Issues on accounting standards.pdf

download Issues on accounting standards.pdf

of 33

Transcript of Issues on accounting standards.pdf

  • 8/14/2019 Issues on accounting standards.pdf

    1/33

    Workshop on Issues inWorkshop on Issues in

    Accounting StandardsAccounting Standards

    April 17, 2009

    Himanshu Kishnadwala

    Contractor, Nayak & Kishnadwala

  • 8/14/2019 Issues on accounting standards.pdf

    2/33

    Todays AgendaTodays Agenda

    AS 11

    AS 1 AS 4

    AS 29

    CNK

    2

  • 8/14/2019 Issues on accounting standards.pdf

    3/33

    Nature of Forex Losses/gainsNature of Forex Losses/gains

    1. On Forex Loans (incl FCCB, ECBs):

    Utilised for acquisition of Fixed assets Outside India

    Within India

    Utilised for other purposes

    2. On Short er! "orro#in$s, Creditors, de"tors, etc

    %. &tilisation o' 'or#ard coers

    . Cancellation o' For#ard Coers

    *. ++ Losses$ains on o-en 'or#ard coers

    3

    CNK

  • 8/14/2019 Issues on accounting standards.pdf

    4/33

    AS 11: ecent !e"e#op$entsAS 11: ecent !e"e#op$ents

    Fe" 2/: +atter re'erred to 0SB (2 !eetin$s held)

    0SB could not arrie at a consensus and re'erred to

    Council

    +arch 2/: IC0I Council could not reach a decision

    In !id!arch discussions #ere held "et#een IC0I, CII

    re-resentaties and 3t .Secretar4, 5OI

    6ecision de'erred to Council +eetin$ in 0-ril 2/ 70C0S held a !eetin$ on 2th+arch 2/, to discuss

    !odi'ication to 0S 11

    IC0I o"8ected to a!end!ent o' 0S 11 #as oerruled

    MCA issued notification on 31stMarch 2009

    4

    CNK

  • 8/14/2019 Issues on accounting standards.pdf

    5/33

    Treat$ent of Forex %xposuresTreat$ent of Forex %xposures

    5

    CNK

  • 8/14/2019 Issues on accounting standards.pdf

    6/33

    1& Forex Loans:1& Forex Loans:For ac'uisition of Fixed assets or for other purposesFor ac'uisition of Fixed assets or for other purposes

    O-tion to 'ollo# 0S 11 or +C0 noti'ication

    I' 0S 11 'ollo#ed:

    0ll losses on loans (#hether 'or ac9uisition o' 'ixed 0ssets or

    others) hae to "e taen to ; < L ac Sa!e treat!ent een 'or losses on 4ear end restate!ent

    MCA notification also omits 2ndpararaph! "xpl# 1$2 in %art

    & of Schedule '

    hus co!-anies, (usin$ "acin$ o' le$al o-inions), a--l4in$Schedule =I 'or ca-italisin$ 'orex losses on ac9uisition o' 'ixed

    assets cannot do so no#

    Such co!-anies no# need to 'ollo# 0S 11 or +C0 noti'ication

    6

    CNK

  • 8/14/2019 Issues on accounting standards.pdf

    7/33

  • 8/14/2019 Issues on accounting standards.pdf

    8/33

    reat!ent i' +C0 o-tion exercised: Exchan$e di''erences 'or all LFC+ relatin$ to de-recia"le 'ixed

    assets to "e ad(usted to the cost of the fixed assets>

    6e-reciation on ad8usted cost oer the "alance li'e o' the asset> Other eli$i"le exchan$e di''erences to "e accu!ulated in a account

    called: )*orei#n Currency +onetary tem -ranslation .ierence

    A!c*# +FCM&,-.

    0!ount accu!ulated under FC+I6 0c to "e amortised o/er

    alance period of the lon term asset$liailit U, "F"

    31stMarch 2011#

    0"oe not applicale'or exchan$e di''erences dealt in -ara 1*

    o' 0S 11 (i.e. 7et Inest!ent in a noninte$ral 'orei$n

    o-eration.)

