase of goods), is considered material, unless on the basis of facts and circumstances of the case it can be concluded that even a transaction of less than 10 per cent is material. As regards nature, ordinarily the related party transactions which are not entered into in the normal course of the business of the reporting enterprise are considered material subject to the facts and circumstances of each case.

If the aggregation of transactions is only by type/category (e.g. sale transactions, purchase transactions, financing transactions, etc.), it could be possible that such aggregated amounts do not meet the materiality threshold for shareholders’ approval. This could lead to situations where various related party transactions may not require shareholders’ approval.

It is important to note that the focus of AS 18 is to provide guidance on disclosures regarding related party transactions whereas the intention of the SEBI is to protect the interests of shareholders. Therefore, it would be appropriate to consider the intent of the legislation in revision of Clause

49 by the SEBI. In this regard, the SEBI’s consultative paper on review of corporate governance norms in India, states:

“Abusive RPTs2 are real concerns as they can be used for personal aggrandisement of controlling shareholders, especially in Asian jurisdictions, which are characterised by concentrated shareholdings. This would dent the confidence of the investors and jeopardise the process of channelising savings into capital market/investment……………”

Accordingly, it may be advisable, pending any clarification from the SEBI and keeping in view the intent of the law, all transactions across all contracts (irrespective of the nature of transactions) with a related party should be aggregated while applying the threshold for seeking approval of shareholders.

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2. Related party transactions

Year-end reminders

I. MCA developmentsRevision in the rules on creation of Debenture Redemption Reserve (DRR)

The Companies (Share Capital and Debentures) Rules, 2014 (Rules) issued by the Ministry of Corporate Affairs (MCA) on 27 March 2014, required companies to create DRR equivalent to at least 50 per cent of the amount raised through the debenture issue. Subsequently, from 1 April 2014, the Rules have changed the requirement for creation of DRR.

The Rules have exempted following companies:

• All India Financial Insititutions regulated by the Reserve Bank of India (RBI) and banking companies in relation to public and privately place debentures

• non-banking financial companies (NBFCs) and other financial institutions covered by section 2(72) of the Companies Act, 2013 for privately placed debentures.

The Rules have reduced the percentage of DRR from 50 per

cent to 25 per cent for following companies:

• NBFCs and other financial institutions covered by section 2(72) of the Companies Act, 2013 for publicly issued debentures

• other companies (listed or unlisted) for public and privately placed debentures.

For a detailed overview of this change, please refer to KPMG’s First Notes dated 19 May 2014.

The year- end review highlights major developments in accounting, disclosure and regulatory matters in India along with the new accounting and disclosure matters in International Financial Reporting Standards and United States Generally Accepted Accounting Principles. The year-end review is intended to be a reminder to our readers of developments that may affect financial statements for companies during the year ending 31 March 2015 or in future periods. We would recommend the readers refer to the official standards or other information for complete descriptions of the new requirements and their respective provisions.

Indian Generally Accepted Accounting Principles (IGAAP)

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• Provides a reminder of the recently issued financial reporting and regulatory developments that may affect financial statements as at 31 March 2015.


Amendment of rules relating to acceptance of deposits

The MCA vide notification dated 6 June 2014 has notified the Companies (Acceptance of Deposits) Amendment Rules, 2014 under the Companies Act, 2013 where companies have been permitted to accept deposits without deposit insurance till 31 March 2015. The amendment came into force from 6 June 2014.

Additionally, the MCA vide notification dated 6 June 2014 has notified Section 74(2) and Section 74(3) of the Companies Act, 2013 relating to ‘power of the Tribunal to extend time period for companies for repayment of deposits accepted under the 1956 Act’ with an effective date of 6 June 2014. The MCA has also notified that until the National Company Law Tribunal is constituted under the Companies Act, 2013 the Board of Company Law Administration shall continue to exercise powers in this regard.

Amendment to rules relating to payment of dividend

The MCA vide notification dated 12 June 2014 has notified the Companies (Declaration and Payment of Dividend) Amendment Rules, 2014. Amended rules require set-off of carried over previous losses and also the depreciation against the profit of the current year, in order to declare dividend instead of earlier requirement to set-off lower of carried over previous year losses or depreciation. Rules became effective from 12 June 2014.

For a detailed overview of this change, please refer to KPMG’s First Notes dated 18 June 2014.

Amendment to rules relating to issue of shares and debentures

The MCA vide notification dated 18 June 2014 has issued the Companies (Share Capital and Debentures)Amendment Rules, 2014. As per this:

• equity shares with differential voting rights issued under Companies Act 1956 will continue to be regulated as per the provisions of the Companies Act, 1956/Rules

• the price of shares or other securities to be issued on preferential basis shall not be less than the price determined on

the basis of valuation report of a registered valuer

• till provisions relating to registered valuer are implemented, valuation report is to be made by an independent merchant banker (registered with the SEBI) or independent Chartered Accountant in practice (minimum experience of 10 years) in case of preferential offer of shares/other securities for non-cash consideration

• classes of companies allowed to issue secured debentures for a period upto 30 years, now include (i) infrastructure finance companies (ii) infrastructure debt fund non banking finance companies.

Clarifications regarding Corporate Social Responsibility (CSR)

Some of the important clarifications relating to CSR are as follows:

• Schedule VII: The MCA vide general circular dated 18 June 2014 has provided clarifications regarding provisions related to CSR under the Companies Act, 2013. The clarification illustrates the activities which capture the essence of items included in schedule VII of the Companies Act, 2013. In this regard, the MCA also provided that the CSR activities should be undertaken by a company as a project/ programme in accordance with its approved CSR policy. One- off events such as awards/charitable contribution, etc. would not qualify as CSR expenditure.

For a detailed discussion on this, please refer to KPMG First’s Notes dated 23 June 2014.

• CSR expenditure: Rule 4(6) of the Companies (Corporate Social Responsibility Policy), Rules 2014, has been amended by MCA vide circular dated 12 September 2014. The amendment states that expenditure on building CSR capacities of their own personnel as well as those of their implementing agencies including ‘expenditure on administrative overheads’ should not exceed five per cent of the total CSR expenditure of the company in one financial year. In this regard, the MCA also clarified that its earlier clarification that ‘salaries paid by the companies to regular

CSR staff as well as to volunteers of the companies (in proportion to companies time/hours spent specifically on CSR) can be factored in to the CSR project cost as part of CSR expenditure stands withdrawn.

• Penalty for non-compliance with CSR provisions: The MCA vide its press release dated 9 December 2014 has stated that in case a company does not comply with the provisions relating to CSR under Section 135 of the Companies Act 2013, penalty provisions under Section 134(8) of the Companies Act, 2013 will be applicable. As per Section 134(8) of the Companies Act, 2013, if a company contravenes the provisions of this section, the company shall be punishable with a fine which shall not be less than INR50,000 but which may extend to INR25 lakh and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than INR50,000 but which may extend to INR5 lakh, or with both.

Provisions for related party transactions modified/ clarified

The MCA vide notification dated 9 July 2014 has issued the Companies (Removal of Difficulties) Fifth Order, 2014. The order makes the following corrections with regard to the definition of ‘related parties’:

• ‘Related party’ with reference to a company means a public company in which a director is a director and holds along with his relatives more than two per cent of paid up share capital (previously all directors or all holders of two percent shares were related parties)

• Similarly, the MCA vide notification dated 24 July 2014 further amended the definition of ‘related parties’ under the Companies Act, 2013 to mean a private company in which relative of a director is a member or director

• Further, the MCA vide general circular dated 17 July 2014 provided clarifications regarding (i) restriction on voting by a related party to apply only for the contracts it is interested in

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(ii) Section 188 of the Companies Act, 2013 does not apply to corporate restructuring and amalgamation transactions (iii) past contracts which were in compliance with section 297 of the Companies Act, 1956 will not require fresh approvals under section 188 of the Companies Act, 2013 till expiry of original term of the contract. If any modification is made in such contracts on or after 1 April 2014, then requirements as per section 188 of the Companies Act, 2013 need to be complied with.

For detailed clarifications, please refer to KPMG’s First Notes dated 18 July 2014.

Amendment to the norms relating to useful life and residual value; clarifies certain aspects of capitalisation of costsAmendments to schedule II of the Companies Act, 2013

Useful life prescribed in schedule II of the Companies Act, 2013 are indicative

At present schedule II requires the following:

(i) the useful life of an asset should not be longer than the useful life prescribed in Part C of schedule II, and

(ii) the residual value of an asset should not be more than five per cent of its original cost

unless the company adopting a useful life or using a residual value different from the above limits, discloses the justification for the difference in the financial statements.

