Accounting and Auditing Update

Transcription

1 Accounting and Auditing Update Issue no. 17/2017 December

2 Editorial

3 Sai Venkateshwaran Partner and Head Accounting Advisory Services KPMG in India Ruchi Rastogi Executive Director Assurance KPMG in India Ind AS 115, Revenue from Contracts with Customers is expected to be applicable to Indian companies covered in the Ind AS road map from 1 April Ind AS 115 introduces a single comprehensive model of accounting for revenue arising from contracts with customers and will supersede the current revenue recognition guidance. In this edition of the Accounting and Auditing Update (AAU), we focus on technology sector which has a varied range of products (e.g. licences, customisation, installation, cloud services, customer support and updates) and services that could be bundled in many different ways. Therefore, technology sector companies would need to evaluate the impact of Ind AS 115 on revenue recognition, transition and disclosures. An article on this topic highlights the significant areas where current guidance in Ind AS is expected to change due to implementation of Ind AS 115. In current times, technological advancement due to data and analytics is helping organisations and auditors to derive benefits and value addition while performing audits, thereby, providing enhanced audit quality. Our article on data and analytics discusses key insights and values that are an outcome of the technology driven audit process. Certain Non-Banking Financial Companies (NBFCs) are required to apply Ind AS from 1 April An NBFC in order to achieve liquidity or to raise funds at a lower cost may have entered into transactions which involve sale of loans to other lending entities through direct assignment, or conversion of their loan assets into marketable securities. Under Ind AS 109, Financial Instruments the accounting treatment for such loans could differ from current Indian GAAP. Therefore, an article on this topic aims to demonstrate the factors to be considered for derecognition of loans and its impact on the business model for similar loans. The article further highlights the accounting treatment and the business model assessment if loans are generally sold by way of securitisation transactions. Under the Companies Act, 2013, we provide an overview of the relaxations available to private companies in India. Accounting of decommissioning costs is judgemental and affects various sectors e.g. power and utilities, extractive, oil and gas, chemical and telecommunications. Ind AS provides detailed guidance on decommissioning costs and our article discusses important factors that should be considered while recognising these costs. As is the case each month, we also cover a regular round-up of some recent regulatory updates in India and internationally. We would be delighted to receive feedback/ suggestions from you on the topics we should cover in the forthcoming editions of AAU.

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5 Table of contents Ind AS Impact on technology sector Reaping the potential benefits of data and analytics in audit Interaction between derecognition and business model assessment for NBFCs Private companies Relaxations under the Companies Act, 2013 Decommissioning costs Regulatory updates

6 1 Ind AS Impact on technology sector This article aims to: Highlight the potential impact of Ind AS 115 on technology sector. Background The Ministry of Corporate Affairs (MCA), through its notification dated 16 February 2015, issued 39 Indian Accounting Standards (Ind AS), which are converged with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). On 22 July 2015, IASB deferred the applicability of IFRS 15, Revenue from Contracts with Customers by one year to Consequently, the regulators in India such as MCA and the Institute of Chartered Accountants of India (ICAI) deferred Ind AS 115, Revenue from Contracts with Customers, which is based on IFRS. As a result of the discussions of the Transition Resource Group (TRG) which was set up jointly by the IASB and the U.S. Financial Accounting Standards Board (FASB), on 12 April 2016, the IASB issued amendments to IFRS 15. These amendments did not change the underlying principles of IFRS 15 but clarified some requirements and provided additional transitional relief to companies that were implementing IFRS 15. To keep Ind AS updated with revisions made to IFRS, in order to maintain convergence, similar amendments were required in the Indian context. Accordingly, on 26 April 2017, the ICAI issued an Exposure Draft on Clarifications to Ind AS 115 (Exposure Draft). This Exposure Draft also proposes that Ind AS 115 would be applicable for accounting periods beginning on or after 1 April Recently, ICAI issued an IFRS convergence status dated 3 November This document highlights that Ind AS 115 s tentative application date is 1 April This date has been decided in consultation with the National Advisory Committee on Accounting Standards (NACAS).

