Accounting and Auditing Update - KPMG | US · PDF fileThis month’s Accounting and...

Accounting and Auditing Update

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Issue no. 03/2016

October 2016

Editorial

© 2016 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.

Sai Venkateshwaran

Partner and HeadAccounting Advisory Services KPMG in India

Ruchi Rastogi

Executive DirectorAssuranceKPMG in India

This month’s Accounting and Auditing Update highlights new and emerging concepts in the field of accounting and auditing.

Technological advancement and explosion of data are changing the way audit is conducted. With Data and Analytics (D&A) tools, auditors can provide clients and audit committees with the ability to look back, forward and tap into in-depth analysis about audit, financial and operational aspects of an organisation. In our D&A series, we describe potential benefits and key value additions when utilising D&A with the help of three case studies.

From 1 April 2015, auditors are required to report on the adequacy of Internal Financial Controls (IFC) over financial reporting of companies in India. We have analysed annual reports of companies that are part of the Nifty 50 index to understand the nature of IFC reporting on both directors’ responsibility statement and auditor’s report. Our article provides a brief analysis on such annual reports and highlights key observations. Additionally, the article highlights new developments in the space of financial reporting and its likely impact on future focus of IFC.

Ind AS 109, Financial Instruments is a standard with various new concepts. Companies in India have investments in mutual funds. Application of Ind AS 109 on classification requirements of mutual fund investments is likely to have an impact on their accounting treatment in the financial statements. Additionally, effective interest rate method is a new concept under Ind AS 109. This method is applied to financial assets and liabilities that are classified at amortised cost. We explain these two topics in this issue with the help of illustrative examples and detailed flowcharts.

Revenue is an important performance metric for companies and Ind AS 18, Revenue introduces new concepts which are expected to result in significant impact across the food, drink and consumer goods companies. Our article focusses on the impact areas due to implementation of Ind AS 18 on this sector.

The concept of integrated reporting aims to reduce the gap between current reporting and investor needs. Therefore, the International Auditing and Assurance Standards Board (IAASB) has formed the Integrated Reporting Working Group

(IRWG) to understand assurance related issues, emerging trends, market demand and developments in external reporting. Recently, the IRWG published its discussion paper to provide credibility and trust in the Emerging forms of External Reporting (EER) e.g. integrated reports. Our article summarises the challenges when carrying out assurance engagements on such EERs.

As is the case each month, we also cover recent regulatory updates in India.

We would be delighted to receive any kind of feedback/suggestions from you on the topics that we should cover.


Table ofcontents



Data and Analytics in audit: Insights and potential benefits

Revenue in the food, drink and consumer goods sector under Ind AS

Application of the effective interest rate method

Regulatory updates

Classification of investments in mutual funds

Internal financial control: Reporting perspective

Integrated reporting: Emerging forms of external reporting

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15

19

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This article aims to:

– Highlight significant impact on companies owing to key differences between the revised drafts of the Income Computation and Disclosure Standards as released by the Ministry of Finance on 8 January 2015 (ICDS (2015)) and the current framework of accounting principles (Indian GAAP).

In continuation of our previous discussion titled Data analytics and technology, published in the September 2016 edition of the Accounting and Auditing Update, in this article we explore the potential benefits of a Data and Analytics (D&A) enabled audit process for organisations.

The financial statements’ audit has long delivered compliance and confidence, and it is expected to continue to do so. But in today’s business environment this may not be enough. Advances in technology and an explosion of data have changed the game. Organisations and investors now have access to a breadth and depth of information that would have been unthinkable a decade ago. The most enlightened of organisations are making use of that information to give them a competitive edge. ‘Big data is a

big deal’ and leveraging insights using data is the need of the hour. D&A tools facilitate interrogation of terra-bytes of data generated by organisations and assists in identification of specific characteristics in data that help enable more meaningful insights to each individual organisation, which in turn drives value. More the sources of data i.e. data points, higher is the potential to tap this data and use it as leverage by organisations. More is always good when it comes to data. The key is to find patterns and correlations. D&A unlocks insights and enhances audit quality. With D&A tools, now auditors can look at providing clients and audit committees with the ability to look back, forward and tap into in-depth analysis about the audit, financial and operational aspects of the organisation.

‘Data without analytics is akin to the internet without the search bar’. Technological enhancements and adoption by organisations has been rapid and looking backward to move forward is no longer feasible. In the past, historical data was considered a fair indicator of future performance. This is not true today in the age of disruptive technology. Data grows exponentially with every millisecond. Kilo-bytes and mega-bytes are replaced with terra-bytes. Audits today are required to be in prime position to match these dynamic changes and deliver more. D&A tools enable audits to be more relevant, drive insights to keep organisations and audits more informative and provides value add no matter how complex audits are and how complex the future appears. Rather than sampling transactions to test a snapshot of activities, analysis is carried out on the complete set of transactions processed,


– Provide an overview of the potential benefits of data and analytics with the help of three case studies.


Data and analytics in audit: Insights and potential benefits

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allowing audit professionals to identify anomalies and narrow down on the variables that show the greatest potential of being high risk. Further, the use of D&A tools provides the ability to present the analysis using visualisations - which are powerful enablers for discussions with senior management personnel, boards and audit committees.

D&A enabled audit - Value addingPotential benefits and key value additions from the use of D&A are as follows:

Leverage investment in IT by increasing the use of IT in audit: Organisations are likely to have invested a significant amount on integrating all operational systems into robust Enterprise Resource Planning (ERP) systems. This is expected to allow organisations to collect significantly larger data about their operations. D&A enables organisations to leverage this investment by further using this ERP investment as the backbone in creating efficiencies and opportunities for performance improvements.

Benchmarking: Industry-specific data and analytic models provide benchmarking and identify patterns against which an organisation’s operations can be compared. Performance amongst organisational units as amongst industry peers can be measured against operational Key Performance Indicators (KPIs). Perspectives on performance can be measured in the form of trend analysis using certain tools of D&A to measure the impact on sales and operational activity. Benchmarking also enables looking in-depth at the data, discovering complex patterns, making sense of them, and identifying anomalies.

Multiple-view points and customisation: D&A is a game-changer as it allows processing of structured as well as un-structured data from all available data points, providing the users with multiple perspectives. Performing an excellent audit using D&A enables processing of large volumes of data with numerous data points and also permits analysis of this data from multiple viewpoints. D&A analysis can be customised to meet the specific objectives and areas of interest for clients. Leveraging on experience gained across a wide spectrum of clients and industries, D&A is likely to enable audit teams to provide clients with additional insights on their organisation.

Visualisation: The output of D&A tools enables representation of data in the form of pictorial graphs, charts and diagrams customised to present key findings to top management, boards and audit committees. This is a powerful enabler to identify trends, correlations and patterns in the underlying data. D&A also has the ability to narrow down from a macro view to a micro view to better understand and interpret the analysis performed.

Automation of audit pre-requirements: By reducing the time client staff need to invest in the audit, a D&A enabled audit facilitates their increased availability to address an organisation’s matters. Automation of mundane and data intensive function saves time, resources and is error free. Further, a reduction in the number of client prepared analyses is possible, as schedules can either be done away with or simplified owing to a D&A - enabled audit. Once set into action these customised and simplified D&A based schedules can be generated for any interim, year-end or specific period reporting requirements resulting in significant efficiencies in staff hours spent.

Operational intelligence: Data extracted from ERP systems for use in D&A audit procedures, can also be converted into intelligent dashboards that can provide organisations with additional insights into operational metrics – for example, by allowing comparison of divisions/branches within the organisation or providing a view of vendors and customers (e.g. time taken, credit period, etc.) across the organisation to enable informed decision making. By leveraging on the power of D&A in audits, organisations could see operational insights as well.

Case studiesAudit professionals are taking innovation to the next level by developing an audit process built with D&A at its heart - delivering a dynamic audit that delivers hindsight, insight and foresight. The cases described below demonstrate how such D&A-enabled audits are helping provide insights to organisations.

The potential benefits of hindsight

Audits have traditionally focussed on looking back; analysing transactions and other data from past activities. While audits enhance confidence that financial statements comply with standards governing their preparation, they do not release the value of data.

Using D&A, audit professionals now make the analysis of the past more insightful. Rather than sampling transactions data to test a snapshot of activities, they can now analyse all transactions processed, allowing them to identify anomalies and narrow down on the items that show the greatest potential of being high risk. Their systems automate this process, increasing the ability to produce high quality audit evidence.

This level of analysis means they can more easily identify trends and anomalies and share findings with relevant management personnel to update processes and activities and adjust them to improve performance.

CASE STUDY 1 The issue

The organisation needed insight into employee compliance with their segregation of duties policy to ensure that individuals were not authorised to perform incompatible duties in their ERP system.

D&A audit impact

D&A capabilities were used to analyse 100 per cent of the organisation’s processed transactions in the sales and purchase processes. Tools were deployed to not only identify scenarios where individuals are assigned incompatible duties, but also instances where they have actually exercised those duties – as well as the associated transaction amounts and the aggregate financial impact.

In this case, incompatible duties that had been assigned to several employees were determined, and such individuals and instances were determined. It was determined that the amounts in question were not material and did not present a significant audit risk. The analysis was further extended to industry-relevant segregation of duties scenarios and compared across the company’s entire system to identify trends and patterns and highlight business units of concern.

The result

D&A provided data-driven insights as to whether the organisation’s employees were behaving in accordance with policy. Where a policy breach was identified, it was concluded that it did not result in a material misstatement in the financial statements. D&A analysis also uncovered opportunities to reduce risk exposure by identifying incompatible duty assignments, and provided additional insights into the effectiveness of controls across business units.

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The importance of insight

For an organisation to really understand its performance, it must look beyond the figures – and measure successes against those of peers and the best in the world. Audits provide the opportunity and ability to make this comparison.