The amendments made by the MCA now prescribe the following:

(i) the useful life of an asset should not ordinarily be different from those prescribed in Part C of schedule II,

(ii) if a company adopts a useful life different from those prescribed in Part C of schedule II or uses a residual value higher than five per cent of the original cost of the asset, the financial statements would need to disclose the fact and provide a justification for different useful life or residual value duly supported by technical advice.

Component approach mandatory from 1 April 2015

Schedule II currently requires that companies should determine significant components of their assets and if useful life of such

significant components is different from useful life of the asset then the useful life of that significant component would be determined separately (i.e. follow a component approach).

The MCA has amended the applicability date for following the component approach. As per the amendment, component approach would be voluntary in respect of the financial year commencing on or after 1 April 2014, and will be mandatory for the financial statements in respect of financial years commencing on or after 1 April 2015.

Adjustment to opening retained earnings not mandatory

Currently, schedule II prescribes specific transitional guidance to enable companies to comply with the provisions of the Act. The transition requires that on 1 April 2014 the carrying amount of the asset:

(i) would be depreciated over the remaining useful life of the asset as per the schedule II,

(ii) after considering the residual value, would be adjusted against the opening balance of retained earnings where the remaining useful life of an asset is nil.

The MCA has amended the requirement for ‘adjustment of the opening balance of the retained earnings’ by making it optional for companies.

Capitalisation of costs by companies constructing power projects

After consulting the Accounting Standards Board of the Institute of Chartered Accountants of India, the MCA has provided following clarifications for companies involved in the construction of power projects:

• Under AS 10, Accounting for Fixed Assets and AS 16, Borrowing Costs, only costs that increase the worth of the assets are eligible for capitalisation.

Based on this principle, the MCA has clarified that the costs incurred during any periods of extended delay in commencement of commercial production (for reasons beyond the control of the developer) after the power plant is ready for use does not increase the worth of fixed assets. Therefore, cost during such periods should not be capitalised as costs of the power project.

• AS 16 provides that when the construction of an asset is completed in parts and a completed part is capable of being used while construction continues for the other parts, capitalisation of borrowing costs in relation to the completed part should cease when substantially all the activities necessary to prepare that part for its intended use or sale are complete.

Based on the above principle, the MCA has clarified that in case one of the units of a power project is ready for commercial production and is capable of being used, while the other units are still under construction, costs incurred upto the point the unit becomes ready for commercial production are eligible for capitalisation. Cost incurred after the unit is ready for use can not be capitalised even though other units are still under construction.

• The MCA has further clarified that principles of AS 10 and AS 16 is applicable to all power projects i.e. whether the power project is a ‘cost plus project’ or a ‘competitive bid project’.

For an overview of these amendments, please refer to KPMG’s First Notes dated 1 September 2014.

Rationalisation of norms relating to consolidated financial statements and internal financial controls systems

The MCA has vide notifications dated 14 October 2014 amended/ clarified provisions relating to:

• Intermediate wholly owned subsidiary (WoS) incorporated in India would be exempted from preparing consolidated financial statements (CFS). However, this exemption is not available for WoS whose immediate parent is a company incorporated outside India

• Preparation of complete CFS by a company that does not have one or more subsidiaries but have just an associate or joint venture- amended to grant a transition period for the financial year commencing 1 April 2014 and ending on 31 March 2015. After 31 March 2015, this relief is not available

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• Reporting on the internal financial control systems by the auditors, mandatory for financial years commencing on or after 1 April 2015 amended to grant a transition period

• The Schedule III related disclosures made in stand-alone financial statements which are not to be repeated in CFS.

These amendments/ clarifications have been applicable from 14 October 2014. For an overview of these amendments, please refer to KPMG’s First Notes dated 16 October 2014.

The Companies Act, 2013, vide Section 129(3), prescribes the requirements for preparation of the consolidated financial statements (CFS). Through a notification issued on 16 January 2015, the MCA has provided transitional relief to companies that have one or more subsidiaries incorporated outside India from preparation of CFS for the purpose of reporting for the first financial year under the Companies Act, 2013.

For an overview of these amendments, please refer to KPMG’s First Notes dated 22 January 2015.

Clarification regarding foreign currency convertible bonds (FCCBs) and foreign currency bonds (FCBs)

The MCA vide general circular dated 13 November 2014 has clarified that issue of FCCBs and FCBs exclusively to persons resident outside India would continue to be governed by Issue of Foreign Currency Convertible Bonds and Ordinary Shares (through depository receipts mechanism) scheme, 1993 and RBI directions/ regulations. Provisions of Chapter III of the Companies Act, 2013 will, however, be applicable if specifically required by such regulations.

MCA amends definition of ‘small company’

The MCA vide order dated 13 February 2015 issued the Companies (Removal of Difficulties) Order, 2015.

The Companies Act, 2013 required that a company, other than a public company, could be classified as a small company if its paid up share capital does not exceed INR5 million (or such other amount as may be prescribed) or its turnover as per the last profit and loss account does not exceed INR20 million. Many companies faced difficulties on

whether it could be treated as a small company if either the paid up capital or turnover threshold is met despite exceeding the monetary limit criteria of the other. In view of this, the definition of ‘small company’ has been amended to provide that a company would be considered as a ‘small company’ provided it meets the monetary limits, both, for turnover and paid up capital.

Further, Section 186 of the Companies Act, 2013 has been amended to provide that any acquisition of securities in the ordinary course of business, made by a banking company or an insurance company or a housing finance company will not attract the provisions of Section 186 (except sub-section 1 relating to investments through not more than two layers).

II. SEBI developmentsSEBI’s amendments to corporate governance norms

• The Securities and Exchange Board of India ( SEBI) vide circular dated 17 April 2014 amended the corporate governance norms for listed companies in India to be effective from 1 October 2014. Although, many of these amendments are in line with the requirements of the Companies Act, 2013, some of the changes are more stringent under the amended norms. The revised norms, inter-alia, have significantly revised the requirements relating to independent directors, their compensation, related party transactions, etc. The revised norms have also introduced several new requirements such as: governing principles for corporate governance, limit on number of directorships of independent directors, new disclosure requirements such as appointment letter and resignation letter of directors, etc.

For a clause by clause comparison with the pre-revised corporate governance norms along with comparison with Companies Act, 2013 please refer to KPMG’s First Notes dated 22 April 2014.

• The Clause 49 of the Equity Listing Agreement was further amended on vide circular dated 15 September 2014. The amendments provide amended applicability criteria along with amendments to clauses related

to the appointment of a woman director, independent directors, nomination and remuneration committee, material subsidiaries, risk and management committee, related party transactions, certain disclosures and certification of financial statements by the CEO. The clause 49 continues to be applicable to all listed companies with effect from 1 October 2014 except for appointment of woman director which will be applicable from 1 April 2015.

For a summary of these amendments, please refer to KPMG’s First Notes dated 17 September 2014.

• Additionally, the SEBI has also amended clause 35B of the Equity Listing Agreement extending the e-voting facility to all shareholders’ resolutions to be passed at the general meeting instead of such facility being open to only businesses transacted through postal ballot as per the pre-revised clause 35B.

SEBI releases new norms for public issue of debt securities

The Securities and Exchange Board of India (SEBI) vide circular dated 17 June 2014 has issued new norms for public issue of debt securities. Some of these relate to details regarding minimum subscription of debt securities which has been specified as 75 per cent of the issue size. Similarly, issue size should be a minimum of INR1 billion or more. It also provides for detailed disclosures in prospectus.

SEBI (Share Based Employee Benefits) Regulations, 2014

On 28 October 2014, the Securities and Exchange Board of India, (SEBI) has notified SEBI (Share Based Employee Benefits) Regulations, 2014. These regulations replace the existing SEBI (Employee Stock Option Scheme and Employee Stock purchase Scheme) guidelines, 1999 (erstwhile guidelines).

• As compared to the erstwhile guidelines, the new regulations are also applicable to a) stock appreciation rights schemes b) general employee benefits schemes c) retirement benefit schemes in addition to employee stock option schemes and employee stock purchase schemes

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• The regulations contain detailed requirements in case of implementation of schemes through trusts

• The requirement of composition of compensation committee has been aligned with that of the Companies Act, 2013

• Additional items requiring shareholders approval have been specified including secondary acquisition for implementation of the schemes and secondary acquisition by the trust in case the share capital expands due to capital expansion undertaken by the company

The regulations provide that any company following any of the share base schemes should follow the requirements of the ‘Guidance Note on accounting for employee share based payments’ or accounting standards as may be prescribed by the Institute of Chartered Accountants of share based payments’ or accounting standards as may be prescribed by the Institute of Chartered Accountants of India (ICAI), including disclosure requirements prescribed therein

• These regulations are effective from 28 October 2014. The regulations have specified provisions to transition to the regulations.