    8

    CNK

  • 8/14/2019 Issues on accounting standards.pdf

    9/33

    ransitional ;roisions: Exchan$e di''erences relatin$ to de-recia"le 'ixed assets to "e

    ad8usted to the cost o' the 'ixed assets>

    Other eli$i"le exchan$e di''erences to "e accu!ulated in theDForei$n Currenc4 +onetar4 Ite! ranslation 6i''erence 0c

    (FC+I6)

    Corres-ondin$ e''ect to "e $ien to 5"6"A7 "S"'"

    0dditional char$e 'or de-reciation

    0!ortisation o' FC+I6

    0dditional 6isclosures:

    Fact o' exercisin$ the o-tion

    0!ount re!ainin$ to "e a!ortised in 'uture 4ears

    9

    CNK

  • 8/14/2019 Issues on accounting standards.pdf

    10/33

    1& Forex Loans:1& Forex Loans:

    For ac'uisition of Fixed assets or for other purposes (For ac'uisition of Fixed assets or for other purposes (

    Schedule =I allo#ed 'orex losses$ains to "e ad8usted to cost o'

    the 'ixed assets onl4 i' the assets #ere ac9uired 'ro! outside

    India

    MCA notification does not ha/e such condition and requiresad(ustment for all assets +i#e# acquired outside &ndia or

    8ithin &ndia.

    Co!-anies #ho had earlier 'ollo#ed Schedule =I (rather than

    0S 11) #ould hae ad8usted losses onl4 'or assets ac9uiredoutside India

    o 'ollo# +C0 noti'ication, these co!-anies #ould no# hae to

    $ie retros-ectie e''ect ('ro! 2?A) 'or een assets

    ac9uired #ithin India corres-ondin$ e''ect to 5eneral esere

    10

    CNK

  • 8/14/2019 Issues on accounting standards.pdf

    11/33

    Financial

    ear

    Amount

    repaid

    +in US-.

    Amt o$s

    +in

    US-.

    ate Amount

    +s. in

    la:hs

    Forex

    +7oss.

    $ ain

    +la:hs.

    emar:s

    2@? 1,, 2 2. Os Loan

    2?A 2, 1 A.2 .2 5ain to ; < L ac

    2?A A, %2. 1.@ ++ $ain to ; < L ac

    2A/ %, * 1%.* (1.*) 0ctual Loss

    2A/ *, * 2*. (*.) ++ Loss

    +4#;0.

    Loan is taen "4 the co!-an4 in Oct 2@ and is re-a4a"le in %

    instal!ents Oct 2?, Oct 2A and Oct 2/.

    11

    CNK

  • 8/14/2019 Issues on accounting standards.pdf

    12/33

    0ssu!in$ Loan is 'or Capital Asset acquisition

    I' +C0 noti'ication a--lied, e''ectie 2?A, all 'orex $ains

    losses to "e ad8usted #ith cost o' ca-ital asset.

    For 2?A, $ain o' s. 1.A lahs #ill "e reduced 'ro! 'ixedassets corres-ondin$ e''ect to 5eneral esere

    For 2A/, loss o' s. @.* lahs #ill "e added to the 'ixed

    assets corres-ondin$ restate!ent o' loans

    6e-reciation 'or 2A/ to "e re#ored "4 considerin$excess de-reciation -roided in 2?A and additional

    de-reciation 'or 2A/

    12

    CNK

  • 8/14/2019 Issues on accounting standards.pdf

    13/33

    0ssu!in$ Loan is 'or

  • 8/14/2019 Issues on accounting standards.pdf

    14/33

    )& *n ST +orro,ings- .reditors- de+tors- etc)& *n ST +orro,ings- .reditors- de+tors- etc

    Outstandin$ "alances o' de"torscreditors are

    !onetar4 ite!s and #ould nor!all4 not exceed a

    -eriod o' 12 !onths

    +C0 noti'ication #ould there'ore not a--l4

    0S 11 #ould "e a--lica"le to these ite!s

    0ll exchan$e di''erences on settlement o' these ite!s

    or on restatement at the 4ear end #ould there'ore "eta:en to the %7 a$c

    14

    CNK

  • 8/14/2019 Issues on accounting standards.pdf

    15/33

    /0& ti#isation or cance##ation of/0& ti#isation or cance##ation of

    For,ard .o"ersFor,ard .o"ers

    0S 11 a--lies 'or 'or#ard contracts : Baced "4 actual transactions (-ara %@%?)