7 Accounting and Auditing Update - Issue no. 17/ Impact on the technology sector Companies in the technology sector have a varied range of products and services which could be bundled in many different ways. The accounting literature under Indian GAAP did not have specific guidance on accounting for these bundled arrangements and companies typically used to follow the contractual terms to determine the accounting practice. With the application of Ind AS, additional guidance is now available for companies where revenue recognition is based on the substance of the arrangement and allocation of the contractual price linked to the fair value determined for individual elements in a bundled arrangement. The introduction of Ind AS 115 will result in the application of a single comprehensive model of accounting for revenue arising from contracts with customers and will supersede the current revenue recognition guidance. The core principle of Ind AS 115 is that an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to. In order to apply this principle, the standard prescribes a five step approach to recognising revenue: Identify the contract with the customer Identify the performance obligations in the contract Determine the transaction price Allocate the transaction price to the performance obligations Recognise revenue as each performance obligation is satisfied. The introduction of the above approach is expected to result in every company, including companies in the technology sector, a need to evaluate the impact of Ind AS 115. This impact goes beyond technical issues to cover significant understanding of the new rules, impact on operational processes including compensation and commission structures or sales methodologies, customer pricing and operating systems such as IT. Some of the significant impacts are as following: Identification of the contract: In an Indian context, one of the key challenges in the technology sector is likely to be in terms of identification of the contract with the customer. Under Ind AS 115, a contract is deemed to exist when there is an agreement between two or more parties that creates enforceable rights and obligations this is generally implied by the company s customary business practices. In the technology sector, this may mean the availability of an approved purchase order or a signed statement of work. The challenge in application would be in respect of renewals of ongoing contracts where such renewals are based on oral confirmations or s, the company will have to assess the extent to which the contractual terms are enforceable and the timing of when such revenue recognition would be appropriate. Identification of distinct performance obligations: In terms of the business model, companies in the technology sector are transitioning from selling products to selling solutions. This typically results in contracts that include bundled offerings containing hardware, software and services which are inter-related. One of the issues to be considered under Ind AS 115, will be in identifying the distinct performance obligations in the context of the standard, a performance obligation is distinct when: the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e. the good or service is capable of being distinct); and the entity s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (ie the promise to transfer the good or service is distinct within the context of the contract). This may result in increase an in judgements required by companies that have bundled products containing licenses, customisation, installation, customer support, warranty and promised upgrades including transition services relating to outsourcing contracts. Companies will have to establish systems to assist with the identification of distinct performance obligations and document the rationale for their accounting decisions. For example, historically in outsourcing type arrangements, there has been a diversity in practice in the sector in relation to the transition phase and whether it can be treated as a separate element distinct from the steady state phase in a multiple element contract. Under Ind AS 115, companies will have to revisit the earlier conclusions in light of the new guidance and specifically, will have to assess whether the transition phase constitutes a performance obligation distinct within the context of the contract.