III. RBI developmentsImpact of unhedged foreign currency exposure on borrowing costs

RBI vide circular dated 3 June 2014 has issued certain clarifications with regard to certain provisions of the guidelines on capital and provisioning requirements for exposures to entities with Unhedged Foreign Currency Exposure (UFCE). These guidelines were applicable from 1 April 2014. Though the requirements pertain to banks, they impact relevant companies since ultimately the banks will pass on the cost of compliance through lending rates to the companies. Companies need to gear up their systems and foreign currency policies in order to manage their borrowing costs.

For detailed clarifications issued by RBI, please refer to KPMG’s First Notes dated 5 June 2014.

RBI changes regulatory framework for NBFCs

The Reserve Bank of India (RBI) vide circular dated 10 November 2014 made certain amendments to the regulatory framework governing the Non- Banking Finance Companies (NBFCs). Key revised requirements relate to:

• minimum net owned funds

• deposit acceptance

• criteria for classifying non- deposit taking NBFCs and systematically important non- deposit taking NBFCs

• prudential norms related to different categories of NBFCs

• asset classification

• percentage of provision required for standard assets

• corporate governance and disclosure related norms.

IV. Other regulatory developments

Enhancement of wage ceiling for schemes under EPF Act

The Ministry of Labour and Employment vide notifications dated 22 August 2014 made certain amendments to the Employees’ Provident Funds Scheme, 1952. These include raising the statutory wage ceiling for mandatory provident fund (PF) contribution from INR6,500 to INR15,000 per month. Similar changes have also been made under Employees’ Pension Scheme, 1995 and Employees’ Deposit-Linked Insurance Scheme, 1976. Contribution in case of higher salaries is voluntary.

V. Guidance Notes/Application Guides issued by the Institute of Chartered Accountants of India (ICAI)

Following guidance notes has been issued by the ICAI during the year 2014-15:

Guidance Note on Accounting for Rate Regulated Activities

The ICAI has issued the Guidance Note on Accounting for Rate Regulated Activities on 18 February 2015. The guidance note is effective

from accounting period beginning on or after 1 April 2015. Early adoption of the guidance note is also permitted.

Guidance Note on Reporting on Fraud under Section 143(12) of the Companies Act, 2013

The ICAI has issued the Guidance Note on Reporting on Fraud under Section 143(12) of the Companies Act, 2013 on 2 March 2015.

Application guide on the provisions of schedule II to the Companies Act, 2013

The ICAI has issued an application guide on 10 April 2015 which includes provisions of the Companies Act, 2013 and Schedule II relating to depreciation. It provides application guidance for implementing the requirements of the Schedule II and it is applicable to all companies for preparation of its financial statements commencing on or after 1 April 2014.

The Guidance Note on Accounting for Depreciation in Companies and the Guidance note on Some Important Issues Arising from the Amendment to Schedule XIV to the Companies Act, 1956 will continue to also apply to the extent applicable post implementation of Schedule II of the Companies Act, 2013.

This application guide provides clarifications and examples for issues arising on implementation of Schedule II.

VI. Expert Advisory Committee Opinions

ICAI has recently issued opinions on:

• Accounting for expenditure on shared infrastructure facilities and depreciation thereon (ICAI Journal the Chartered Accountant April 2014)

• Accounting treatment of subsequent expenditure on technological upgradation/ Improvements on capital assets (ICAI Journal the Chartered Accountant May 2014)

• Treatment of commission cost paid to agent in relation to projects (ICAI Journal the Chartered Accountant June 2014)

• Accounting treatment of dividend declared by mutual fund in debt fund scheme under dividend re-investment plan (ICAI Journal the Chartered Accountant July 2014)


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• Accounting treatment of expenditure incurred on stamp duty and registration fees for increase in authorised capital (ICAI Journal the Chartered Accountant August 2014)

• Accounting treatment of liquidated damages on unexecuted portion of contract (ICAI Journal the Chartered Accountant September 2014)

• Accounting treatment of raw materials sent to manufacturer by the company for getting finished product (ICAI Journal the

Chartered Accountant October 2014)

• Disclosure of revenue as per AS 9 (ICAI Journal the Chartered Accountant November 2014) Determination of stage of completion in construction contracts (ICAI Journal the Chartered Accountant December 2014)

• Accounting treatment of contribution to a cluster project (ICAI Journal the Chartered Accountant January 2015)

• Applicability of tax rate in quarterly financial results (ICAI Journal the Chartered Accountant February 2015).

• Presentation of write-back of provisions no longer required in the statement of profit and loss (ICAI Journal the Chartered Accountant March 2015)

Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27)

On 31 October 2012, the IASB published the Investment Entities (Amendments to IFRS 10, IFRS 12, and IAS 27), according to which a qualifying investment entity is required to account for investments in controlled entities, as well as investments in associates and joint ventures at fair value through profit or loss with some exceptions. The consolidation exception is mandatory and not optional. The amendments became applicable for annual periods beginning on or after 1 January 2014. For details on this topic, please refer to the Accounting and Auditing Update – June 2013 issue.

(Source: First Impressions: Consolidation relief for investment funds; Accounting and Auditing Update September 2014)

Offsetting Financial Assets and Financial Liabilities - Amendments to IAS 32

Para 42 of IAS 32, Financial instruments – Disclosure and Presentation, provides “A financial asset and a financial liability shall be offset and the net amount presented in the statement of financial position when, and only when, an entity:

• Currently has a legally enforceable right to set off the recognised amounts; and

• Intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.

According to the amendment, an entity currently has a legally enforceable right to set-off if that right is:

• Not contingent on a future event; and

• Enforceable both in the normal course of business and in the event of default, insolvency or bankruptcy of the entity and all counterparties.

Further, to meet the criterion in paragraph 42(b) an entity must intend either to settle on a net basis or to realise the asset and settle the liability simultaneously.

The amendment clarifies that if an entity can settle amounts in a manner such that the outcome is, in effect, equivalent to net settlement, the entity will meet the net settlement criterion in paragraph 42(b). This will occur if, and only if, the gross settlement mechanism has features that eliminate or result in insignificant credit and liquidity risk, and that will process receivables and payables in a single settlement process or cycle.

These amendments became applicable for annual periods beginning on or after 1 January 2014 and should be applied retrospectively.

(Source: Accounting and Auditing Update September 2014)

Defined benefit plans: Employee contributions (amendments to IAS 19)

IAS 19, Employee Benefits, as released in 2011 required companies to forecast future service related contributions from employees and attribute those contributions to periods of service as negative benefits under the plan’s benefit formula or on a straight-line basis. As a result such contributions would be included when calculating net current service cost and the defined benefit obligation. This could require complex actuarial calculations.

IAS 19 as amended now permit companies to reduce such contributions from the service cost in the period in which the related service is rendered provided such contributions:

• are set out in the formal terms of the plan

• linked to service

• independent of number of years of service for example, contributions that are a fixed percentage of the employee’s salary.

The amendment is relevant for defined benefit plans that involve contributions from employees or third parties meeting the criteria as mentioned above. For example – certain provident fund plans which are classified as defined benefit plans.

The amendments are required to be retrospectively applied for annual periods beginning on or after 1 July 2014. Earlier application is permitted.

(Source: In The Headline 2013-20; Accounting and Auditing Update September 2014)

IFRIC 21, Levies

IFRIC 21, Levies, lays guidance for accounting for a liability to pay a levy in accordance with the requirements of IAS 37, Provisions, Contingent Liabilities and Contingent Assets. IFRIC 21 defines a levy as “an outflow of resources embodying economic benefits that is imposed by governments on entities in accordance with legislation”.

International Financial Reporting Standards (IFRS)


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This IFRIC scopes out liabilities to pay income taxes as per IAS 12, Income taxes fines or penalties imposed for breaches in legislation and liabilities arising from emission trading schemes.

IFRIC 21 aims to address the timing of recognition of such a levy. Accordingly it requires entities to identify triggering event that necessitates the payment of levy in accordance with the legislation, which is when the liability should be recognised. It clarifies that an entity does not recognise a liability at an earlier date, even if it has no realistic opportunity to avoid the triggering event.

To illustrate, an entity is liable to pay a levy if it generates revenues in a specific market on 1 January 2015. Under the interpretation, it does not recognise a liability at 31 December 2014,even if it is economically compelled to operate in 2015 and prepares financial statements on a going concern basis.