    Intended 'or tradin$ or s-eculation -ur-oses (-ara %A%/)

    In "oth cases a"oe, the -ro'itloss on cancellation or

    on ++ is to "e char$ed to the ;L ac +C0 7oti'ication does not coer this

    I' 'or#ard contracts are 'or DForecast or Bihl%roale future transactions, 0S 11 does not a--l4

    o 'ollo# IC0I 0nnounce!ent o' +arch 2A in such

    cases

    15

    CNK

  • 8/14/2019 Issues on accounting standards.pdf

    16/33

    2& 3T3 Losses/gains on open for,ard co"ers2& 3T3 Losses/gains on open for,ard co"ers

    7either 0S 11 nor +C0 noti'ication a--l4 to such ite!s

    IC0I announce!ent o' +arch 2A #ould "e

    a--lica"le 'or such ite!s

    0s -er the announce!ent 2 o-tions: Char$in$ ++ losses to the ;L ac (no entr4 'or -ro'its)

    i' not so done "4 the co!-an4, statutor4 auditor to $ie

    Dappropriate disclosures in his re-ort

    Such disclosures ma not amount to a qualification

    Earl4 ado-tion o' 0S %

    16

    CNK

  • 8/14/2019 Issues on accounting standards.pdf

    17/33

    2& 3T3 Losses/gains on open for,ard co"ers2& 3T3 Losses/gains on open for,ard co"ers

    I' 0S % ado-ted oluntaril4: o 'ollo# 0S % to the extent -er!itted "4 existin$ la#s and

    re$ulations

    O-en deriatie contracts are to "e ++ unless the4 can "econsidered as DCash Flo# ed$e

    I' treated as DCash Flo# ed$e, $ainslosses can "e taen to

    DE9uit4 rather than ;L ac+for the effecti/e portion of the

    hede. +normall ta:en to )Bedin eser/e a$c.* Strin$ent docu!entation necessar4 'or the sa!e

    For ineffecti/e-ortion $ainslosses to "e taen to ;L ac

    On closure, $ainslosses to "e trans'erred to the ;L ac

    17

    CNK

  • 8/14/2019 Issues on accounting standards.pdf

    18/33

    2& 3T3 Losses/gains on open for,ard co"ers2& 3T3 Losses/gains on open for,ard co"ers

    ransitional -roisions i' 0S % ado-ted Ine''ectie -ortion o' such deriatie contracts as at the

    "e$innin$ o' the accountin$ -eriod is to "e ad8usted a$ainst the

    o-enin$ eenue eseres

  • 8/14/2019 Issues on accounting standards.pdf

    19/33

    ;ara A1 o' 0S % #hich deals #ith Guali'4in$ ed$in$

    Instru!ents states DThis Standard does not restrict thecircumstances in which a derivative maybe designated as a hedging

    instrument, provided the conditions of para 98 are met, except for

    some options.However, a non-derivative financial asset or non-

    derivative financial liability maybe designated as a hedging

    instrument only for a hedge of a foreign currency ris.

    ;ara /@(") o' 0S % de'ines Cash 'lo# hed$e as !a hedge of the

    exposure to variability in cash flows that" #i$ is attributable to a particular ris associated with a recognised

    asset or liability#such as all or some future interest payments on

    variable rate debt$or a highly probable forecast transaction and

    #ii$ could affect profit or loss.