With the use of industry-specific D&A models, audit is likely to provide benchmarks and identify patterns against which one can compare an organisation’s operations. Audit professionals can give organisations the information they need to measure performance against industry peers and they benchmark data on operational KPIs. They provide perspectives on performance related to consumer sentiment so organisations can assess the impact on sales and operational activity.

As well as benchmarking, audit professionals look in-depth at the data, discovering complex patterns, making sense of them, and identifying anomalies. They use this information in the audit of the financial statements and to generate meaningful, useable insights – that give organisations invaluable information on which they can act to gain real advantage.


The organisation was concerned that standard approval processes in purchasing and material management were being circumvented, resulting in production delays and costing the organisation time and money.

D&A audit impact

D&A tools and techniques used in conjunction, pinpointed the cause of the slowdown as the inconsistent use of ERP approval processes vital to production efficiency, resulting in the frequent use of manual interventions. The recording of deliveries outside the ERP process had a direct impact on inventory and production management. The high volume of manual price adjustments revealed an underlying issue with the accuracy of inventory costing.

The result

Insights provided into the organisation’s process that were not clearly seen before, allowing the management to assess opportunities to drive efficiency and better leverage their investment in their ERP systems, which enabled them to address specific challenge areas and ultimately to streamline production.

The advantage of foresight

The future cannot be predicted – but having a view of what it is likely to bring can make all the difference. By looking ahead and anticipating scenarios, an audit can play a major role in identifying the future risks facing an organisation and quantifying the impact they could have on performance. It can also help to identify opportunities, giving organisations the foresight to take advantage.

Through predictive analytics, using historical performance trends and giving effect to current market events, audit professionals are better prepared to assess future performance. Through correlative data (macro and

microeconomic indicators) they can assess predictive performance and, where appropriate, share sensitivity analysis with the management and the audit committee.


The organisation, an Indian subsidiary of a U.S. entity, utilised ERP deployed by the group. The current Management Information System (MIS) reports provided by the ERP system were focussed and driven by the group’s requirements. MIS reporting for the stand-alone Indian entity was based on manual reports prepared by the finance team. Since the process was manual, management of the Indian organisation did not have complete confidence on the accuracy of the manual MIS reports.

D&A audit impact

D&A tools and routines implemented provided several reports relating to sales, purchase, inventory, etc. These reports included key metrics including

- top 10 customers for the given period, revenue percentages from top customers, Days of Sales Outstanding (DSO), etc. These reports and results were compared with the manual MIS reports prepared by local the management to validate accuracy.

The result

The reports provided data-driven insights into the organisation’s key metrics that had not been independently validated before. These insights helped boost the management’s confidence on the MIS reports prepared for the subsidiary and helped to show case the value addition of the D&A audit tools.


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Source: Reference taken from KPMG International publication - Data & Analytics Unlocking the value of audit published in 2014


Consider this….A D&A-enabled audit is no longer just about past performance, it goes much deeper, discovering patterns and making sense of them to generate insights into an organisation’s current business performance. It is not just about reporting back, it is about enhancing value and giving actionable insights on performance – value and insights that were never achievable before. And because it also looks forward, it provides future insights that help make decisions that impact the management’s decisions about the direction of a business.

In the next article on D&A, we will explore how D&A-enabled audits are changing the audit process by being instrumental in improving audit quality and providing deeper insights.

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Indian Accounting Standard (Ind AS) 109, Financial Instruments establishes principles for the classification of financial assets into various categories and their subsequent measurement on this basis.

Ind AS 109 requires all financial assets to be categorised based on the business model in which they are held and their contractual characteristics into those measured at:

• Amortised cost• Fair Value through Profit or Loss

(FVTPL), or• Fair Value through Other

Comprehensive Income (FVOCI).

In our previous issue, we described the guidance relevant to classification of investments in preference shares. While the same guidance applies to classification of investments in mutual funds, there are additional application issues to consider. In this article, we analyse these issues for investments in three types of mutual funds to determine their classification under Ind AS 109.


– Describe principles for the classification of mutual funds (financial assets) into various categories and their subsequent measurement under Ind AS 109.


Classification of investments in mutual funds

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Key terms of investments in mutual fundsCompany A provides IT services to clients and invests its surplus funds in the following instruments.

Company A is required to classify each of these investments on initial recognition in accordance with the guidance in Ind AS 109.

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Diversified equity mutual fund Liquid fund Fixed Maturity Plan (FMP)

Objective Long-term investment of surplus funds

Short-term investment to manage liquidity needs

Medium term investment to generate fixed returns

RedemptionOpen-ended scheme, redemption permitted at any time

Open-ended debt scheme, redemption permitted at any time

Close-ended debt scheme with a fixed maturity date at the end of 3 years (redemption not permitted prior to maturity). Can be traded on an exchange

Dividends

None - The mutual fund is a growth fund and is expected to generate returns through capital appreciation

Dividends are paid by the fund based on its performance

The FMP expects to generate a yield of 9 per cent per annum

Business model Not ‘held to collect’ Held to collect dividends and for

sale Held to collect until maturity

Underlying investments of the fund

Equity shares – these may be traded frequently by the fund house to generate returns

Short-term money market instruments (commercial paper, certificate of deposit, treasury bills) – may be traded to generate returns

Fixed income instruments (corporate bonds, government securities, commercial paper) with matching maturities – these are all held until maturity

Source: KPMG in India’s analysis, 2016

Accounting issueInd AS 109 requires company A to classify its financial assets as subsequently measured at amortised cost, FVOCI or FVTPL on the basis of both:

• Its business model for managing the financial assets, and

• The contractual cash flow characteristics of the financial asset.

Accounting guidanceFigure 1 is an illustration of the relevant guidance in Ind AS 109 for classification of investments.

AnalysisDoes the mutual fund meet the definition of an equity instrument?

Ind AS 109 permits an entity to make an irrevocable choice to present changes in the fair value of an investment in an equity instrument in Other Comprehensive Income (OCI). However, this option is available only if the equity investment is neither ‘held for trading’ nor is in the nature of contingent consideration recognised by an acquirer in a business combination to which Ind AS 103, Business Combinations applies. Accordingly, company A would be permitted to select this measurement option if its investments in mutual fund units are in the nature of qualifying equity instruments.

The term ‘equity instrument’ is defined from the perspective of the issuer

in Ind AS 32, Financial Instruments: Presentation as ‘any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities’. Further, a financial liability is defined as ‘any liability that is a contractual obligation to deliver cash or another financial asset to another entity’. Based on these, a unit issued by a mutual fund or an FMP would not meet the definition of an equity instrument since the issuer (the fund) has a contractual obligation to redeem the instrument either at the option of the holder (for open-ended schemes) or at maturity (for close-ended plans). While Ind AS 32 has a specific exception for classifying puttable instruments (those that give the holder the right to put the instrument back to the issuer for cash or another financial asset) as equity in certain circumstances, these

instruments still are not considered to meet the definition of an equity instrument for the purpose of the FVOCI election. This interpretation is consistent with the Basis for Conclusions to International Financial Reporting Standard (IFRS) 9, Financial Instruments which is applicable internationally.

Consequently, these investments cannot be designated as FVOCI and are to be classified based on the relevant guidance illustrated in Figure 1.


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Does the instrument (in its entirety) meet the definition of an equity instrument (Ind AS 32)?

Is the instrument held for trading?

Has the instrument been irrevocably categorised as FVOCI?

FVOCI Equity FVOCI DebtFVTPL Amortised cost

Are the instrument’s contractual cash flows Solely Payments of Principal and Interest (SPPI)?

Are the instruments held in a business model whose objective is - hold to collect contractual

cash flows?

Are the instruments held in a business model whose objective is achieved by both collecting

contractual cash flows and selling financial assets?

No

No No

No

No

No

Yes Yes

Yes

Yes

Yes Yes

Source: Insight into IFRS, KPMG IFRG Ltd’s publication, 13th edition September 2016.

Diversified equity mutual fund

This investment is classified as FVTPL since there are no contractually specified cash flows and hence the SPPI criterion is not met. The amount receivable by the holder on redemption or sale shall be based on the fair value of the underlying investments held by the fund in equity instruments.

Liquid fund

While the investment held in the liquid fund yields returns in the form of dividends and is also redeemable by the holder for cash, further analysis is required to determine its classification. In addition to assessing the cash flows generated by the instrument, Ind AS 109 requires the holder to ‘look through’ to the underlying investments that ultimately generate the cash flows in a scenario where the returns on an investment are contractually linked to underlying assets. In this case, the investments held by the liquid fund are all debt instruments which generate cash flows that represent payments

of principal and interest. However, the liquid fund has the discretion to sell its investments in order to optimise returns. Therefore, the cash flows paid by the fund to the unit holder comprise gains/losses on the debt instruments held by the fund, in addition to interest and principal cash flows from those instruments. Consequently, the SPPI criterion is not met.

While the investment in the liquid fund is held by company A within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets, the investment cannot be classified as FVOCI since the SPPI criterion is not met. Hence, company A should classify this investment as FVTPL.

FMP

In the illustration above, the FMP that company A has invested in is a close-ended scheme with no redemptions permitted until maturity. Further, the underlying instruments that the FMP invests in are all debt instruments that

give rise to contractual cash flows that are in the nature of solely principal and interest payments. The FMP invests in debt instruments with maturities that match the payments to be made by the FMP to its unit holders, and also generally holds these investments until their maturity. This indicates that the SPPI criterion is met for this investment.

Further, the investment in the FMP is held by company A within a business model whose objective is to hold investments to collect their contractual cash flows.

These factors indicate that company A’s investment in the FMP could qualify for classification into the ‘amortised cost’ category. This classification is based on a detailed analysis of facts and circumstances, including ‘looking through’ to the underlying investments made by the FMP and the existence of restricting on the fund’s ability to buy/sell/trade investments. Absent such restriction FVTPL treatment would be required.