8 3 Variable consideration: Owing to a shifting trend in the industry, companies in the technology sector are also moving from an input based pricing model to an outcome and consumption based pricing model. This would result in an increased focus on the ability of companies to estimate outcomes and the related transaction price on the basis of which revenue would be accounted. With larger components of variable revenue in the transaction price, companies may need to start exercising significant judgement to determine what portion of variable consideration needs to be included in the transaction price. This is different from the current practice, where typically contingent revenue is recognised only once the contingency is resolved and therefore, may force companies to account for variable consideration earlier than current accounting requirements under Ind AS 18. Allocation of transaction price: Another area of potential change is in respect of allocation of transaction price for identified performance obligations. Unlike the current practice under Ind AS 18, which allows the use of a residual method in allocating revenue, Ind AS 115 mandates the use of a relative fair value method of allocation based on the stand-alone selling price of individual elements unless the selling price for a good or a service is highly variable and uncertain which is expected to be very rare in practice. The use of a relative method ensures that any discounts provided on bundled arrangements is fairly divided between the different performance obligations unlike the residual method which would allocate all of the discount to the undelivered elements in a contract. While this change may not have a significant impact on the total amount of revenue recognition, this is likely to impact the timing thereof and increase the documentation requirements on companies which would have to demonstrate the basis on which the transaction price has been allocated. Timing of revenue recognition: Finally, the last step in revenue recognition is the determination of the timing of revenue i.e. at a point in time vs over time. The timing of revenue recognition will now be based on an assessment of when the control over the performance obligation is transferred to the customer this is a change from the current model which focussed on risks and rewards. The change in emphasis from a risks and rewards model to a control model for revenue is consistent with changes that are happening in the accounting guidance under IFRS for multiple areas such as leases, consolidation, etc. which have also been incorporated in Ind AS. For companies in the technology sector, this change in guidance is unlikely to have a significant impact where there are significant bespoke activities related to software development being carried out based on customer specifications and instructions as also for routine maintenance and other outcome based activities. One area where this may have an impact is in the consulting space where typically companies used to follow the completed contract accounting based on established industry practices this may no longer be possible under Ind AS 115. Specifically, in the context of licence of intellectual property, companies will have to firstly determine whether the licence constitutes a distinct performance obligation. If it does constitute a distinct performance obligation, then the next step would be to determine whether the licence represents a right of access or a right of use. This determination is important to establish whether revenue is required to be recognised over time or at a point in time. This guidance under Ind AS 115 is likely to change accounting for time based software licences where revenue is typically spread over the period of the licence currently now, companies need to evaluate whether the software licence constitutes a right of access or use and account for revenue on this basis irrespective of whether these are time based. Capitalisation of contract costs: In addition to detailed guidance on revenue recognition, Ind AS 115 also provides guidance in relation to capitalisation of contract costs. The standard allows capitalisation of both incremental costs to obtain a contract as also costs related to future performance. There was no guidance under Ind AS 18 in relation to these costs. Companies engaged in the outsourcing business are likely to find that a significant portion of their upfront costs (such as funding of retrenchment obligations, etc.) will likely meet the criteria for capitalisation under Ind AS 115. Other companies will also need to start looking at costs such as sales and renewal commissions, non-refundable upfront fees paid to the customer and customisation costs including licenses for potential capitalisation under Ind AS 115. Disclosures: In addition to the changes in respect of recognition and measurement of revenue, Ind AS 115 also significantly enhances the disclosure burden on entities. The disclosure objective stated in IFRS 15 is for an entity to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.

9 Accounting and Auditing Update - Issue no. 17/ In order to meet this objective, an entity would therefore be required to provide quantitative and qualitative information relating to the nature of contracts with customers, significant judgements made in applying the revenue guidance to those contracts and any assets recognised or capitalised with respect to those contracts. Entities will need to consider the level of detail necessary to satisfy the disclosure objective and how much emphasis to place on each of the requirements. An entity should aggregate or disaggregate disclosures to ensure that useful information is not obscured. Transition approach Ind AS 115 provides a range of transition options that a company may choose from. On one hand, an entity may choose to apply the new standard to all its contracts retrospectively and adjust each of its comparative periods presented. On the other, an entity can also recognise the cumulative effect of applying the new standard at the date of initial application without making any adjustments to comparative information. There are several practical expedients also available which create additional alternatives. While these expedients may ease some of the burden around transition, they may also reduce comparability which can create an additional challenge for financial statements users. Given that this a complex decision that will be driven by each entity s own requirements and constraints, there is no blanket approach that can be recommended for companies. An entity will also have to assess the industry and sector trends in terms of the transition approach to ensure that any approach adopted does not make it an outlier within its sector. Peer companies impact As laid out above, there are significant challenges and impacts of adopting Ind AS 115. Given that the Indian standard has been developed largely from IFRS 15 which is the equivalent revenue standard under IFRS, companies will need to start looking at some of the guidance that is being put out by entities listed in Europe and the U.S. with respect to the application impact of the new standard to help understand how some of their multi-national peers are applying this guidance. Looking at the FTSE 100 companies 1, for instance, of the 71 companies that have made a qualitative statement about IFRS 15 adoption to date, 91 per cent have disclosed that they expect the impact of the new standard to be immaterial. If just 9 per cent of those disclosing impacts think that it would be material, you might ask, what is all the fuss about? The fuss is about the work that has been required to prove that there is or is not a material impact. For many businesses, the small size of the overall impact does not reflect the amount of work that they have done. Many highlight that the new standard is complex and will require changes to processes, documentation and systems, even if there is not a material financial impact. We also note that despite the high proportion who stated that the impact will be immaterial, only 26 per cent noted that they have completed an initial assessment of the potential impact of IFRS 15, with a further 43 per cent indicating that work is ongoing to evaluate the effects of adoption. This suggests that there is still a lot of work to do. Given that from an Indian perspective the standard will likely be applicable from 1 April 2018, it is therefore, important for companies to start looking at the impact that this may have on their accounting systems both in terms of timing of revenue recognition and also resultant documentation and system related impacts that will be required sooner rather than later. The actual impact on the sector and indeed at a company level is expected to be distinct and therefore, each company would have to assess these from its own perspective. 1. Source: KPMG in United Kingdom website IFRS 15 Revenue: What should you be doing?