This IFRIC explains further that the liability to pay a levy is recognised progressively if the obligating event occurs over a period of time. Similarly, if an obligation to pay a levy is triggered when a minimum threshold is reached, then no liability is recognised until this ‘minimum threshold’ is reached.

The amendments equally apply to interim financial statements. The amendments became applicable for annual periods beginning on or after 1 January 2014. Any changes in accounting policies from the initial application of IFRIC 21 should be accounted for retrospectively as per IAS 8.

(Source: In the Headlines- Issue 2013/09; Accounting and Auditing Update September 2014)

Significant developments- annual improvements 2010-12 cycleAmendment to IFRS 2, Share-based Payment

These amendments clarified the definition of vesting conditions by adding definitions for service condition and performance condition. The amendments also clarified the definition of market condition.

Performance condition:

According to the new definition, for a condition to be a performance condition, it needs to meet both of the following criteria:

a. Requirement for the counterparty to complete service condition, which may be explicit or implicit

b. Meeting specified performance target while the counterparty is rendering the service as mentioned in (a) above

The amendments clearly state that the period for achieving the performance target(s) cannot extend beyond the end of the service period, but it may start before the service period provided that the commencement date of the performance target is not substantially before the commencement of the service period.

As such, performance targets achieved after the requisite service period would not be accounted for as a performance condition, but would instead be accounted for as a non-vesting condition. The amendment also clarifies both:

• how to distinguish between a market and a non-market performance condition and

• the basis on which a performance condition can be differentiated from a non-vesting condition.

For example, a share market index target would be a non-vesting condition – even if an entity’s shares form part of that index because such an index, reflects not only the performance of the entity, but also the performance of other entities outside the group.

Any failure to complete a specified service periodeven due to the entity terminating an employee’s employmentwould represent a failure to satisfy a service condition.

Market condition: The definition of market condition is amended to clarify that it requires the counter party to complete service condition which may be explicit or implicit. Further it is clarified that a market condition can be used on the market price of the entity’s equity instruments or the equity instruments of another group entity.

The IASB considered that changes in the definitions as above may result in changes to the grant date fair value of share based payments for which grant date was in previous periods. Thus to avoid the use of hindsight, these amendments in IFRS are applicable prospectively for share based payments transactions for which the grant date is on or after 1 July 2014.

(Source: KPMG’s IFRS The Balancing Items-2013-06; Accounting and Auditing Update September 2014)

Amendment to IFRS 3, Business Combinations

IFRS 3, Business combinations, has been amended to clarify that the classification as a liability or equity of any contingent consideration in a business combination, that is a financial instrument, should be determined as per IAS 32 Financial Instruments: Disclosure and Presentation, rather than as per any other IFRSs.

Further, contingent consideration that is classified as an asset or a liability is always subsequently measured at fair value (rather than being measured at amortised cost), with changes in fair value recognised in profit or loss.

Consequential amendments are also made to IAS 39 Financial Instruments: Recognition and Measurement and IFRS 9 Financial Instruments. In addition, IAS 37 Provisions, Contingent Liabilities and Contingent Assets is amended to exclude provisions related to contingent consideration of an acquirer.

The amendment became applicable prospectively to business combinations for which the acquisition date is on or after 1 July 2014 .

(Source: Annual improvements 2010-2012 cycle as published by the IASB and KPMG’s IFRS The Balancing Items -Issue 6; Accounting and Auditing Update September 2014)


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Amendment to IFRS 8, Operating Segments

IFRS 8, Operating Segments, has been amended to explicitly require the disclosure of judgements made by management in applying the aggregation criteria. The disclosures include:

• a brief description of the operating segments that have been aggregated; and

• the economic indicators that have been assessed in determining that the operating segments share similar economic characteristics.

In addition, this amendment clarifies that a reconciliation of the total of the reportable segments’ assets to the entity’s assets is required only if this information is regularly provided to the entity’s chief operating decision maker. The amendments are applicable for annual periods beginning on or after 1 July 2014. Earlier application is permitted.

(Source: Annual improvements 2010-2012 cycle as published by the IASB and KPMG’s IFRS The Balancing Items -Issue 6;Accounting and Auditing Update September 2014)

Amendment to IAS 24, Related Party Disclosures

IAS 24, Related Party Disclosures has been amended to include ‘a management entity that provides key management (KMP) services to the reporting entity or to the parent of the reporting entity’ in the definition of related party.

In this regard amounts incurred by the reporting entity for the provision of KMP services by such management entity should be separately disclosed. However, it is clarified that the reporting entity is not required to disclose compensation paid by the management entity to the individuals providing the KMP services. Nevertheless, the reporting entity will also need to disclose other transactions with the management entity under the existing disclosure requirements of IAS 24 – e.g. loans.

The amendments are applicable for annual periods beginning on or after 1 July 2014. Earlier application is permitted.

(Source: Annual improvements 2010-2012 cycle as published by the IASB and KPMG’s IFRS The Balancing Items -Issue 6; Accounting and Auditing Update September 2014)

IFRS 13, Fair Value MeasurementMeasurement of short-term receivables and payables

The IASB has clarified that in issuing IFRS 13 and making consequential amendments to IAS 39 and IFRS 9, it did not intend to prevent entities from measuring short- term receivables and payables that have no stated interest rate at their invoiced amounts without discounting, if the effect of not discounting is immaterial.

(Source: Annual improvements 2010-2012 cycle as published by the IASB and KPMG’s IFRS The Balancing Items -Issue 6)

IAS 16, Property, Plant and Equipment and IAS 38, Intangible Assets

The amendments clarify the requirements of the revaluation model in IAS 16 and IAS 38, recognising that the restatement of accumulated depreciation (amortisation) is not always proportionate to the change in the gross carrying amount of the asset. Accordingly, IAS 16 and IAS 38 have been amended to clarify that, at the date of revaluation:

• the gross carrying amount:

– is adjusted in a manner that is consistent with the revaluation of the carrying amount of the asset- e.g restated in proportion to the change in the carrying amount or by reference to observable market data; and

– the accumulated depreciation (amortisation) is adjusted to equal the difference between the gross carrying amount and the carrying amount of the asset after taking into account accumulated impairement losses; or

• the accumulated depreciation (amortisation) is eliminated against the gross carrying amount of the asset.

The amendment is applicable for annual periods beginning on or after 1 July 2014. Earlier application is permitted. If an entity applies that amendment for an earlier period it shall disclose that fact.

(Source: Annual improvements 2010-2012 cycle as published by the IASB and KPMG’s IFRS The Balancing Items -Issue 6)

OthersRecoverable Amount Disclosures for Non- Financial Assets (Amendments to IAS 36)

The IASB has issued amendments to reverse the unintended requirement in IFRS 13 Fair Value Measurement to disclose the recoverable amount of every cash-generating unit to which significant goodwill or indefinite-lived intangible assets have been allocated.

Under the amendments, recoverable amount is required to be disclosed only when an impairment loss has been recognised or reversed.

The amendments apply retrospectively for annual periods beginning on or after 1 January 2014

(Source: IFRS Breaking News)

IFRS 9, Financial Instruments

On 24 July 2014, the International Accounting Standards Board (IASB) issued the completed version of its new standard on financial instruments- IFRS 9 Financial Instruments. IFRS 9 (2014) consolidates the previous three versions of IFRS 9 to replace IAS 39 in entirety. The new standard includes revised guidance on the classification and measurement of financial assets, including impairment, and supplements the new hedge accounting principles published in 2013.

Classification and measurement

Although the permissible measurement bases for financial assets- amortised cost, fair value through other comprehensive income (FVOCI) and fair value through profit and loss (FVTPL)- are similar to IAS 39 Financial Instruments: Recognition and Measurement, the criteria for classification into appropriate measurement category are significantly different. Embedded derivatives are no longer separated from financial asset hosts, instead, the entire hybrid instrument is assessed for classification. For financial liabilities, IFRS 9 retains almost all of the existing requirements from IAS 39. However, the gain or loss on a financial liability designated at FVTPL that is attributable to changes in its


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credit risk is usually presented in OCI; the remaining amount of change in fair value due to asset specific performance risk is presented in profit or loss.

Impairment

The new impairment model is similar to the model proposed in 2013. IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with an ‘expected credit loss’ model, which means that a loss event will no longer need to occur before an impairment allowance is recognised. The standard aims to address concerns about ‘too little, too late’ provisioning for loan losses, and will accelerate recognition of losses.

Hedge accounting

The new hedge accounting requirements seek to deliver a more principles based approach that aligns hedge accounting more closely with risk management.

One of the major changes that the new standard has brought about is that now the components of the non-financial items may also be hedged.