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Classification of investments – analysis

Our analysis for classification of the investments in funds is summarised in the table below.

Criteria Diversified equity mutual fund Liquid fund FMP

Does the instrument meet the definition of an ‘equity’ instrument under Ind AS 32

No (Redeemable at the option of the holder)

No(Redeemable at the option of the holder)

No(Redeemable at maturity)

Are the contractual cash flows SPPI?

No(Redemption amount represents capital appreciation in investment based on return generated by underlying equity investments)

No(Redemption amount represents composite return earned on underlying investments which may include gains/losses on sale)

Yes(FMP pays a return that is based on contractual cash flows of its underlying debt investments, that meet SPPI)

Are the instruments held within a ‘held to collect’ business model?

No No Yes

Are the instruments held within a business model that has a dual objective of holding to collect and for sale?

No Yes No

Classification under Ind AS 109 FVTPL FVTPL Amortised cost


Consider this….• Although a puttable financial instrument such as a unit issued by a fund may

qualify for classification as ‘equity’ from the perspective of the issuer under the exception provided in Ind AS 32, it does not meet the definition of an equity instrument since the issuer has a contractual obligation to pay the holder. Consequently, the irrevocable option to classify and measure equity investments at FVOCI would not be available to such investments, which would therefore be classified and measured at FVTPL.

• Investments in a debt mutual fund do not necessarily meet the SPPI criterion even though the fund invests in debt instruments with contractual cash flows that are solely payments of principal and interest. The fund may periodically churn its investment portfolio and hence the return paid by the fund to its unit holders is also based on gains or losses on sale of investments. Therefore, the units in the fund held by the investor may not give rise to contractual cash flows that meet the SPPI criterion.

• While the investment in the FMP in the illustration above may qualify for classification and measurement at amortised cost, each investment should be assessed based on its specific facts and circumstances. This may include ‘looking through’ to the underlying investments when the cash flows are contractually linked to such instruments and restrictions on the fund manager’s ability to buy/sell/trade such investments.

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Revenue is the measure of the size and growth of an entity and directly impacts the operating margin and Earnings Per Share (EPS) of an entity.

Ind AS standard on revenue is expected to result in significant impact across the food, drink and consumer goods companies. Such companies should assess how their financial reporting, information systems and processes might be affected, and engage with their stakeholders to manage expectations of how their key performance indicators or business practices may change. In particular, such companies should review their arrangements with distributors and retailers e.g. trade incentives, returns, extended credit terms, etc. to assess whether the amount or the timing of

revenue recognised under the new standard may be affected.

This article aims to summarise the revenue recognition guidance under Ind AS 18, Revenue and key potential impact areas due to application of this standard on food, drink and consumer goods companies.

Timing and recognition of revenueAs per the current AS 9, Revenue Recognition, revenue is recognised on transfer of property or on transfer of significant risks and rewards of ownership to the buyer.

Under Ind AS 18, revenue is recognised when the entity has transferred to the buyer the significant risks and rewards

of ownership of the goods and the entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold. Generally, the transfer of the significant risks and rewards of ownership happens on transfer of legal title or physical delivery.

However, in some cases the transfer of risks and rewards of ownership could occur at a point different from the transfer of legal title or the passing of possession. For example, a seller may retain the legal title to the goods solely to protect the collectability of the amount due. In such a case, if the entity has transferred the significant risks and rewards of ownership, the transaction is considered as a sale and revenue is


– Summarise key potential impact areas due to application of Ind AS.

Revenue in the food, drink and consumer goods sector under Ind AS

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recognised. Similarly, in retail sale when a refund is offered, if the customer is not satisfied, it is an example of retaining risk of ownership, even though it could be only an insignificant one. Revenue in cases where entity retains insignificant risk of ownership is recognised at the time of sale provided the seller can reliably estimate future returns and recognises a liability for returns based on previous experience and other relevant factors.

Terms of shipmentsTerms of shipment or delivery terms are one of the key considerations, when evaluating the point at which the risks and rewards of ownership are transferred to the buyers. These are explained under various situations as under:

1. In case of ex-factory terms, revenue is recognised when goods are dispatched from the factory or depot to the buyer. However, where the transporter acts as an agent of the seller, one needs to assess whether the effective control over the goods sold is retained by the seller or not. In such a case, it may be more appropriate to recognise revenue only when goods reach the buyer’s location.

2. Under free on road or rail terms where the seller’s responsibility is to deliver the goods at the buyer’s place, it is appropriate to recognise revenue only when the goods reach the buyer’s location. It is considered that till such time the risk related to the goods remains with the seller.

3. In case of export of goods under free on board terms where the entity has no further performance obligations, risk and reward is transferred once the goods clear the port of shipment and hence revenue is recognised at the time of shipment of goods at the port. However, if the seller is responsible for carriage, insurance and freight until the goods are delivered, these form part of the sellers performance. As a result the same is considered as retention of the risks and rewards with the seller, for the items sold until delivery to the client site, and the timing of revenue recognition could be different depending upon the terms of delivery.

It is noteworthy that under the existing AS 9 requirements also, a similar accounting treatment to such transactions is warranted.

In summary, the terms of the sale arrangement need to be carefully evaluated to determine the appropriate time for revenue recognition under Ind AS. In practice, companies may be currently recognising revenue from domestic sales on dispatch from the factory, and on export sales on the bill of lading date, however, application of the above criteria may result in deferral of revenues, as compared to current practice.

Right of ‘returns’ Return rights are commonly granted in the consumer industry and may take the form of product obsolescence protection, stock rotation, trade-in agreements, or the right to return all products upon termination of an agreement. Some of these rights may be articulated in contracts with customers or distributors, while others are implied during the sales process, or based on historical practice. Revenue in such cases is recognised at the time of sale provided the seller can reliably estimate future returns and recognises a liability for returns based on previous experience and other relevant factors.

As per Ind AS 18, if an entity retains only insignificant risks and rewards of ownership, a sale has occurred and revenue is recognised. In such cases, the buyer should control the goods following the delivery and should be free to use or dispose of them as he/she wishes.

Treatment of promotion schemesThe principle set out in Ind AS 18 is that revenue should be measured at fair value of the consideration received or receivable taking into account trade discounts, volume rebates and other incentives (such as cash settlement discounts).

The contract of sales may provide for various rebates or discounts payable to the customer. Suppliers may offer customers discounts for either achieving a minimum threshold of purchases (volume discounts) or for prompt settlement of outstanding receivables (settlement discounts).

If the amount of rebate can be measured reliably then a rebate or a discount is recognised as a reduction of revenue. Hence under Ind AS, any discount or rebate, including cash discounts is received by the customer, would be recorded as a reduction from revenue.

Visibility cost (product placement cost) Visibility cost is incurred to ensure that products of an entity are visible to the end consumers and are therefore displayed in stores. It is through this that the companies incentivise the customer (distributors or retailers) to ensure that its products receive prominent placement on store shelves and are likely to improve sale.

The visibility cost is usually negotiated as part of the contract (either contractually or through customary business practices) for sale of related products and are accrued based on the terms of the contracts. Such visibility (product placement) costs are paid (either as a percentage of sales or as a fixed fee) to the distributors or retailer and are an integrated part of sales transaction. Further, in many cases, product placement services (visibility cost) cannot be sold separately, as it would be difficult to identify it as a distinct service. When that happens, these are integrated part of sales transaction as this incentivises the retailer to keep products in store at favourable placements that are likely to improve sale.

The recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series of transactions as a whole. As per the guidance specified in Ind AS 18, an entity should in such scenarios evaluate to recognise visibility spends as a reduction in the transaction price at which the products are to be transferred to the retailer. This determination requires careful consideration of the facts and circumstances of each arrangement.

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Free goods, gifts

Free goods - own manufactured

Entities may have schemes such as buy one product and get another unit/(s) of the same product free. The provision of free or discounted goods or services is a form of identifiable benefit that is required to be identified as a separate component of the sales transaction. In such cases, revenue should be recognised and allocated to all goods or services, including those provided free of charge. The cost of the free goods is included in the cost of goods sold.

Accounting of customer loyalty programmesUnder the existing Indian GAAP, there is no accounting standard dealing with the accounting of customer loyalty programmes or award credits. Award credits are generally given by airlines, hotels or retailers. There is a technical guide issued by the Institute of Chartered Accountants of India (ICAI) on the retail sector. This guide provides that accounting for such programmes can be recognised in two ways. One of the options under the technical guide is to create a provision towards loyalty points awarded to a customer and the other option is to determine the fair value of the loyalty points awarded and deferring such value from the total sales made, to be recognised as revenue when such points are redeemed.

Under Ind AS, however, the accounting literature does not provide an option for the provisions approach of accounting. Generally, the award credits and other loyalty programmes are accounted as a separately identifiable component of the sales transaction(s) in which they are granted (at the time of ‘initial sale’). The fair value of the consideration received or receivable in respect of the initial sale is allocated between the award credits and the other components of the sale. The consideration allocated to the award credits is measured by reference to their fair value, i.e. the amount for which the award credits could be sold separately. The consideration allocated to award credit is recognised when award credits are redeemed.

The scope of customer loyalty programmes guidance is not limited to few types of arrangements but captures a wide range of sales incentives that might include, for example, vouchers, coupons, gifts to dealers and stockists on achieving specified volume of sales.

Presentation of excise duty Under the existing Indian GAAP, the revenue from sale of goods is disclosed net of excise duty. Generally, other indirect taxes such as sales tax are also reduced from revenues.

As per Ind AS 18, revenue includes only the gross inflows of economic benefits received and receivable by the entity on its own account. Amounts collected on behalf of third parties such as sales taxes, goods and services taxes and value added taxes are not economic benefits which flow to the entity and do not result in increase in equity. Therefore, they are excluded from revenue.

In an agency relationship, the gross inflows of economic benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity. The amounts collected on behalf of the principal are not revenue.