10 5 Reaping the potential benefits of data and analytics in audit This article aims to: Discuss the value additions to organisations and audit teams when utilising data and analytics tools in audits. Introduction In today s world, technological advancement is undeniable. With the evolution of technology being exceptionally fast in the recent years, auditors must embrace the changing expectations of the organisation and keep pace with it as well. Today s organisations expect their auditors to use bigger sample sizes, perform a deeper analysis during audit, constructively challenge the organisation s management and also provide them with a holistic view of the state and prospects of the organisation. The auditing profession needs to evolve and take advantage of the technology available, in order to keep pace with the growing expectations of the organisations. The tools of technology and data analytics have opened up avenues to access big data and allows an auditor to analyse the numerous financial attributes of an organisation; providing him/ her with insights to design relevant procedures and resulting in an effective audit. Potential benefits and value addition The key benefits and value addition from Data and Analytics (D&A) routines to organisations, as well as to audit teams in the recent years along with deeper insights and enhanced audit quality are as follows: Segregation of duties: One of the key routines on Segregation of Duties (SOD) helps in identification of users that have system access with two or more incompatible roles.

11 Accounting and Auditing Update - Issue no. 17/ Traditional audit techniques are limited to identification of incompatible roles within an organisation s systems. It is the onus on the audit teams and the organisation to sift through all the transactions undertaken during the period under review, to identify and investigate specific transactions that were recorded, considering the incompatible duties, to assess implications. This is typically a very onerous and time consuming process. Using the available D&A tools, the output provided by the SOD routine is capable of not only highlighting existing incompatible roles, but also the actual instances of transactions which were processed through such incompatible roles. This enables the organisation and the audit team to focus their reviews on high risk transactions. In addition, this routine is also capable of providing the organisation with a health check on their SOD control environment and enables them to get rid of unwanted roles in the ERP 1 and also save on licensing costs. Vendor master data: Another area of focus for many organisations is the integrity and hygiene of the vendor master data. Scenarios of multiple bank accounts for the same vendors, transactions with one time/seldom used vendors and incomplete records are common areas of risk. D&A routines on the vendor master data help to analyse several of these scenarios, highlighting the potential risk areas such as differences between the vendor s country of origin in the master data and the country indicated for the vendor s bank details, vendors without bank account numbers, frequent modifications to a vendors bank account details, possibility of duplicate payments, vendors with identical bank account numbers, and so on. The identification of such higher risk transactions help indicating areas of potential fraud risk and deviation from the standard operating procedures. Analysis of transactions: Analysis of transactions, key performance metrics, ratios and trends is another area, where teams have been primarily dependent on Management Information Systems (MIS) and excel based analysis. This ability, however, is hampered by large data volumes and complex transactions. D&A audit tools help cut through these challenges to provide deeper insights. The ability to represent the results of the analysis through interactive visualisations, enhances the usage of the output for identification of trends, outliers and other patterns. Further, these D&A reports also have the ability for the users to drill down to the specific underlying transactions, empowering the client to investigate these. The D&A reports also help validate the accuracy of the MIS, which would be appreciated by clients as well, since it provides incremental confidence to key decision makers on the accuracy of the MIS. Manual entries: Organisations today generate large volumes of transactions on a daily basis. Automated entries in ERP systems are pre-configured and validated and hence instances of unexpected/high risk transactions occurring are remote. Manual entries are, however, highly susceptible to errors. Traditionally, these entries were manually identified and reviewed by clients and auditors. Through the use of D&A routines, journal entries posted for the period selected for testing, including post-closing entries through the data extraction date can be identified and reviewed in an efficient manner. Audit teams are now able to customise the journal entries testing routines, enabling them to control the output as per their respective requirements and highlighting unexpected combinations and high risk transactions. Large volumes of sales and purchases: D&A routines can also analyse large volumes of sales and purchases activities included in the entity s sub ledgers. The routines can perform a scan over the quantity and price information associated with the purchase/sales orders, delivery documents and invoices and identify unexpected differences, which are required to be further evaluated by the audit teams. This provides a more focussed population for audit testing resulting in higher quality audits. These instances of value addition to organisations and audit teams through the use of D&A tools in audit highlight few of the numerous benefits in a technology-driven audit. Based on the deployment experience, the insights provided by D&A tools have delighted the organisations where they have been implemented. 1. Enterprise Resource Planning