Another major change is the elimination of bright lines to assess hedge effectiveness. Hitherto hedge was considered to be highly effective if the changes in the fair value or cash flow of the hedging instrument and the hedged item are within the range of 80 to 125 per cent. However, the new standard has replaced such rule based approach with more qualitative, forward-looking hedge effectiveness assessments.

The new standard has a mandatory effective date of 1 January 2018, but may be adopted early. As the standard has been completed in

stages, the relatively few entities that have adopted a previously released version of IFRS 9 can continue to use it until then. In addition, entities can adopt in isolation the part of the standard that allows them to reflect the effects of changes in credit risk on certain marked-to-market liabilities outside of profit or loss. For an overview of the complete standard, please refer to the August 2014 edition of Accounting and Auditing Update (AAU).

(Source: First impressions: IFRS 9 Financial Instruments)

IFRS 15, Revenue from Contracts with Customers

On 28 May 2014, the IASB and FASB issued IFRS 15/ASC 606 Revenue from Contracts with Customers. This new standard will apply to every entity under IFRS and US GAAP. The new standard replaces IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreement for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers, SIC-31 Revenue- Barter Transactions Involving Advertising Services.

The new standard provides a single converged framework for revenue recognition, replacing existing revenue guidance in IFRS and US GAAP. It moves away from the industry and transaction specific requirements under US GAAP, which was also used by some IFRS preparers in the absence of specific IFRS guidance. New qualitative and quantitative disclosure requirements aim to enable financial statement users to understand the nature, amount, timing and uncertainity of

revenue and cash flows arising from contracts with customers.

A five-step model has been introduced to determine when to recognise revenue and at what account. The model specifies that revenue should be recognised when (or as) an entity transfers control of goods or services to a customer at the amount to which the entity expects to be entitled. Depending on whether certain criteria are met, revenue is recognised:

• over time, in a manner that depicts the entity’s performance; or

• at a point in time, when control of the goods or services is transferred to the customer.

The new standard provides application guidance on numerous topics, including warranties and licenses. It also provides guidance on when to capitalise costs of obtaining or fulfilling a contract that are not addressed in other accounting standards- e.g. for inventory.

For entities applying IFRS, the new standard is effective for annual periods beginning on or after 1 January 2017. Early adoption is permitted only under IFRS.

For an overview of the complete standard, please refer to the July 2014 edition of Accounting and Auditing Update.

(Source: First impressions: Revenue from contracts with customers 2014)


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Service concession arrangements

ASU 2014-05 deals with accounting for service concession arrangements (SCA) and states that an operating entity’s rights resulting from public-to-private SCAs that meet the following conditions should be accounted for as a service arrangement rather than a lease:

• The public sector entity controls or has the ability to modify or approve what services the operating entity must provide with the infrastructure, to whom it must provide them, and at what price; and

• The public sector entity controls any residual interest in the infrastructure at the end of the arrangement through ownership, beneficial entitlement, or another arrangement.

The arrangement may result in recognition of a financial asset, an intangible asset, or both by the private sector entity. The private sector entity would be precluded from recognising property, plant, and equipment (PPE) for payments it makes to the public sector entity, even if those payments are for construction or renovations of PPE.

The effective date for public entities is for interim and annual periods beginning after 15 December 2014. The effective date for non-public entities is for annual periods beginning after 15 December 2014 and interim periods thereafter.

Discontinued operations

ASU 2014-08 changes the definition of discontinued operations under U.S. GAAP to bring it closer to IFRS guidance. The ASU defines discontinued operations as either:

• a component of an entity (or a group of components) that:

– has been disposed of, meets the criteria to be classified as held-for-sale, or has been abandoned/spun-off, and

– represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results, or

• is a business or nonprofit activity that, on acquisition, meets the criteria to be classified as held-for-sale.

As per the ASU, continuing involvement in the disposed component is no longer relevant for evaluating discontinued operations presentation. However, the ASU requires specific disclosures about an entity’s continuing involvement with discontinued operations and disposals of individually insignificant components that do not qualify as discontinued operations.

Disposals of equity method investments (or those held-for-sale), among other items, are now eligible for discontinued operations presentation if they meet the new definition. However, discontinued operations presentation continues to be precluded for disposals of oil and gas properties that are accounted for using the full-cost method.

For public business entities and certain not-for-profit entities, the ASU is effective prospectively for disposals (or classifications as held-for-sale) occurring within annual periods beginning on or after 15 December 2014, and interim periods within those annual periods. For other entities, the guidance is effective for disposals (or classifications as held-for-sale) occurring within annual periods beginning on or after 15 December 2014 and interim periods thereafter.

Early application is permitted, but only for those disposals (or classifications as held-for-sale) that have not been reported in financial statements previously issued or available for issuance. While companies may early adopt prospectively in a quarter other than their first quarter, they are not permitted to retrospectively apply the new standard to disposals (or classifications as held-for-sale) that have been reported in previously issued financial statements under the previous guidance.

Repurchase agreements

ASU 2014-11 issues a new standard that requires repurchase-to-maturity transactions and repurchase financing arrangements to be accounted for as secured borrowings.

Transfers of financial assets executed with a contemporaneous repo will no longer be evaluated to determine whether they should be accounted for on a combined basis as forward contracts.

The ASU requires new disclosures for transactions similar to repos in which the transferor retains substantially all of the exposure to the economic return on the transferred financial assets. It also requires additional disclosures about the nature of collateral pledged in repos that are accounted for as secured borrowings.

For public business entities, the accounting changes and certain disclosure requirements are effective for the first interim or annual period beginning after 15 December 2014. Other disclosure requirements are effective for annual periods beginning after 15 December 2014 and for interim periods beginning after 15 March 2015. Early application is prohibited.

For entities other than public business entities, all changes are effective for annual periods beginning after 15 December 2014 and interim periods in fiscal years thereafter. An entity that is not a public business entity may elect to apply the requirements for interim periods beginning after 15 December 2014.

Transitioning to the Committee of Sponsoring Organisations of the Treadway Commission (COSO) 2013

In May 2013, COSO released its updated Internal Control – Integrated Framework (2013 Framework). The changes made to update the 1992 Framework are evolutionary, not revolutionary. The 2013 Framework updates the original COSO Framework released in 1992. The 2013 Framework contains 17 principles and related points of focus that bring additional structure and rigor to the five components of internal control and demonstrates that the control environment is the foundation for a sound system of internal control. Further, the 2013 Framework includes more extensive discussion about the types of fraud (fraudulent financial reporting, misappropriation of assets, and illegal

Year end remindersUnited States Generally Accepted Accounting Principles (U.S. GAAP)

acts) and management override of controls and the organisation’s response to fraud risk. The 2013 Framework also includes other updates to reflect changes in the business environment since the 1992 Framework was released.

Transition - timeline

COSO Board had announced that the 2013 Framework will supersede the 1992 Framework on 15 December 2014. At the 2014 AICPA SEC Conference, the SEC staff stated that they do not intend to question registrants who continue to use the COSO 1992 Framework in their ICFR assessment for this calendar year-end. The SEC staff is more likely to question the use of a superseded framework with the passage of time. Registrants are required to disclose which COSO Framework is used in management’s annual assessment of ICFR. While it remains uncertain whether the SEC will ultimately set a transition date, questions as to why a registrant continues to use a superseded framework will become more legitimate with the passage of time.

Changes to pension mortality tables

The Society of Actuaries (SOA) updated its mortality tables and mortality improvement scale in October 2014. The updated mortality data reflect increasing life expectancies in the United States.

Companies should consider the SOA’s new mortality data for U.S. based defined benefit pension and other postretirement benefit plans when making their mortality assumptions for year-end 2014 financial reporting. For companies that adopt the new mortality tables or revise their projection scale, the effect on the pension or other postretirement benefit obligation may be material.

Plan sponsors will need to document how they considered available mortality information and applied it to the facts and circumstances of the plan to arrive at their best estimates when measuring their defined benefit retirement obligations.

New option for push down accounting

ASU 2014-17 provides an option of pushdown accounting for acquired entities upon acquisition by a new controlling parent. The decision on whether to apply pushdown

accounting would be made independently for each acquisition by a new parent. Once pushdown accounting is applied to a particular change-in-control event, that election is irrevocable.

Entities that elect to apply this ASU upon acquisition by a new parent would reflect in their separate financial statements the new basis of accounting established by the acquirer for the individual assets and liabilities of the acquired entity by applying ASC Topic 805- Business Combinations.

An acquired entity would recognise goodwill that arises from the application of ASC Topic 805- Business Combinations in its separate financial statements. However, a bargain purchase gain, if any, would not be recognised in the acquired entity’s income statement, and would instead be recorded in equity. Acquisition-related debt incurred by an acquirer would be recognised in the separate financial statements of the acquired entity only if that entity is required to do so under other U.S. GAAP.