The ITFG¹ in its fourth bulletin considers excise duty to be a liability of the manufacturer, which forms part of the cost of production, irrespective of whether the goods are sold or not. The recovery of excise duty flows to the entity on its own account and should be included in the amount of revenue. Accordingly, the ITFG has recommended a consistent approach and clarified that revenue should be presented as a gross amount including excise duty in the statement of profit and loss prepared under Ind AS. The excise duty payable should be reflected as an expense.

Apart from this, as per Schedule III of the Companies Act, 2013 notified by the Ministry of Corporate Affairs on 7 April 2016 for companies applying Ind AS, revenue from sale of products should be disclosed after including excise duty. Hence, revenue should be disclosed gross of excise duty.

Extended credit Under the existing Indian GAAP, revenue is recognised at the gross value of the consideration receivable.

Under Ind AS 18, revenue should be measured at the fair value of the consideration received or receivable. If there is a significant time lag between provision of goods or services and the consideration received the time value of money should also be taken into account for the purpose of determining fair value revenue.

In such a situation, revenue is recognised at the present value of future cash inflows. Interest income is recognised over the credit period. When a current cash price is available, the imputed rate of interest is the rate that exactly discounts the amount to be received in the future to the current cash selling price. When a current cash price is not available, the imputed rate of interest is a market-participant-based discount rate for a similar instrument, including the counterparty’s credit risk.


` ```

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1. The ICAI on 11 January 2016 announced the formation of the Ind AS Transition Facilitation Group (ITFG) in order to provide clarifications on issues arising due to applicability and/or implementation of Ind AS.


Consider this….Food, drink and consumer goods companies ought to consider following actions while applying Ind AS 18:

• Apply judgements whether to bundle or unbundle the contracts for revenue recognition purposes

• Careful evaluation of transfer of risks and rewards of ownership of goods and services to determine the appropriate time for revenue recognition under Ind AS.

• Review arrangements involving payments to distributors and retailers to determine if those payments are made in exchange for separate goods or service or they represent a sale incentive. For many of these arrangements, significant judgement and appropriate internal controls, and documentation to support that judgement would be required.

• Consider whether the allocation method that is currently applied to account for customer loyalty programmes remains acceptable under Ind AS 18.

• Review existing returns methodology to assess for compliance with the requirements of Ind AS 18.

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IntroductionThe Companies Act, 2013 (2013 Act) emphasised the importance of corporate governance with the introduction of IFC. The 2013 Act introduced the concept of assurance by the Board of Directors on the IFC to be followed by the company. The 2013 Act is largely effective from 1 April 2014. Therefore, all companies in India are required to comply with the new provisions/requirements for financial periods beginning 1 April 2014.

Additionally, the 2013 Act lays responsibility on the audit committee and statutory auditors to review the adequacy and operational effectiveness of the IFCs.

BackgroundFrom an applicability and responsibility perspective, the 2013 Act emphasises the importance of a robust IFC environment by casting specific responsibility on the board, audit committee, management as well as auditors aiming to strengthen all the three lines of defence as explained below:

Reporting responsibility of the management - Section 134(5)(e) of the 2013 Act and Rule 8(5)(viii) of the Companies (Accounts) Rules, 2014 require:

• Listed companies: The directors’ responsibility statement to state that IFC are adequate and operating

effectively. The board’s report to state the adequacy of IFC with respect to financial statements.

• Other companies: The board’s report to state adequacy of IFC with respect to financial statements.

Responsibility of the audit committee: Section 177(4)(vii) states that the duties of the audit committee include evaluation of IFC and preparation of a report to the board.

Reporting by auditors: Section 143(3)(i) of the 2013 Act requires an auditor of a company to state in his/her report whether the company has an adequate IFC system in place and on the operating effectiveness of such controls.


– Provide a brief analysis on Internal Financial Controls (IFC) of annual reports of Nifty 50 index companies and highlight key observations.

– Highlight new developments in financial reporting and its likely impact on future focus of IFC.


Internal financial control: Reporting perspective

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Additionally, Rule 10A of the Companies (Audit and Auditors) Rules, 2014, provides that the auditors are required to report about the existence of an adequate IFC system and its operating effectiveness for the first time from the financial year commencing on or after 1 April 2015.

Guidance note issued by ICAI: Since the 2013 Act did not provide any specific guidance in this context, the Institute of the Chartered Accountants of India (ICAI) in September 2015 issued a Guidance Note on Audit of Internal Financial Controls Over Financial Reporting (Guidance note) which provided the guiding principles to both the company and its auditors. The guidance note establishes the principle that an auditor reporting on IFC under 2013 Act implies and relates to expressing an opinion on the adequacy and operating effectiveness of the company’s IFC over Financial Reporting (IFC-FR).

Further, the Guidance note provides the Illustrative Reports on IFC-FR for the auditor’s reference. There are separate formats for both stand-alone and consolidated financial statements and also separate illustrative reports in case of modified and unmodified opinion.

It has been more than a year since the new provisions have been made effective and companies have implemented an IFC framework in line with the 2013 Act’s requirements.

Through this article, we have highlighted the approach adopted by Nifty 50 companies and auditors of such companies while reporting on IFC.

Basis of our analysisWe have analysed the annual reports for the financial year 2015-16 of the companies forming part of the Nifty 50 index. Out of the 50 companies, nine are banks and out of those nine banks two banks are not constituted under the Companies Act, therefore, IFC reporting requirement is not applicable to those two banks.

Further, out of the remaining 41 companies (other than banks), three companies follow a different financial year, other than April-March therefore auditor reporting requirement would be applicable from next financial year.

In total, we have analysed 48 directors’ responsibility report and 45 auditors’ report.

Practice vs expectation

The IFC requirements are largely in line with the governance standards being followed internationally by developed economies. The introduction of IFC in India is a good initiative taken by regulators in India to bring in governance practices in alignment with those followed by global companies. The regulations relating to IFC are very important and cast onerous responsibilities on the company, Key Managerial Personnel (KMP), directors and also external and internal auditors.

The IFC definition places a lot of emphasis on the existence of and compliance with policies/procedures, safeguarding of assets, accuracy of financial reporting and prevention and detection of fraud and errors. In light of the requirements of the 2013 Act it is expected from the board and the management develop and implement

a framework which encompasses all areas pertaining to process controls, financial reporting, governance and fraud risk management controls. The guidance note focusses on more qualitative aspects of reporting by the management and expects to enhance documentation and testing of policies, procedures and controls. An effective change management is expected to be defined and implemented. Further, for the IFC framework to be sustainable it is expected from each stakeholder to play an important role during its implementation.

What we observedDirectors’ responsibility statement

While analysing the annual reports of the Nifty 50 listed entities, we observed that all the companies in this group complied with the requirements of the 2013 Act and the directors’ responsibility statement of such companies contains disclosure relating to IFC.

While 29 per cent companies have provided detailed descriptions in their report about the IFC e.g. company’s philosophy about internal controls and describes components of internal controls such as control environment, risk assessment, control activities, information, communication and monitoring of information. Others provided a boilerplate kind of report.

Auditors’ report on IFC

Auditors of the Nifty 50 companies have also ensured compliance in relation to IFC-FR requirements of the 2013 Act by including an annexure in the auditors’ report regarding IFC reporting.

We have analysed the auditors’ report of the 45 Nifty 50 companies and noted that the auditors have issued unmodified opinion with respect to IFC and complied with the format prescribed by ICAI. However, one auditor issued unmodified opinion but has identified certain areas of improvement in designing the documentation on IFC.

IFC reporting is a continuous process and the management is continuously expected to lay emphasis on formalising or documenting their control environment.

Companies should use IFC as an effective tool to derive various benefits and should not consider it only as a compliance activity, thus, following an approach that ensures abiding with the formats and disclosures in the board’s report. It may also provide an opportunity to companies to benchmark internal controls against industry leading practices for effective risk and control management.


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Consider this….

New developments in financial reporting and future focus

IFC implementation is expected to be impacted by the changes in the landscape of financial reporting. Following important changes should be considered by the companies to ensure compliance with IFC-FR:

Ind AS – Its implementation starts the new era of financial reporting where India Inc. is moving to IFRS converged standards with the adoption of Ind AS beginning 1 April 2016. Ind AS introduces significant variables that are different from the requirements of existing Accounting Standards (AS). In addition to changes in the requirements of the standards themselves, there are several areas where Ind AS requires application of judgement and financial reporting would be based on estimates made by the management. Under Ind AS, annual financial statements are also required to include several new quantitative and qualitative disclosures, especially in relation to financial instruments and consolidated financial statements.

ICDS – The tax accounting standards referred to as 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 new tax standards are applicable from Assessment Year 2017-18 and subsequent assessment years. With the adoption of ICDS, irrespective of whether the company reports its financial results as per Ind AS or as per existing AS, they would compute taxable income in accordance with ICDS. The adoption of ICDS could significantly alter the way companies compute their taxable income as taxable profits would now be determined after making appropriate adjustments to the financial statements to bring them in conformity with ICDS.

GST – The Indian economy is gearing up for the biggest tax change in the country’s history with Goods and Services Tax (GST) set to replace the prevailing excise duties, service tax and the state Value Added Tax (VAT). It is well-known that GST will subsume current indirect taxes imposed by the central/state governments. GST is expected to bring transformation in the Indian business environment which may extend beyond the tax framework. It is expected to impact every part of business such as financial reporting, tax reporting, supply chain network, etc. Therefore, companies are required to gear up for a smooth GST implementation.

Fraud reporting – Section 143 of the 2013 Act requires an auditor to report to the audit committee or central government (in case amount of frauds exceeds specified amount) about the fraud committed against the company by officers or employees of the company. Due to such requirement, consequential amendment made in Section 134 of the 2013 Act which deals with the board’s report where directors of the company are required to include information about the frauds reported under Section 143 other than those which are reportable to the central government. These sections increase the responsibility of an auditor and also cast some responsibilities on directors to include such reporting in the board’s report.