12 7 Conclusion The days when the organisations expected a tick on the financial statements by the auditors, are long gone. Today s Board of Directors and the senior management personnel expect the auditor to take a much deeper dive and surface with hitherto unknown insights into their organisation. D&A routines in audit are effective tools for providing insights into the business and greater comfort over the underlying transactions and cutting through vast amounts of data generated by ERP systems. Effective use of these tools can equip auditors to obtain actionable insights and add greater value, as an outcome of the audit process. Moving into the D&A in Audit era will not be without challenges e.g. acceptance of the D&A tools by regulators, the additional costs and efforts involved in deploying the D&A tools in the initial periods and most importantly, the current skill set of the auditors, etc.

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14 9 Interaction between derecognition and business model assessment for NBFCs This article aims to: Highlight the factors to be considered when assessing the business model and derecognition criteria for loans that may be securitised or sold through direct assignment In order to meet their liquidity needs, Non-Banking Financial Companies (NBFCs) in the financial services sector have entered into transactions which involve sale of loans to other lending entities through direct assignment, or conversion of their loan assets into marketable securities, known as asset-based securitisation. This not only provides them with liquidity, but also helps them to raise funds at a lower cost. Under the Generally Accepted Accounting Principles (GAAP) currently applicable to NBFCs, loans that were securitised or sold (assigned) were derecognised from the financial statements based on the guidelines provided by the Reserve Bank of India in its Master Circular for NBFCs and its Guidelines for Securitisation of Standard Assets issued in February 2006 (RBI Guidelines). However, the accounting treatment for such loans could differ under Indian Accounting Standards (Ind AS) that apply to large NBFCs with effect from 1 April Ind AS 109, Financial Instruments, specifies the criteria for derecognition of financial assets from the financial statements. Such entities are also required to determine if their assignment or securitisation practices have an impact on the classification and measurement of existing or newly originated loans that are similar in nature. In order to classify and measure financial assets, entities need to assess the business model within which these assets are managed. As per Ind AS 109, assessing the business model of financial assets (or a group of financial assets) is a matter of fact, and reflects the way the entity manages its business. Entities may consider the manner in which the financial assets generate cash flows to determine their classification- i.e. whether the financial assets are held for collecting contractual cash flows (amortised cost ), held for sale (Fair Value Through Profit or Loss (FVTPL)) or both (Fair Value through Other Comprehensive Income (FVOCI 1 )). 1. Assuming that the contractual terms of the financial asset give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding.