A consolidated subsidiary of an acquired parent would also have the option to apply the ASU in its separate financial statements whether or not the acquired parent applies pushdown accounting in its consolidated financial statements.

The ASU was effective on 18 November 2014. Acquired companies electing to apply the guidance must do so prospectively for transactions in which the acquirer has obtained control after 18 November 2014. If the financial statements for the period including the most recent change-in-control event already have been issued or made available to be issued, the acquired entity may still be able to retroactively apply the new guidance, but application would be a change in accounting principle and therefore, subject to a preferability analysis. Entities are not allowed to retrospectively eliminate pushdown accounting applied to prior transactions.

Presentation of certain unrecognised tax benefits

ASU 2013-11 requires entities to present the unrecognised tax benefit as a reduction of the deferred tax asset for a net operating loss (NOL), similar tax losses or tax credit carry forward rather than as a liability when the uncertain tax position

would reduce the NOL or other carry forward under the tax law and the entity intends to use the deferred tax asset for that purpose.

ASU became effective for public companies from 15 December 2013. For non - public companies, the ASU is effective annual and interim periods beginning after 15 December 2014. Early adoption and retrospective application are permitted.

Accounting Standards affecting Companies in 2015 and beyondAccounting for goodwill

The amendments brought by ASU 14 - 02, apply to all entities except for public business entities and not-for-profit entities as defined in the Master Glossary of the Accounting Standards Codification (ASC) and employee benefit plans within the scope of Topics 960 through 965 on plan accounting.

The amendments allow an accounting alternative for the subsequent measurement of goodwill. Thus, an entity within the scope of the amendments that elects the accounting alternative should amortise goodwill on a straight-line basis over 10 years, or less than 10 years if the entity demonstrates that another useful life is more appropriate. An entity that elects the accounting alternative is further required to make an accounting policy election to test goodwill for impairment at either the entity level or the reporting unit level. The accounting alternative, if elected, should be applied prospectively to goodwill existing as of the beginning of the period of adoption and new goodwill recognised in annual periods beginning after 15 December 2014, and interim periods within annual periods beginning after 15 December 2015. Early application is permitted, including application to any period for which the entity’s annual or interim financial statements have not yet been made available for issuance.

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Accounting for goodwill

The amendments brought by ASU 14 - 02, apply to all entities except for public business entities and not-for-profit entities as defined in the Master Glossary of the Accounting Standards Codification (ASC) and employee benefit plans within the scope of Topics 960 through 965 on plan accounting.

The amendments allow an accounting alternative for the subsequent measurement of goodwill. Thus, an entity within the scope of the amendments that elects the accounting alternative should amortise goodwill on a straight-line basis over 10 years, or less than 10 years if the entity demonstrates that another useful life is more appropriate. An entity that elects the accounting alternative is further required to make an accounting policy election to test goodwill for impairment at either the entity level or the reporting unit level. The accounting alternative, if elected, should be applied prospectively to goodwill existing as of the beginning of the period of adoption and new goodwill recognised in annual periods beginning after 15 December 2014, and interim periods within annual periods beginning after 15 December 2015. Early application is permitted, including application to any period for which the entity’s annual or interim financial statements have not yet been made available for issuance.

Simplified hedge accounting approach

The amendments brought by ASU 14-03 apply to all entities, except for public business entities and not-for-profit entities as defined in the Master Glossary of the FASB ASC, employee benefit plans within the scope of Topics 960 through 965 on plan accounting, and financial institutions.

The amendments allow the use of the simplified hedge accounting approach to account for swaps that are entered into for the purpose of economically converting a variable-rate borrowing into a fixed-rate borrowing. Under this approach, the income statement charge for interest expense will be similar to the amount that would result if the entity had directly entered into a fixed-rate borrowing instead of a variable-rate borrowing and a receive-variable, pay-fixed interest rate swap. Alternatively, that entity may continue to follow the current guidance in Topic 815.

The simplified hedge accounting approach provides entities with a practical expedient to qualify for cash flow hedge accounting under Topic 815. The simplified hedge accounting approach will be effective for annual periods beginning after 15 December 2014, and interim periods within annual periods beginning after 15 December 2015, with early adoption permitted. Private companies have the option to apply these amendments using either a modified retrospective approach or a full retrospective approach.

Please refer to our March 2014 issue of the Accounting and Auditing Update for a detailed discussion on this topic.

Common control leasing

ASU 2014-07 gives an option to private entity lessees to not apply the variable interest entity (VIE) consolidation guidance in FASB Accounting Standards Codification Topic 810 to some lessor entities under common control. A private entity lessee can elect not to apply the VIE consolidation guidance to a lessor if all the four conditions mentioned in the ASU are met.

A private entity that elects the alternative would, instead of providing VIE disclosures, be required to disclose:

• Amount and key terms of liabilities recognized by the lessor that expose the private entity to providing financial support to the lessor, and

• A qualitative description of circumstances (e.g., certain commitments and contingencies) not recognised in the financial statements of the lessor that expose the private entity to providing financial support to the lessor.

The guidance is effective for annual periods beginning after 15 December 2014 and interim periods within annual periods beginning after 15 December 2015. Early adoption is allowed and retrospective application is required.

Going concern

ASU 2014- 15 issues a new standard on going concern which describes how entities should assess their ability to meet their obligations and sets disclosure requirements about how this information should

be communicated. As per the new guidance, entities must perform a going concern assessment by evaluating their ability to meet their obligations for a look-forward period of one year from the financial statement issuance date (or date the financial statements are available to be issued).

The ASU amended the Master Glossary of the FASB’s Accounting Standards Codification to specifically define substantial doubt in the context of assessing going concern uncertainties. Substantial doubt about an entity’s ability to continue as a going concern exists if it is probable that the entity will be unable to meet its obligations as they become due within one year after the date the annual or interim financial statements are issued or available to be issued (assessment date). Management needs to consider known (and reasonably knowable) events and conditions at the assessment date.

Disclosures are required if it is probable an entity will be unable to meet its obligations within the look-forward period. Incremental substantial doubt disclosure is required if the probability is not mitigated by management’s plans.

The ASU applies to all entities for the first annual period ending after 15 December 2016 and interim periods thereafter, with early adoption permitted.

Accounting for share- based payments with certain performance targets

ASU 2014-12 clarified that performance targets that could be achieved after the requisite service period should be treated as performance conditions. Those performance conditions would not be reflected in estimating the grant date fair value of the award, but instead would be accounted for when the achievement of the performance condition becomes probable. Any previously recognised compensation cost would be reversed if the performance target was previously determined to have been probable of being achieved but later is determined to no longer be probable of being achieved or the award is forfeited before the service condition is met.

Similar treatment would be required when grants are made to retirement-eligible employees who may receive their awards without providing any future service to the entity if achievement of the awards’ performance target subsequently becomes probable.

For all companies, the ASU is effective for annual periods, and interim periods within those annual periods, beginning after 15 December 2015. Early adoption is permitted.

The ASU may be adopted either prospectively for share-based payment awards granted or modified on or after the effective date, or retrospectively, using a modified retrospective approach. The modified retrospective approach would apply to share-based payment awards outstanding as of the beginning of the earliest annual period presented in the financial statements on adoption, and to all new or modified awards thereafter.

FASB eliminates extraordinary items concept

ASU 2015-01 eliminates the separate presentation of extraordinary items, net of tax and the related earnings per share. The concept of an event or transaction being unusual in nature or infrequent in its occurrence is not impacted by the release of the ASU. The ASU does not affect the requirement to disclose material items that are unusual in nature or infrequently occurring.

Entities will continue to evaluate whether items are unusual in nature or infrequent in their occurrence for presentation and disclosure purposes and when estimating the annual effective tax rate for interim reporting purposes.

The ASU is effective for interim and annual periods in fiscal years beginning after 15 December 2015. The ASU allows prospective or retrospective application provided certain conditions are met. Early adoption is permitted if applied from the beginning of the fiscal year of adoption. The effective date is the same for both public entities and all other entities.

Revenue recognition standard released

ASU 2014-09 issues a new standard on revenue recognition. For U.S. GAAP, the standard generally eliminates transaction and industry specific revenue recognition guidance. This includes current guidance on long-term construction-type contracts, software arrangements, real estate sales, telecommunication arrangements, and franchise sales. The new standard substantially converged revenue recognition under U.S. GAAP and IFRS.