The changes in operating environment and reporting requirements emerging as a result of Ind AS, ICDS, GST and fraud reporting are likely to impact internal controls and companies would be required to re-evaluate the internal control environment and make appropriate changes to the existing controls and processes particularly in areas of financial reporting, taxation, risk assessment and other entity level controls.


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Financial assets and liabilities that are classified as ‘amortised cost’ are subsequently measured using the effective interest rate method under Indian Accounting Standard (Ind AS) 109, Financial Instruments. In addition, financial assets (excluding equity instruments) that are classified into the ‘Fair Value through Other Comprehensive Income (FVOCI)’ category also require the application of the Effective Interest Rate (EIR) method for recognition of interest income.

Ind AS 109 defines the EIR method as the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial asset or financial liability to the gross carrying amount of a financial asset or to the amortised cost of a financial liability.

In this article, we aim to illustrate the application of the EIR method to a financial liability measured at amortised cost and a financial asset classified as FVOCI.


– Describe the application of the effective interest rate method to a financial liability measured at amortised cost and a financial asset classified as FVOCI under Ind AS 109.

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Application of the effective interest rate method

Key terms of financial instrumentsZ Limited (the company), currently in the process of building a port in India, has entered into the following transactions on 1 April 2016:


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Preference shares issued Corporate bonds acquired

Description 1,000,000, 5 per cent cumulative preference shares of INR100 each, issued at par (INR100,000,000)

5,000 10 per cent corporate bonds acquired for INR1,000 each (INR5,000,000)

Transaction costs

INR1,000,000 on legal and professional fees N.A.

Redemption Redeemable by the company at the end of 3 years at a premium of 20 per cent (i.e. redemption amount is INR120,000,000)

Redeemable by the issuer at the end of 5 years at face value being INR1,200 per bond (i.e. redemption amount is INR6,000,000)

Dividends/interest

5 per cent per annum 10 per cent per annum

Business model

N.A. Held to collect and for sale (the company has acquired these investments for temporarily investing surplus funds. These bonds may be sold to fund capital expenditure in the future)

Ind AS 109 classification

Financial liability at amortised cost Financial asset at FVOCI

Fair value at 31 March 2017

N.A. INR1,100 per bond


This illustration does not include the impact of expected loss assessment on the investment in corporate bonds.

Accounting issueInd AS 109 requires the company to recognise interest expenses/income in accordance with the EIR method. The financial liability (preference shares) is subsequently measured at amortised cost and the financial asset (investment in corporate bonds) is subsequently measured at FVOCI. The analysis in this article illustrates the computation of the EIR and its application in accounting for these financial instruments.


Accounting guidanceFigure 1 illustrates the guidance in Ind AS 109 on the elements forming part of the calculation of amortised cost:

Financial assets

Minus

Minus

Plus or minus

Equals

Equals

Gross carrying amount

Loss allowance

Amortised cost

Amount initially recognised

Principal repayments

Cumulative amortisation, using the EIR of any difference between the initial amount and the maturity amount

Financial liabilities

Amortised cost (no adjustment for loss allowance)

Analysis

Preference shares - financial liabilityOn initial recognition, a financial asset or financial liability that is not classified as FVTPL is measured at its fair value plus or minus directly attributable and incremental transaction costs. The fair value on initial recognition is generally equal to the transaction price, i.e. the fair value of consideration given or received for the financial instrument. Therefore, the preference share liability is initially recognised at INR99 million (INR100 million – INR1 million).

The preference share liability is classified as measured at amortised cost, which is calculated on the basis of the EIR method. This method is used for amortising premiums, discounts and transaction costs. The EIR is calculated on initial recognition and is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument, to the gross carrying amount of a financial asset or the amortised cost of a financial liability.

In the case of the preference share liability, its amortised cost on initial recognition is equal to its fair value, adjusted for transaction costs, i.e. INR99 million. The expected cash payments include the annual interest payments at 5 per cent per annum (INR5 million payable annually) and the redemption amount including the redemption premium (INR120 million).

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Source: KPMG in India’s analysis, 2016 based on Ind AS 109


Corporate bonds – financial asset

The investment in corporate bonds is in the nature of a debt instrument, which is classified as FVOCI by Z Limited. Therefore, gains or losses are recognised in OCI, except for the following items, which are to be recognised in the statement of profit and loss (similar to the recognition requirements for financial assets measured at amortised cost):

• Interest revenue measured using the EIR method,

• Expected credit losses or reversals, and

• Foreign exchange gains or losses, if any.

On derecognition of the financial asset, the cumulative gain or loss recognised in OCI is reclassified to profit or loss.

In determining the EIR for a financial asset, all contractual terms of the instrument are considered other than expected credit losses. This is since the interest revenue is measured on the basis of contractual terms and is independent of the expected credit loss estimates.

The corporate bonds are initially recognised at their fair value (equal to the transaction price), being INR5 million. The expected cash receipts include the annual interest coupon of 10 per cent per annum (INR600,000 per annum) and the redemption proceeds of INR6 million at the end of five years. Based on these, the EIR for this financial asset is computed as 14.92 per cent per annum.

Date Interest expense(in INR)

Cash flows(in INR)

Amortised cost(in INR)

1 April 2016 99,000,000 99,000,000

31 March 2017 11,260,852 (5,000,000) 105,260,852

31 March 2018 11,972,998 (5,000,000) 112,233,850

31 March 2019 12,766,150 (125,000,000) Nil

Date Accounting entry Amortised cost(in INR)

1 April 2016 On initial recognition of the financial liability, net of transaction costs

BankPreference share liability

Dr 99,000,000Cr 99,000,000

31 March 2017 Accrual of interest expense and payment of dividend

Interest expensePreference share liabilityBank

Dr 11,260,852Cr 6,260,852Cr 5,000,000

Based on these, the EIR for this liability is computed as 11.37 per cent per annum. The following table illustrates the computation of interest expense and amortised cost based on the EIR.

The difference between the accrued interest expense and the dividend paid represents the amortisation of the transaction costs and the redemption premium on the preference share liability. The following are the accounting entries that should be recognised by Z Limited for the preference share liability for the year ended 31 March 2017.



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Particulars Amount (in INR)

Initial carrying amount of the corporate bonds at 1 April 2016

Add: Interest income accrued in the profit or loss at the EIR of 14.92 per cent

Less: Interest coupon received by the entity

Amortised cost of the corporate bonds as at 31 March 2017

5,000,000

746,166

(600,000)

5,146,166

Fair value of the corporate bonds at 31 March 2017 (INR1,100 per bond)

Amortised cost of the bonds

Cumulative fair value change (gain) recognised in OCI

5,500,000

5,146,166

353,834

Date Accounting entry Amortised cost(in INR)

1 Apr 2016 On initial recognition of the investment

Investment in corporate bonds (FVOCI debt)Bank

Dr 5,000,000Cr 5,000,000

31 March 2017 Accrual of interest income, receipt of interest coupon and recognition of fair value changes

BankInvestment in corporate bondsInterest income (profit or loss)Fair value gain on corporate bonds (OCI)

Dr 600,000Dr 500,000Cr 746,166Cr 353,834

The following table illustrates the accounting impact for the first year, including the computation of amortised cost and the amounts recognised in profit or loss/OCI. The impact of expected credit losses has been ignored for the purpose of this illustration.

The interest income accrued in profit or loss includes the amortisation of the difference between the amount initially recognised and the redemption amount.

The following are the accounting entries that should be recorded by Z Limited in respect of the corporate bonds for the year ended 31 March 2017.

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Consider this….• A financial liability that has been issued at a low or nil interest rate but carried a

substantial redemption premium will affect the statement of profit and loss as the redemption premium will be accrued over the life of the instrument at the EIR. Companies that have such financial liabilities outstanding at the date of transition to Ind AS are required to retrospectively compute the amortised cost of the liability and recognise the unamortised premium in the form of interest expense over the remaining term.

• A financial asset, being a debt instrument, classified as FVOCI will still have an impact on the statement of profit and loss for accrual of interest income on the basis of the EIR, recognition of expected losses and foreign exchange differences, if any. Further, the fair value change recognised in OCI is reclassified into the profit or loss on derecognition of such financial asset unlike fair value gains or losses on investments in equity instruments that are irrevocably classified as FVOCI.

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IntroductionInvestors and company boards have struggled over the years to get a true picture of business value from the historical financial information presented as part of corporate reporting. More information is required to help readers understand how the management is driving the business forward and how changes in the business environment might present new opportunities and challenges.

The International Integrated Reporting Council (IIRC) formed in August 2010 aimed to reduce the gap between current reporting and investor needs through the introduction of the concept of Integrated Reporting (<IR>). <IR> aims at enabling the capital markets to better understand a company’s strategy, align their models with business performance, and make efficient and

forward-looking investment and other key decisions.

Ever since the introduction of <IR>, there have been lot of experiments with different approaches to such reporting with the intention to enhance the credibility of the report. Therefore, in September 2014, the International Auditing and Assurance Standards Board (IAASB) formed the Integrated Reporting Working Group (IRWG) which works closely with the IIRC and other stakeholders to fully understand the assurance related issues, emerging trends and market demand and encourages research and innovation based on the various frameworks and developments in external reporting.

Continuing with its efforts, in August 2016, the IRWG published its Discussion

Paper (DP) on ‘Supporting Credibility and Trust in Emerging Forms of External Reporting: Ten Key Challenges’. This DP intends to explore the following in relation to Emerging forms of External Reporting (EER):i. The factors that can enhance

credibility and trust, internally and externally,

ii. The types of professional services covered by the IAASB’s international standards are extremely relevant to these reports, in particular assurance engagements,

iii. The key challenges in relation to assurance engagements, and

iv. The type of guidance that might be helpful to support the quality of these assurance engagements.