    19

    CNK

  • 8/14/2019 Issues on accounting standards.pdf

    20/33

    ;ara F.1.@ o' 5uidance in i!-le!entin$ 0S % in %rd-ara

    !entions the 'ollo#in$:

    !%s regards foreign currency ris, &., hedge accounting can be applied

    because para 8' of %S () permits a non-derivative financial asset orliability to be designated as a hedging instrument for hedge

    accounting purposes for a hedge of a foreign currency ris*

    Further, -ara F.2. o' 5uidance in i!-le!entin$ 0S % deals

    #ith the 9uestion D+s hedge accounting permitted for a

    currency borrowing that hedges an expected but not contractualrevenue stream in foreign currency*

    20

    CNK

  • 8/14/2019 Issues on accounting standards.pdf

    21/33

    es, if the revenues are highly probable. nder paragraph 9/#b$

    of %S () a hedge of an anticipated sale may 0ualify as a cash

    flow hedge.

    1or example, an airline entity may use sophisticated modelsbased on experience and economic data to pro2ect its revenues

    in various currencies. +f it can demonstrate that forecast

    revenues for a period of time into the future in a particular

    currency are !highly probable*, as re0uired by paragraph 98 of

    %S (), it may designate a currency borrowing as a cash flow

    hedge of the future revenue stream. The portion of the gain or

    loss on the borrowing that is determined to be an effective hedge

    is recognised directly in the appropriate e0uity account until the

    revenues occur.

    21

    CNK

  • 8/14/2019 Issues on accounting standards.pdf

    22/33

    +C0 noti'ication re9uires co!-anies to 'ollo# either 0S 11 or

    -ara @ 'or all such Forex lia"ilities

    Can companies still adopt Bede Accountin as per AS 30

    for these forex liailities &n other 8ords! neither AS 11 nor MCA notification is

    follo8ed! ut AS 30 is adopted#

    I' ed$e 0ccountin$ as -er 0S % is ado-ted, the losses 'or the

    e''ectie -ortion #ould "e taen to a Ded$in$ esere he sa!e does not need to "e a!ortised, "ut reersed on

    co!-letion o' the transaction

    his #ould result in 'urther de'er!ent o' such ++ losses.

    22

    CNK

  • 8/14/2019 Issues on accounting standards.pdf

    23/33

    Inco$e Tax I$p#icationsInco$e Tax I$p#ications

    2 t4-es o' losses to "e considered: Losses on eenue account

    Losses on ca-ital account

    Losses on eenue 0ccount Losses can "e on settle!ent or on restate!ent

    e'er recent SC decision in case o' Wood#ard 5oernor

    India ;t Ltd (SC) onda Siel ;o#er ;roducts Ltd (SC)

    #herein such losses are considered allo#a"le

  • 8/14/2019 Issues on accounting standards.pdf

    24/33

    Inco$e Tax I$p#ications (Inco$e Tax I$p#ications (

    Losses on Ca-ital 0ccount Ex-lanation to sec %0 -roides that losses$ains to "e

    ad8usted to cost o' asset to the extent the same arises on

    repament and for assets acquired outside &ndia For losses$ains ad8usted other than a"oe ad8ust!ents to

    "e done to "loc o' assets

    6e-reciation allo#a"le us %2 to "e reco!-uted accordin$l4

    In case +C0 noti'ication not follo8edand losses$ainstaen to ; < L ac #hether deducti"leH Seems difficult in

    /ie8 of SC decision of ,ata &ron = Steel 7td 231 &, 2>#

    24

    CNK

  • 8/14/2019 Issues on accounting standards.pdf

    25/33

    e#e"ant for Inco$e Tax i$p#icationse#e"ant for Inco$e Tax i$p#ications

    Section %0 o' I 0ct, 1/@1

    Sutle8 Cotton +ills Ltd (SC): 11@ I 1

    ata Iron < Steel Ltd (SC): 2%1 I 2A* Wood#ard 5oernor India ;t Ltd (SC)

    onda Siel ;o#er ;roducts Ltd (SC)

    25

    CNK

  • 8/14/2019 Issues on accounting standards.pdf

    26/33

    AS 1: !isc#osure of Accounting 4o#iciesAS 1: !isc#osure of Accounting 4o#icies

    Basic 0ssu!-tions in 'inancial state!ents: 5oin$ Concern

    Consistenc4

    0ccrual

    With !an4 industriesco!-anies 'acin$ recession,

    oin concernissue !a4 need to "e addressed.