The ASU is effective for public entities (public business entities and certain not-for-profit entities and employee benefit plans) for fiscal years, and interim periods within those years, beginning after 15 December 2016 (1 January 2017 for calendar year end public entities), and for other entities for years beginning after 15 December 2017, and interim and annual periods thereafter. Early adoption is not permitted for public entities under U.S GAAP. (It is permitted under IFRS.) Early adoption is permitted for non- public entities but no earlier than the public entities adoption date. Entities may adopt the guidance retrospectively for all years presented (with certain optional practical expedients available) or make a cumulative effect adjustment to retained earnings on the date of adoption. Entities planning to adopt retrospectively may want to begin gathering data and consider running parallel accounting systems for current guidance and the new guidance beginning 1 January 2015.Cumulative effect adopters will need to evaluate open contracts as of the adoption date.

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The MCA clarifies the continuance of provisions of Schedule XIII of Companies Act, 1956 relating to payment of managerial remuneration under the Companies Act, 2013

According to the provisions of schedule XIII (sixth proviso to Para (C) of Section ll of Part ll) of the Companies Act, 1956, every listed company or a subsidiary of a listed company was allowed to make payment of remuneration to the managerial person in excess of limits specified in para II Para (C) of such schedule without approval of the Central Government if the managerial person meets the conditions specified therein.

In order to address the concerns raised by various stakeholders as to whether such provisions would be applicable under the Companies Act, 2013, the MCA clarifies that the managerial person will continue to receive remuneration for his remaining term in accordance with the terms and conditions approved by company as per relevant provisions of schedule XIII even if the part of his/her tenure falls after 1 April 2014. (Source: General Circular No. 15/07 dated 10 April 2015)

The Companies (Registration Offices and Fees) Amendment Rules, 2015

Companies (Registration Offices and Fees) Amendment Rules, 2014 requires every company including a foreign company carrying on business through electronic mode to file application, financial statements, prospectus, return, declaration, memorandum, articles, particulars of charges, or any other particulars or document or any notice, or any communication or intimation required to be filed or delivered or served under the Companies Act, 2013 and rules to be filed or delivered or served in computer readable electronic form, in portable document format

(pdf) or in such other format as has been specified under the Companies Act, 2013 to the Registrar through the portal maintained by the Central Government on its website or through any other website notified by the Central Government. Once filed, the registrar shall examine every application or e-form and can call for more information or explanations. The Ministry of Corporate Affairs (MCA) vide notification dated 24 February 2015 issued amended rules called the Companies (Registration Offices and Fees) Amendment Rules, 2015 where sub-rule 7 has been added under Rule 10(6) which states that “any further information or documents called for, in respect of application or e-form or document, filed electronically with the MCA shall be furnished in Form No. GNL - 4 as an addendum.” In the annexure, a new form GNL - 4 has been added after GNL - 3.

(Source - Notification by Ministry of Corporate Affairs dated 24 February 2015)

RBI’s prior approval for change in shareholding of registered securitisation companies/ reconstruction companies

In order to safeguard the interests of investors, the Reserve Bank of India (RBI) vide notification dated 24 February 2015 has provided that all securitisation companies (SC) or reconstruction companies (RC) need to obtain prior approval of the RBI for any substantial change in management by way of transfer of shares only in the following cases:

• any transfer of shares by which the transferee becomes a sponsor

• any transfer of shares by which the transferor ceases to be a sponsor

• an aggregate transfer of ten per cent or more of the total paid up share capital of the SC/RC by a sponsor during the period of five years commencing from the date of certificate of registration.

(Source - Notification by RBI dated 24 February 2015)

Indian Insurance Companies (Foreign Investment) Rules, 2015

Based on extensive consultation with relevant organisations and departments, the Ministry of Finance vide notification dated 25 February 2015 issued the Indian Insurance Companies (Foreign Investment) Rules, 2015. Key highlights of these rules are as under:

• not more than 49 per cent of the paid up capital of an Indian insurance company to be held by foreign investors by way of foreign equity investment in its equity shares, including portfolio investors

• at all times, ownership and control of an Indian insurance company shall remain with resident indian entities

• Foreign direct investment (FDI) through automatic route to be allowed upto 26 per cent of the total paid-up equity of the Indian insurance company

• FDI investments more than 26 per cent upto 49 per cent shall be on Foreign Investment Promotion Board (FIPB) route and require appropriate FIPB approvals

• Foreign portfolio investment in an Indian insurance company to be governed by the relevant provisions under the FEMA Regulations, 2000 and provisions of the Securities Exchange Board of India (SEBI) (Foreign Portfolio Investors) Regulations

• Further, any increase of foreign investment of an Indian insurance company will be in accordance with the pricing guidelines specified by RBI under the FEMA.

The rules are effective from 19 February 2015.

(Source - Notification by Ministry of Finance dated 19 February 2015)

The MCA clarifies applicability of lending norms on loans and/or advances to employees

Section 186 (2) of the Companies Act, 2013 provides that no company shall directly or indirectly:

• give any loan to any person or other body corporate

• give any guarantee or provide security in connection with a loan to any other body corporate or person

• acquire by way of subscription, purchase or otherwise, the securities of any other body corporate.

exceeding 60 per cent, of its paid up share capital, free reserves

Regulatory updates

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and securities premium account or 100 per cent of its free reserves and securities premium account, whichever is more.

The Ministry of Corporate Affairs vide general circular dated 10 March 2015 has clarified that loans and/ or advances made by the companies to their employees, other than the managing or whole time directors (which is governed by section 185 of the Companies Act) would not be governed by provisions of section 186 provided the prescribed conditions are met.

For an overview of this clarification, please refer to KPMG’s First Notes dated 12 March 2015.

(Source - MCA General Circular No. 04/2015 dated 10 March 2015)

MCA revamps e-voting norms; relaxes compliance requirements

The Ministry of Corporate Affairs (MCA) issues new rules relating to shares capital and debentures; revamps e-voting norms and relaxes compliance requirements for preferential offers, requirements for creation of charge/mortgage and procedures have been relaxed for certain powers of the board.

For an overview of these amendments, please refer to KPMG’s First Notes dated 26 March 2015.

(Source - Notification by Ministry of Corporate Affairs dated 18 March 2015)

SEBI board meeting

SEBI in its meeting held on 22 March 2014 has inter alia taken the following important decisions:

Review of continuous disclosure requirements for listed entities

On 5 May 2014, SEBI had issued draft SEBI (Listing Obligations and Disclosures Requirements) Regulations, 2014 specifying disclosure requirements for listed entities. The SEBI has continuously been reviewing the disclosure requirements and in its board meeting on 22 March 2015 have approved the following changes to the proposed SEBI (Listing Obligations and Disclosures Requirements) Regulations:

• Earlier, the listed entity needed to immediately notify/ inform the stock exchange of all events which will have a bearing on the performance/ obligations of the listed entity as well as price sensitive information. As

per the approved changes now, disclosure is to be made to the stock exchange(s) first, as soon as reasonably practicable and not later than 24 hours of occurrence of event/information.

• The timeline for disclosure of outcome of board meetings has been extended from 15 minutes to 30 minutes from the closure of the meeting as per the approved changes.

• Approved changes requires the updation of disclosure on material developments on a regular basis till such time the event/information is resolved/closed with explanations wherever necessary in addition to current requirement of making disclosure at the time of occurrence and after the cessation of the event.

• Currently, the listed entity should disclose on its website all events/information which is material. The approved changes additionally require that such information shall be hosted for a minimum period of 5 years and thereafter as per the archival policy of the listed entity, as disclosed on its website.

• The amendments to the proposed regulations now specifically requires disclosure of all material events or information with respect to subsidiaries.

• The approved changes now requires the listed entities to provide specific and adequate reply to the queries of stock exchange(s) with respect to rumours and on its own initiative also, confirm or deny any reported information to the stock exchange(s). No such requirement was present in the earlier proposed regulations.

• Earlier, there were no prescribed parameters for determining materiality except in cases of related party transactions and subsidiaries. However, the approved changes have specifically provided following two criterias for a listed entity to determine whether a particular event/ information is material:

– the omission of an event/information, which is likely to result in discontinuity / alteration of information already available publicly; or result in significant market reaction if the said omission came to light at a later date

– if in the opinion of the Board of Directors of the listed entity, the event /information is considered material.

Also, the listed entity is now required to formulate a policy for determination of materiality and should display it on its website.

The new disclosure requirements require rationalisation, consolidation, enhancement and categorisation of the existing list of events into two parts:

• Events which are by nature material i.e. those that necessarily require disclosure without any discretion by the listed entity.

• Events which shall be construed to be material based on application of the guidelines for materiality, as specified by SEBI.