Integrated reporting: Emerging forms of external reporting


– Provide an overview of the discussion paper issued by the IAASB recently on supporting credibility and trust in emerging forms of external reporting.

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Currently, there is awareness that the future prospects of an entity are impacted by a wider range of factors than those that are presented in the financial statements. All these matters have been increasingly addressed by EER frameworks.

EER, whether incorporated into the traditional annual report or published as supplemental reports is still evolving to meet the emerging needs of a variety of stakeholders for wider information about the entity.

This article aims to provide an overview on the objectives of the DP issued by IAASB and key findings from the DP have been discussed in this article:

Factors enhancing user credibility and trustCredibility is a user-perceived attribute of information that engenders in the mind of the user an attitude of trust in the information. Following diagram depicts four key factors that enhances and engenders the external user credibility and trust in the EER report.

Sound reporting

framework

Criteria - who, what, why, when, where and how of the report.

Evaluation of consistency of EER with internal and external sources of information.

• Oversight and management functions

• Effective system of internal control, with ‘lines of defence’, including internal audit

• Obtaining external professional services.

Access to publication of professional services report(s):• Assurance • Other.

Strong governance

Consistent wider

information

External professional services and other reports

Source: IAASB’s DP on Supporting Credibility and Trust in Emerging Forms of External Reporting: Ten Key Challenges issued in August 2016

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Professional services highly relevant to EER There is a range of professional services which may also enhance credibility and trust in EER reports. These are assurance engagements, agreed-upon procedures and compilation engagements. The type of professional services that are extremely appropriate to users will depend on users’ needs (which varies for external and internal users), the nature of the external input and the maturity of the entity’s EER processes. However, the most common of these currently performed in relation to EER reports are assurance engagements.

As per International Standard on Assurance Engagements (ISAE) 3000 (Revised), Assurance Engagements Other than Audits or Reviews of Historical Financial Information an assurance engagement is one in which a practitioner endeavours to obtain adequate appropriate evidence in order to express, in a written report, an assurance conclusion designed to enhance the degree of confidence of intended users other than the responsible party about the outcome of the measurement or evaluation of an underlying subject matter against identified criteria.

Different types of assurance engagements are possible in case of EER reporting wherein the assurance conclusion could be expressed in terms that the EER report has been prepared properly on the basis of the stated framework. However, even if the EER framework does not provide a basis for suitable criteria, an assurance engagement is possible which can address either:

a. Only specific information in the EER report applying the criteria relevant to that information, or

b. The EER reporting process applying, criteria-based on the EER framework and others established in the context of more general objectives for such a reporting process.

10 key challenges in relation to EER assurance engagementsEER reports address a wider range of subject matters and are used by a broader and more diverse group of intended users for a more diverse range of purposes than traditional financial statements or annual reports. Therefore, entities would be requiring broader subject matter competence and may have a greater need to use experts in designing and operating EER reporting

systems than for financial reporting systems. Existence of differences in EER and financial reporting, poses various challenges in assurance engagements.

The DP explores the following 10 key challenges in relation to the performance of EER related assurance engagements as compared to an audit of financial statements.• Determining the scope of an EER

assurance engagement can be complex: The scope of an EER assurance engagement is much broader and diverse than that of an audit of financial statements. This may result in difficult acceptance judgements in a number of areas or also in the costs outweighing the benefits for full scope assurance engagements.

• Evaluating the suitability of criteria in a consistent manner: EER frameworks are often less prescriptive about content elements and depiction methods and hence, more ambiguity is involved while determining these items. Additionally, it provides considerable opportunity for management bias.

• Addressing materiality for diverse information with little guidance in EER frameworks: EER reports are generally less comprehensively specified and more judgemental as compared to financial reporting. It becomes difficult to assess what would be material for diverse users having different information needs. Also, EER has no common unit of measurement or evaluation in which each of the content elements relating to the underlying subject matter could be expressed.

• Building assertions for subject matter information of a diverse nature: The diverse nature of EER subject matter information compared with that contained in financial statements makes it more challenging to develop appropriate assertions.

• Lack of maturity in governance and internal control over EER reporting processes: The entities intending to apply EER frameworks may not have sufficiently robust EER reporting systems, controls and oversight in place.

• Obtaining assurance with respect to narrative information: Narrative information in EER reports could be factual or more subjective. It could also include management judgments and hence, more susceptible to management bias.

• Obtaining assurance with respect to future oriented information: EER frameworks address the type of future-oriented information relevant to include in an EER report, but they do not address the boundaries of acceptable assumptions made while considering the measurements or evaluations that give rise to the subject matter information.

• Exercising professional skepticism and professional judgement: Professional judgement and professional skepticism being interrelated play a fundamental role in an assurance engagement.

However, it is difficult for a practitioner to obtain the competence needed to support the application of professional judgement and professional skepticism in relation to such engagements.

• Obtaining the competence necessary to perform the engagement: Greater competence is required on part of the practitioner to challenge the management effectively, address the perspectives of a wider range of intended users while applying the materiality concept and while using the work of broader range of experts.

• Communicating effectively in the assurance report: Communication of the practitioner’s conclusion over the diverse subject matter information included in EER reports pose another challenge.

Way forwardEER frameworks are still evolving and entities applying them often do not have fully mature reporting systems, controls and oversight. Currently, no specific standards address the narrative information and above written 10 challenges as part of the subject matter information in an assurance engagement.

Therefore, the IAASB believes that it may be too early to develop a definitive standard in this area and the most effective way to begin to address these challenges would be to explore whether additional guidance is needed to enable practitioners to apply the requirements of ISAE 3000 (Revised) more effectively.

Next stepsThe DP seeks responses on the proposals suggested with the last day being 15 December 2016.


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Regulatory updates

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The CBDT notifies revised ICDSBackground

On 31 March 2015, the Ministry of Finance (MoF) issued 10 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’. Earlier the notification specified that these standards were to be applicable for Previous Year (PY) commencing from 1 April 2015, i.e., Assessment Year (AY) 2016-17 onwards.

Later, CBDT announced that the revision of ICDS and the Tax Audit Report (Form No. 3CD) to ensure compliance with the provisions of ICDS and to capture the disclosures mandated by ICDS. Additionally, MoF announced deferment of ICDS by one year and to be applicable from 1 April 2016 i.e. PY 2016-17 (AY 2017-18), instead of 1 April 2015.

New developments

The Central Board of Direct Taxes (CBDT) through its notification No. 87/2016 dated 29 September 2016 notified revised ICDS and repealed its earlier Notification No. 32/2015, dated 31 March 2015. The revised ICDS is applicable to all assessees other than an individual or a Hindu Undivided Family who is not required to get his/her accounts of the PY audited in accordance with the provisions of Section 44AB of the Income-tax Act, 1961 (IT Act). Such assessees need to follow the mercantile system of accounting, for the purposes of computation of income chargeable to income-tax under the head ‘Profits and gains of business or profession’ or ‘Income from other sources’. The notification shall apply to AY 2017-18 and subsequent AYs. (Emphasis added to changes).

Additionally, CBDT through its notification No. 88/2016, dated 29 September 2016 has also amended Tax Audit Report (Form No. 3CD) in the

Income-tax Rules, 1962 by inserting a new sub-clause in the Form No. 3CD to provide details of adjustments with respect to ICDS and disclosures as per ICDS.

There are no amendments to three ICDSs relating to accounting policies, government grants and provisions, contingent liabilities and contingent assets. All other ICDS have amendments.


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Overview of the key amendments

ICDS II: Valuation of Inventories

Standard cost method

The revised ICDS now allows standard cost method for measuring inventory. Additionally, it prescribes that where standard costing would be used as a measurement of cost, the following disclosures should be provided:

– Details of inventories measured at standard cost, and

– A confirmation that standard cost approximates the actual cost.

Cost of services in the case of service provider

The previously issued ICDS included the requirement of determining the cost of services in the case of a service provider. The revised ICDS removes the reference to the service provider.

ICDS IV: Revenue Recognition

Revenue from service transactions

The previously issued ICDS required revenue from service transactions to be recognised by the percentage-of-completion method in all cases. The revised ICDS introduces the following exceptions:

– When services are provided by an indeterminate number of acts over a specific period of time, revenue may be recognised on a straight line basis over the specific period, and

– Revenue from service contracts with duration of not more than 90 days may be recognised when the rendering of services under that contract is completed or substantially completed.

Use of resources by others yielding interest, royalties or dividends

The previously issued ICDS required interest revenue to be accrued on time basis determined by the amount outstanding and the rate applicable. The previously issued ICDS did not provide any exception to accrual of interest on time basis on tax, duty or cess. The revised ICDS exempts accrual of interest on refund of any outstanding tax, duty or cess.

The revised ICDS provides that interest on tax, duty or cess would be recognised in the PY in which it is received. Therefore, accrual is not required.

ICDS V: Accounting for Tangible Fixed Assets

The previously issued ICDS required an entity holding jointly owned tangible fixed assets to indicate separately such assets in the tangible fixed assets’ register.

The revised ICDS have removed this requirement.

ICDS VI: The Effects of Changes in Foreign Exchange Rates

Conversion of non-monetary item (inventory)

The revised ICDS have added a new paragraph relating to non-monetary item that is a foreign currency inventory. The revised ICDS require that such inventory, if carried at net realisable value, should be reported using the exchange rate that existed when such value was determined.

Change in foreign operation accounting

The revised ICDS removes the classification requirement of a foreign operation into integral and non-integral operations. The financial statements of such foreign operation should be translated using the principles and procedures specified for foreign currency transactions considering as if the transaction of the foreign operation had been those of the person himself.


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Overview of the key amendments

ICDS VIII: Securities

The revised ICDS introduce two parts in this standard. They are as follows:

– Part A deals with the securities held as stock-in trade

– Part B deals with the securities held by a scheduled bank or public financial institutions formed under a Central or a State Act or so declared under the Companies Act, 1956 (1956 Act) or the Companies Act, 2013 (2013 Act).