    I!-ortant 'actors to "e considered: 7et #orth (een i' -ositie $oin$ concern !a4"e a''ected)

    Ca-acit4 to serice de"t re-a4a"le in near 'uture

    Future "usiness scenario

    26

    CNK

  • 8/14/2019 Issues on accounting standards.pdf

    27/33

    AS 0: .ontingencies and %"ents *ccurring after theAS 0: .ontingencies and %"ents *ccurring after the

    5a#ance Sheet !ate5a#ance Sheet !ate

    hose si$ni'icant eents that occur "et#een the BSdate and date on #hich 'inancial state!ents area--roed.

    2 t4-es o' eents -ossi"le: those #hich -roide 'urther eidence o' conditions that

    existed at the "alance sheet date> and

    those #hich are indicatie o' conditions that arosesu"se9uent to the "alance sheet date.

    Contin$encies not coered "4 0S since re-lacedand no# coered "4 0S 2/

    27

    CNK

  • 8/14/2019 Issues on accounting standards.pdf

    28/33

    AS 0: %"ents *ccurring after the 5a#anceAS 0: %"ents *ccurring after the 5a#ance

    Sheet !ate (Sheet !ate (

    Ad(ustments to assets$liailitiesD 6ecessar'or eents that pro/ide additional information

    !ateriall4 a''ectin$ the deter!ination o' a!ounts relatin$ to

    conditions existin$ at BS date. (e.$. a de"tor #ho has "eco!einsolent)

    6ot appropriate 'or eents #hich do not relate to conditions

    existin$ at BS date. (e.$. 'all in !aret alue o' inest!ents

    a'ter BS date) Eents #hich do not a''ect 'i$ures stated in the 'inancial

    state!ents #ould nor!all4 not re9uire disclosure in 'inancial

    state!ents disclosure, however, re0uired in 3irectors4 5eport

    28

    CNK

  • 8/14/2019 Issues on accounting standards.pdf

    29/33

    AS 0: %"ents *ccurring after theAS 0: %"ents *ccurring after the

    5a#ance Sheet !ate (5a#ance Sheet !ate (

    So!e eents re9uired to "e re'lected in BS "ecause o'statutor4 re9uire!ents or their s-ecial nature (e.$.'inal diidends -ro-osed or declared)

    So!e eents !a4 indicate that the D5oin$ Concern isiolated. (e.$. drastic deterioration in o-eratin$results, unusual chan$es a''ectin$ existence or su"stratu! o' the enter-rise due to 'ire, etc).

    29

    CNK

  • 8/14/2019 Issues on accounting standards.pdf

    30/33

    %ro/isionre9uired #hen:

    here is a ;resent O"li$ation>

    Which esults 'ro! a -ast eent>

    here is Out'lo# o' resources e!"od4in$ econo!ic

    "ene'its>

    elia"le esti!ate can "e !ade 'or the sa!e.

    30

    CNK

  • 8/14/2019 Issues on accounting standards.pdf

    31/33

    9

    Present obligation as a

    result of an obligatingevent?

    Probable outflow?

    Reliable estimate?

    Provide

    Possible obligation?

    Disclose contingent liability

    Remote?

    No

    Yes

    NoNo (rare)

    Yes

    Yes

    Yes

    No

    Yes

    Do nothing

    No

    AS 29 -- Recognition Criteria Decision TreeAS 29 -- Recognition Criteria Decision Tree

    31

    CNK

  • 8/14/2019 Issues on accounting standards.pdf

    32/33

  • 8/14/2019 Issues on accounting standards.pdf

    33/33

    8uestions (8uestions (

    Thank youThank you

    himanshu@cnkindia com

    33