Further, the SEBI to specify an indicative list of information which may be disclosed upon occurrence of an event as per the approved changes to regulations.

Conversion of debt into equity by banks and financial institutions (FIs)

The SEBI after consultation with the RBI has decided to relax the applicability of certain provisions of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 and the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 in cases of conversion of debt into equity of listed borrower companies in distress by the lending institutions. Such relaxation in terms of pricing will be subject to the allotment price being as per a fair price formula prescribed and not being less than the face value of shares. Other requirements would be available if conversions are undertaken as part of the proposed Strategic Debt Restructuring (SDR) scheme of RBI.

Other key decisions taken in the meeting were related to SEBI guidelines on International Financial Services Centres (IFSC), SEBI (Issue and Listing of Debt Securities by Municipalities) Regulations, 2015 and certain amendments to SEBI (Mutual Funds) Regulations, 1996 regarding managing/ advising of offshore pooled funds by local fund managers.

(Source - SEBI Board Meeting dated 22 March 2015; PR No. 70/2015)

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Clarification regarding applicability of Companies (Acceptance of Deposits) Rules 2014

The Ministry of Corporate Affairs vide its notification dated 31 March 2015, has issued the Companies (Acceptance of Deposits) Amendment Rules, 2015 which inter alia include the following amendments:

• Treatment of past application money pending allotment- Earlier, amounts received by way of subscriptions to shares, stock, certain bonds or debentures pending allotment and calls in Treatment of past application money pending allotment- Earlier, amounts received by way of subscriptions to shares, stock, certain bonds or debentures pending allotment and calls in advance on shares were not considered as deposits under section 58A of the Companies Act, 1956. The Ministry of Corporate Affairs vide circular dated 31 March 2015 has clarified that unless otherwise required under the Companies Act, 1956 or the Securities and Exchange Board of India Act 1992 or Rules or Regulations made thereunder to allot any share, stock, bond or debenture within a specified period, if a company had received any amount by way of subscriptions to shares, stock, bonds or debentures before 1 April 2014 and had disclosed in the balance sheet for the financial year ending on or before the 31 March 2014 against which the allotment was pending on 31 March 2015, the company shall, by 1 June 2015, either:

– return such amounts to the persons from whom these were received,

– allot shares, stock, bonds or debentures, or

– comply with the deposits Rules - 2014.

• Credit ratings for deposits and insurance cover- The notification also provides that every eligible company as prescribed in the deposit Rules- 2014 shall obtain at least once in a year, credit rating for deposits accepted and file a copy of the rating to the Registrar of companies along with the return of deposits in the prescribed form.

It has further been amended that companies are permitted to accept deposits without deposit insurance contract till 31 March 2016 instead of 31 March 2015 or till the availability of a deposit insurance product, whichever is earlier.

• Clarification for amounts received by private companies from their members, directors or their relatives prior to 1 April 2014- Such amounts should not be treated as deposits under the Act and the deposit Rules - 2014 provided the company discloses in the notes to its financial statements for the financial year commencing on or after 1 April 2014, the figure of such amounts and the accounting head in which such amounts have been shown in the financial statements. Any renewal or acceptance of fresh deposits on or after 1 April 2014 should be in accordance with the provisions of the Act and the deposit Rules - 2014

For detailed overview of the clarifications, please refer to KPMG’s First Notes dated 2 April 2015.

(Source - General Circular 05/2015 dated 30 March 2015 and notification dated 31 March 2015 issued by the Ministry of Corporate Affairs)

Revised regulatory framework for non-banking financial companies (NBFCs)

The Reserve Bank of India (RBI), vide notification dated 27 March 2015, has issued various notifications for meticulous compliance of the revised regulatory framework for NBFCs. Amongst others, the RBI has specified that in order to commence business or carry on the business of an NBFC, all NBFCs are required to have two hundred lakhs as the net owned funds. However, an NBFC already holding a certificate of registration issued by the RBI and having net owned fund of less than INR20 million may continue to carry on business of an NBFC provided:

• it achieves the limit of INR10 million of net owned funds by 1 April 2016, and

• limit of INR20 million of net owned funds by 1 April 2017.

(Source - Notification by the RBI dated 27 March 2015)

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AhmedabadCommerce House V 9th Floor, 902 & 903 Near Vodafone House, Corporate Road, Prahlad Nagar Ahmedabad - 380 051. Tel: +91 79 4040 2200 Fax: +91 79 4040 2244

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ChandigarhSCO 22-23 (Ist Floor) Sector 8C, Madhya Marg Chandigarh 160 009Tel: +91 172 393 5777/781 Fax: +91 172 393 5780

ChennaiNo.10, Mahatma Gandhi RoadNungambakkamChennai 600 034Tel: +91 44 3914 5000Fax: +91 44 3914 5999

DelhiBuilding No.10, 8th FloorDLF Cyber City, Phase IIGurgaon, Haryana 122 002Tel: +91 124 307 4000Fax: +91 124 254 9101

Hyderabad8-2-618/2Reliance Humsafar, 4th FloorRoad No.11, Banjara HillsHyderabad 500 034Tel: +91 40 3046 5000Fax: +91 40 3046 5299

KochiSyama Business Center,3rd Floor, NH By Pass Road, Vytilla, Kochi – 682019Tel: +91 484 302 7000Fax: +91 484 302 7001

KolkataUnit No. 603 – 604,6th Floor, Tower – 1,Godrej Waterside,Sector – V,Salt Lake,Kolkata – 700091Tel: +91 33 44034000Fax: +91 33 44034199

MumbaiLodha Excelus, Apollo MillsN. M. Joshi MargMahalaxmi, Mumbai 400 011Tel: +91 22 3989 6000Fax: +91 22 3983 6000

Pune703, Godrej CastlemaineBund GardenPune 411 001Tel: +91 20 3058 5764/65Fax: +91 20 3058 5775

KPMG in India offices

www.kpmg.com/in

Introducing KPMG in India IFRS InstituteKPMG in India is pleased to re-launch IFRS Institute - a web-based platform, which seeks to act as a wide-ranging site for information and updates on IFRS implementation in India.The website provides information and resources to help board and audit committee members, executives, management, stakeholders and government representatives gain insight and access to thought leadership publications that are based on the evolving global financial reporting framework.

ICDS – A new paradigm for computing taxable income

On 31 March 2015, The Ministry of Finance has issued ten Income Computation and Disclosure Standards (ICDS), operationalising a new framework for computation of taxable income by all assesses.

All assesses would be required to adopt these standards for the purposes of computation of taxable income under the heads “Profit and gains of business or profession” and “Income from Other Sources”. These standards are applicable for previous year commencing from 1 April 2015, i.e., Assessment Year 2016-17 onwards.

The notification of these ICDS is quite timely and important, especially considering that the timelines for adoption of Ind AS (IFRS converged standards) have also been notified, which permits voluntary adoption for financial year 2015-16. Providing a tax neutral framework for transition to Ind-AS was a prerequisite for smooth implementation of Ind AS from this year.

The adoption of ICDS will significantly alter the way companies compute their taxable income, as many of the concepts from existing Indian GAAP have been modified. This may also require changes to existing process and systems. Our First Notes provides an overview of key matters and roadmap for implementation of ICDS, along with our brief comments.

KPMG in India is pleased to present Voices on Reporting – a monthly series of knowledge sharing

calls to discuss current and emerging issues relating to financial reporting

On 18 March 2015, we covered the following topics :I. Overview of section 143(12) of the

Companies Act, 2013II. Persons covered for reporting under section

143(12) of the Companies Act, 2013

III. Reporting on frauds in various scenarios.

Missed an issue of Accounting and Auditing Update or First Notes?

IFRS NotesIFRS convergence – a reality now! MCA notifies Ind AS standards and implementation roadmap

This issue of our IFRS Notes provides a high level analysis of the much awaited Indian Accounting Standards (Ind AS) that are converged with International Financial Reporting Standards (IFRS), which was finally notified by the Ministry of Corporate

Affairs on 16 February 2015.

The notification of these IFRS converged standards aims to fill up significant gaps that exist in the current accounting guidance, and India can now claim to have financial reporting standards that are contemporary and virtually on par with leading global standards. This in turn may improve India’s place in global rankings on corporate governance and transparency in financial reporting.

With the notification of 39 Ind AS standards together with the implementation roadmap, coupled with the progress made on finalising the Income Computation and Disclosure Standards (ICDS), the government has potentially addressed several hurdles which possibly led to deferment of Ind AS implementation in 2011.

Companies should make an impact assessment and engage with stakeholders, both internal and external, to deal with their respective areas of impact and ensure a smooth transition.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.


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