Part A

Part A of the revised ICDS is similar to previously issued ICDS on 31 March 2015. However, revised ICDS modifies the definition of securities. The revised ICDS defines securities as ‘that shall have the meaning assigned to it in clause (h) of Section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and shall include share of a company in which public are not substantially interested but shall not include derivatives referred to in sub-clause (ia) of that clause (h)’.

Additionally, under the revised ICDS subsequent measurement of securities would be allowed using weighted average cost method.

Part B

Part B of the revised ICDS is a new addition to the standard and introduces requirements for securities held by a scheduled bank or public financial institutions formed under a Central or a State Act or so declared under the 1956 Act or the 2013 Act.

Securities covered under this part should be classified, recognised and measured in accordance with the guidelines issued by the Reserve Bank of India (RBI) and any claim for deduction in excess of such guidelines should not be taken into account. Further, Part B prescribes that in relation to such securities, the provisions of ICDS VI on the effect of changes in foreign exchange rates relating to forward exchange contracts should not apply.

ICDS IX: Borrowing Costs

The previously issued ICDS did not define a qualifying asset. Therefore, borrowing cost, may need to be capitalised even if an asset may not take a substantial period of time to contact.

The revised ICDS updates the definition of qualifying asset for the purposes of general borrowing cost capitalisation only (and not specific borrowing cost capitalisation). It specifies that qualifying asset should be such an asset that necessarily requires a period of 12 months or more for its acquisition, construction or production.

Transitional provisions

The 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.

ICDS on construction contracts and services

With respect to construction contracts commenced prior to the applicability of ICDS, but not completed by 31 March 2016, the revised ICDS requires that the contract revenue and contract costs associated with such contracts to be recognised based on the method followed by an entity prior to the applicability of the ICDS i.e. 1 April 2016. Similar transition guidance is also available to service contracts.

Other ICDS

The revised ICDS has incorporated transitional provisions for most of the ICDSs. As per the transitional provisions the impacted assessees would have 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. With the deferment of ICDS, the transition date for this assessment is 1 April 2016 for all the ICDSs.

(Source: CBDT Notification No. 86/2016, 87/2016 and 88/2016 dated 29 September 2016 and KPMG in India’s First Notes dated 5 October 2016)


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RBI issues NBFCs Auditor’s Report Directions 2016Background

In 2015, the Reserve Bank of India (RBI) through a master circular (RBI/2015-16/11) issued the Non-Banking Financial Companies, (NBFCs) Auditor’s Report Directions, 2008 which provided additional directions on matters to be reported by auditors of an NBFC.

New developments

On 29 September 2016, RBI issued NBFCs Auditor’s Report Directions, 2016 (Auditor’s Report Directions, 2016) to every auditor of an NBFC for submission of an additional report to the Board of Directors (Board). These directions replace the previous circular and shall come into force with immediate effect.

Please refer KPMG in India First Notes dated 12 October 2016, which provides a summary of the Auditor’s report directions, 2016.

(Source: RBI Notification dated 29 September 2016)

The MCA amends certain provisions in the Companies (Management and Administration) Rules and Companies (Incorporation) RulesRecently, MCA through different notifications have made certain amendments to Rules to the 2013 Act as follows:

• Issued the Companies (Management and Administration) Amendment Rules, 2016 vide notification dated 23 September 2016,

• Issued the Companies (Incorporation) fourth Amendments Rules, 2016 vide notification dated 1 October 2016,

These amendments have come into force from the date of their publication in the Official Gazette i.e. from 23 September 2016 and 1 October 2016, respectively.

The subsequent section summarises the important amendments made to the Rules by the MCA.

Companies (Management and Administration) Amendment Rules, 2016.

• Relaxation of time period to update the register of members – Currently, Rule 3(1) and Rule

3(2) of the Rules requires all companies which existed on the commencement of the 2013 Act to compile within six months from the date of commencement of the Rules all particulars required in the register of members in Form No. MGT-1.

– The amendment has now eliminated the timeline of six months and requires all companies existing on the commencement of the 2013 Act to update Form No. MGT-1 with the particulars available in the register of members maintained under the Companies Act, 1956. Additional information required under the 2013 Act and the Rules can be updated in Form No. MGT-1 as and when provided by the members.

• Revision in base of filing return of change in shareholding position – Currently, Rule 13 of the Rules

requires every listed company to file with the Registrar of Companies (ROC), a return in Form No. MGT-10 along with a fee, with respect to changes relating to either increase or decrease of two per cent or more in the shareholding position of the promoters and top 10 shareholders of the company

– The amendment in the Rules now requires filing of Form No. MGT-10 only where there has been a change in the shareholding position of the promoter and top 10 shareholders of the company, in each case representing an increase or decrease by two per cent or more of the paid-up capital of the company.

• Additional exemption from voting through electronic means – Rule 20(2) of the Rules prescribes

that every company which has listed its equity shares on a recognised stock exchange and every company having 1,000 or

more members shall provide to its members the facility to exercise their right to vote on resolutions proposed to be considered at general meetings by electronic means.

– Currently, companies falling in the above criteria and referred to in Chapter XB (i.e. Issue of specified securities by small and medium enterprises) or Chapter XC (i.e. Listing and issue of capital by small and medium enterprises on institutional trading platform without initial public offering) of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 are exempt from the above requirement.

– The amendment additionally exempts a Nidhi from providing the members a right to vote by electronic means on resolutions proposed to be considered at general meetings.

• Introduction of definition ‘Nidhi’- Nidhi: Nidhi means a company which has been incorporated as a Nidhi with the object of cultivating the habit of thrift and savings amongst its members, receiving deposits from and lending to, its members only, for their mutual benefit, and which complies with such rules as are prescribed by the Central Government for regulation of such class of companies.

• Calling of an EGM on any day other than a national holiday – Rule 17 of the Rules and

Section 100(4) of the 2013 Act, prescribe the manner in which the requisitionists may call for an Extraordinary General Meeting (EGM) of the company.

– Currently, Explanation to Rule 17(2) of the Rules, provides that an EGM should be held either at the registered office of the company or in the same city or town where the registered office is situated on a working day.

– The amended Rules now allow EGM to be held on any day other than a national holiday.

• Minutes book of general meetings to be kept at registered office only – Rule 25(1)(e) of the Rules currently,

allows a company to maintain the minute books of general meetings either at the registered office or at any other place as may be approved by the board of directors.

– The amended Rules now require the minutes book to be kept at the registered office of the company and not at any other place as may be approved by the Board.

(This amendment has been made in line with the requirements of Section 119(1) of the 2013 Act which requires minutes of the proceedings of any general meeting to be kept at the registered office of the company only.)

• Amendment in provisions relating to voting by postal ballot – Rule 22(7) of the Rules currently,

provide that if a resolution is assented to by the requisite majority of the shareholders by means of postal ballot including voting by electronic means, it shall be deemed to have been duly passed at a general meeting convened in that behalf.

– Additionally, Rule 22(14) of the Rules provide that the resolution shall be deemed to be passed on the date of the meeting convened in that behalf. Since Section 110(2) of the 2013 Act contains similar provisions, Rule 22(7) and 22(14) have been deleted by the amended Rules.

Other amendments

• Reduction in documentation requirements – Currently, Rule 9(1) of the Rules

requires the holder of shares of a company, whose name is entered in the register of members, but who does not hold beneficial interest in such shares (the registered owner) should file a declaration with the company in Form No. MGT-4 in duplicate within 30 days from date his name is entered in the register of members.

– Additionally, Rule 9(2) of the Rules requires every person who holds beneficial interest in the shares of a company, but whose name is not entered in the register of members (the beneficial owner) should file a declaration disclosing his interest in such shares in Form

No. MGT-5 in duplicate within 30 days after acquiring such beneficial interest. Further, any change in the beneficial interest in the shares, should be intimated to the company in Forms MGT-4 and MGT-5 by the registered owner and the beneficial owner of the shares respectively, in duplicate, within 30 days from the date of such change.

The amended Rules do not require the filing of duplicate copies of the above mentioned forms.

• Revised Form No. MGT-6 issued – Currently, Form No. MGT-6, return

to be filed with the Registrar under Section 89 (relating to declaration in respect of beneficial interest in any share) received by the company, requires only the details of the beneficial owner of the shares;

– The amended Rules have issued revised Form No. MGT-6, which now requires a company to provide the ROC with details of the registered owner along with the beneficial owner of the shares.

Companies (Incorporation) fourth Amendment Rules, 2016

The Ministry of Corporate Affairs MCA on 1 October 2016 issued the Companies (Incorporation) fourth Amendment Rules, 2016. The highlights of the key amendments are as follows:• Introduction of ‘Simplified Proforma

for Incorporating Company Electronically (SPICe) with effect from 2 October 2016

• Addition of a new Rule (No.39) for conversion of a ‘company limited by guarantee’ into a ‘company limited by shares’ effective from 1 November 2016

SPICe

Currently, Rule 36 of the Companies (Incorporation) Rules lays down integrated processes, procedures and forms to be filled for incorporation of a company.

In order to make this process electronic, a new Rule 38 has been added which provides a simplified integrated process for incorporation of a company. Therefore, for incorporation of a company following forms have to be filed:

Accordingly, old forms have been replaced by new forms. The new forms provide operational ease such forms have been enabled to accept foreign addresses of authorised persons of the company incorporated outside India, facility for Permanent Account Number (PAN), Tax Deduction Account Number (TAN) and Employee State Insurance Corporation (ESIC) have been enabled as part of the integrated application form, etc.

Conversion of a company limited by guarantee into a company limited by shares

The MCA has inserted a new Rule 39 which lays down the procedure for a company limited by guarantee to convert to a company limited by shares. New provisions are as follows:

• Rule 39 is applicable to all companies other than companies covered under Section 25 of the Companies Act, 1956 or Section 8 company of the 2013 Act.

• Company seeking conversion should have share capital equivalent to the guarantee amount.

• Special resolution to be passed authorising such conversion omitting the guarantee clause in the Memorandum of Association (MOA) and altering the Articles of Association (AOA).

• Copy of special resolution to be filed with the ROC in Form no.MGT-14 within 30 days from passing of resolution.

• Application in Form INC-27 to be filed with the ROC in the manner prescribed.

Within 30 days from the date of receipt of application filed, the ROC will issue a certificate of incorporation in new form- INC-11B.


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Sr no.

Name of form

New e-form number

1. SPICe INC-32

2. SPICe MOA INC-33

3. SPICe AOA INC-34

Table 1: Forms to be filled

Other amendment

Post formation of the National Company Law Tribunal (NCLT), the word ‘Tribunal’ has been used in place of ‘Central Government’/’competent authority’ in Rule 33(2).

(Source: MCA notification dated 23 September 2016 and 1 October 2016)

ICAI updatesInd AS Transition Facilitation Group (ITFG) issues Clarifications Bulletin 5

Background

With Ind AS being applicable to large corporates from 1 April 2016, ICAI, on 11 January 2016 announced the formation of the Ind AS Transition Facilitation Group (ITFG) in order to provide clarifications on issues arising due to applicability and/or implementation of Ind AS under the Companies (Indian Accounting Standards) Rules, 2015 (Rules 2015).

Earlier this year, ITFG issued four bulletins to provide guidance on issues relating to the application of Ind AS.

New development

The ITFG held its fifth meeting on 19 September 2016, and issued its bulletin (Bulletin 5) to provide clarifications on eight issues in relation to the application of Ind AS, as considered in its meeting.

The issues relate to the following topics:

• Application of Ind AS on meeting net worth criteria

• Classification of a liability as current/non-current

• Property, plant and equipment - application of deemed cost exemption

• Straight-lining of lease payments• Accounting of share in profit in case

of joint venture.

Please refer KPMG in India IFRS Notes dated 13 October 2016 which provides an overview of the issues discussed in ITFG bulletin.

(Source: Bulletin 5 issued by ITFG of ICAI)

The ICAI recently issued the following guidance notes

Guidance Note on Reports or Certificates for Special Purposes - The recently released Guidance Note supersedes the Guidance Note on Audit Reports and Certificates for Special

Purposes, issued by the ICAI in 1984. It provides guidance on engagements which require a ‘professional accountant in public practice’ (to issue reports other than those which are issued in audits or reviews of historical financial information.

The guidance note covers assurance engagements other than audits or reviews of historical financial information, as described in the Framework for Assurance Engagements (Assurance Framework) issued by the ICAI. This guidance note does not apply to assurance engagements for which subject specific Standards on Assurance Engagements have been issued by the ICAI.

Guidance Note on Combined and Carve-Out Financial Statements - On 28 September 2016, ICAI issued its Guidance Note on Combined and Carve-out Financial Statements. This guidance note specifies indicative situations in which combined/carve-out financial statements may be prepared and provides guidance on their preparation and required disclosures.

Guidance Note on Audit of Consolidated Financial Statements: The recently released guidance note supersedes the Guidance Note on Audit of Consolidated Financial Statements, issued by the ICAI in 2003.

The guidance note covers aspects such as introduction, definitions, responsibility of the parent, responsibility of the auditor of consolidated financial statements, audit considerations, auditing the consolidation, special considerations, management representations, reporting.

Additionally, the appendices to the guidance note include the illustrative formats of auditor’s report on consolidated financial statements.

(Source: The ICAI notification dated 28 September 2016, 1 October 2016 and 17 October 2016)

Withdrawal of Guidance Notes and Application guide issued by ICAI

The ICAI through its notification dated 7 October 2016, has withdrawn the following:

• Guidance Note on Availability of Revaluation Reserve for Issue of Bonus Shares

• Guidance Notes on Accounting for Fringe Benefits Tax

• Application Guide on the Provisions of Schedule II to the Companies Act, 2013 from the date the Guidance Note on Accounting for Depreciation in Companies in the context of Schedule II to the Companies Act, 2013, became applicable (i.e. for accounting periods beginning on or after 1 April 2016)

(Source: The ICAI notification dated 7 October 2016)

The ICAI issued clarification for auditor’s rotation

Background

The 2013 Act which became largely effective from 1 April 2014, brought new requirement for auditor rotation. Section 139 of the 2013 Act provides appointment of auditors for a five-year term which is to be ratified annually by an ordinary resolution. It further provides that listed companies and certain prescribed classes of companies cannot appoint or re-appoint an audit firm for more than two consecutive terms of five years each. Section 139 states that every company, existing on or before the commencement of the 2013 Act is required to comply with these provisions within three years from 1 April 2014 i.e. from 1 April 2017. Accordingly, MCA has clarified that companies should ensure compliance of the new provisions of Section 139 within a period which shall not be later than the date of the first annual general meeting of the company held after 1 April 2017.

The ICAI issued Standard on Quality Control (SQC) 1 Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagement. The purpose of Standard on Quality Control (SQC) is to establish standards and provide guidance regarding a firm’s responsibilities for its system of quality control for audits and reviews of historical financial information, and for other assurance and related services engagements.

The SQC1 code discusses the familiarity threat that may be created by using the same senior personnel on an assurance engagement over a long period of time and the safeguards that might be appropriate to address such a threat. Accordingly, it provides that every chartered accountant firm should


34

establish the following policies and procedures:

a. Setting out the criteria for determining the need for safeguards to reduce the familiarity threat to an acceptable level when using the same senior personnel on an assurance engagement over a long period of time, and

b. For all audits of financial statements of listed entities, requiring the rotation of the engagement partner after a specified period in compliance with the code.

The code specifies that for the purpose of financial statement audits of listed entities the engagement partner should be rotated after a pre-defined period, normally not more than seven years

New development

The ICAI in its recent announcement issued a clarification on the difference in requirements relating to auditor’s rotation under SQC1 vis-à-vis the 2013 Act.

The SQC1 is applicable for all engagements relating to accounting periods beginning on or after 1 April 2009. In case of audits of listed entities, SQC1 requires rotation of the engagement partner after a pre-defined period normally not more than seven years. The provisions regarding the rotation of engagement partner would be due from 1 April 2016 as per SQC1 during the transition phase.

Since the 2013 Act is applicable from 1 April 2014 and the existing companies have been given a relaxation of three years to comply with the requirement of auditor’s rotation, the provisions regarding auditor’s rotation would be due from 1 April 2017 as per the 2013 Act during the transition phase. Therefore, there is a difference of one year in the requirement of the auditor’s rotation between SQC1 vis-à-vis the 2013 Act.

Therefore, with an aim to provide consistency between the requirements of 2013 Act and SQC1, the ICAI issued a clarification and provided relaxation in the requirement of rotation of the engagement partner for the transition phase i.e. one time only for the financial year 2016-17. Hence, the rotation of the engagement partner of for audit of listed entities is required from financial year beginning 1 April 2017.

(Source: The ICAI notification dated 30 September 2016)

Amendment to certain Accounting Standards (for non-corporate entities)

The ICAI with the view to align the Accounting Standards (applicable to non Ind AS companies) notified by the central government amended the Accounting Standards which were issued by the ICAI for non-corporate entities. Accordingly, the following changes have been made by the ICAI:

• AS 6, Depreciation Accounting stands withdrawn

• The following Accounting Standards are amended:

– AS 2, Valuation of Inventories – AS 4, Contingencies and Events

Occurring After the Balance Sheet Date

– AS 10, Property, Plant and Equipment

– AS 13, Accounting for Investments – AS 14, Accounting for

Amalgamations – AS 21, Consolidated Financial

Statements – AS 29, Provisions, Contingent

Liabilities and Contingent Assets

These amendments will come into effect in respect of accounting periods commencing on or after 1 April 2017.

(Source: ICAI notification dated 29 September 2016)


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36

KPMG in India offices


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KPMG in India’s IFRS institute Visit KPMG in India’s 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.

RBI issues NBFCs Auditor’s Report Directions 2016

12 October 2016

Background

In 2015, the Reserve Bank of India (RBI) through a master circular (RBI/2015-16/11) issued the Non-Banking Financial Companies (NBFCs) Auditor’s Report Directions, 2008 which provided additional directions on

matters to be reported by auditors of an NBFC.

New development

On 29 September 2016, RBI issued NBFCs Auditor’s Report Directions, 2016 (Auditor’s Report Directions, 2016) to every auditor of an NBFC for submission of an additional report to the Board of Directors (Board). These directions replace the previous circular and shall come into force with immediate effect.

This issue of First Notes provides a summary of the Auditor’s report directions, 2016.

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.

Special session on revised Income Computation and Disclosure Standards (ICDS)

In our recent call on 7 October, 2016 we provided an overview of the key changes to the ICDS and their likely impact on companies in India.

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

IFRS NotesInd AS Transition Facilitation Group (ITFG) issues Clarifications Bulletin 5

13 October 2016

Background

With Indian Accounting Standards (Ind AS) being applicable to large corporates from 1 April 2016, the Institute of Chartered Accountants of India (ICAI), on 11 January 2016 announced the formation of the Ind AS Transition Facilitation

Group (ITFG) in order to provide clarifications on issues arising due to applicability and/or implementation of Ind AS under the Companies (Indian Accounting Standards) Rules, 2015 (Rules 2015).

Earlier this year, ITFG issued four bulletins to provide guidance on issues relating to the application of Ind AS.

New developments

The ITFG held its fifth meeting on 19 September 2016, and issued its bulletin (Bulletin 5) to provide clarifications on eight issues in relation to the application of Ind AS, as considered in its meeting.

This edition of IFRS Notes provides an overview of the issues discussed in Bulletin 5.

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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