15 Accounting and Auditing Update - Issue no. 17/ In this article, we aim to demonstrate the factors to be considered when assessing derecognition of loans assigned by an NBFC to another lending institution, and assess the impact on determination of the business model for similar loans. Further, we also highlight, how the accounting treatment and the business model assessment could differ if the loans are generally sold by way of a securitisation transaction. Transaction overview Company S is an NBFC with a net worth of INR6,000 million engaged in the business of advancing loans to retail customers. Its largest loan portfolio is of automobile loans. As on 1 April 2018 an identified portfolio comprised of 1,500 loans, amounting to an outstanding amount of INR200 million at an average interest rate of 12.5 per cent. The average remaining tenor of the loans was 30 months. As per its internal policy, the company holds all its automobile loans to collect their contractual cash flows. However, in order to meet its funding needs, it may sell some of these loans from time to time (after holding them for the prescribed Minimum Holding Period in accordance with the Reserve Bank of India (RBI) guidelines) to other banks/financial institutions by way of direct assignment (retaining a minimum portion of 10 per cent, as per RBI guidelines). On 1 April 2018, the NBFC has sold this identified portion of its automobile loan portfolio to Bank C for a consideration of INR180 million (90 per cent of the outstanding amount of the portfolio sold). 10 per cent of the loan portfolio continues to be held by company S and ranks pari-passu with the portion that is sold. Company S does not provide any credit enhancement and is not entitled to any residual interests in the portion of the loans sold. Therefore, it does not retain any risks and rewards associated with ownership with respect to the loans sold to Bank C, and has no control over those assets. Accounting issue Since company S has a net worth exceeding INR5,000 million, it falls within phase I of the Ind AS implementation road map for financial institutions. Accordingly, it is required to prepare Ind AS compliant financial statements for accounting periods beginning 1 April As per its internal policy, the company may directly assign its loan portfolios on a periodic basis in order to generate funds. Considering this, company S should determine whether it would be permitted to derecognise the assigned automobile loan portfolio from its financial statements. Accordingly, it is required to assess the business model for its existing loan portfolio and similar loans that would be originated subsequently, in order to determine their classification and measurement basis. Accounting guidance Ind AS 109 specifies the criteria for derecognition of a financial asset (or a group of similar financial assets/ part of (similar) financial asset(s)). This is illustrated in Figure 1 - where risks and rewards of ownership of the loans are transferred, the loans would be eligible for derecognition from the financial statements. Company S originates the loans and has a practice of selling some of those loans through direct assignment transactions. The manner in which the company manages its financial assets, would therefore, reflect the business model within which they are held. If selling the loans would result in derecognition, then the objective of the business model would generally be inconsistent with a held-tocollect objective. It may indicate that the company originates those loans with a dual objective of both collecting contractual cash flows and selling the financial assets. Conversely, if the loans continue to be recognised by the company since risks and rewards have been retained, it would generally indicate that the company originates the loans with the objective of collecting their contractual cash flows (i.e. the business model meets the held-tocollect objective).

16 11 Figure 1: Derecognition criteria under Ind AS 109 and interaction with business model assessment Yes Have the rights to the cash flows from the asset expired? Yes No Has the entity transferred its rights to receive the cash flows from the asset? No Has the entity assumed an obligation to pay the cash flows from the asset that meets the conditions in paragraph in Ind AS 109 No Yes Yes Has the entity transferred substantially all risks and rewards? No Has the entity retained substantially all risks and rewards? Yes No No Has the entity retained control of the asset? Yes Continue to recognise the asset to the extent of the entity's continuing involvement Derecognise the asset Continue to recognise the asset Similar loans are held in a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets Similar loans are held in a business model whose objective is 'hold to collect contractual cash flows' Is the loan's contractual cash flows Solely Payments of Principal and Interest (SPPI) No FVTPL Yes Yes FVOCI Amortised cost (Source: KPMG in India s analysis, 2017 read with Insights into IFRS, KPMG IFRG Ltd. s publication, 14th edition September 2017)

17 Accounting and Auditing Update - Issue no. 17/ Analysis Evaluation for derecognition of loans based on direct assignment Applicability of derecognition criteria to a portion of the loan portfolio As per Ind AS 109, the derecognition criteria would apply to a portion of a financial asset, only if any of the three criteria are met, (a) the cash flows from that portion of the asset are specifically identifiable, (b) the cash flows are a proportionate share of the total cash flows of the asset, or (c) the cash flows are a proportionate share of specifically identified cash flows of the asset. In the current case, company S has sold 90 per cent of the cash flows from the automobile loan portfolio to bank C. This is a proportionate share of cash flows from the portfolio of loans. Accordingly, the portion of the loan sold by company S would be assessed for derecognition, and the balance portion would continue to be recognised as an asset. Derecognition of portion of the loan Company S has transferred its contractual rights to receive cash flows from the loan assets to bank C. Further, it has not provided any credit enhancement and does not retain any residual interest indicating that it has not retained any risks and rewards pertaining to that portion of the loan portfolio. In accordance with the guidance in Ind AS 109 (demonstrated in Figure 1), company S is therefore permitted to derecognise outstanding loans of INR180 million from its financial statements as on 1 April Business model assessment Business model assessment for portion of the portfolio that is sold As per company S s internal policy, it originates automobile loans to collect contractual cash flows thereon, and may periodically sell identified portfolios of these loans in order to re-deploy its funds towards new assets. As analysed above, the sale of loans through a direct assignment route, would generally qualify for derecognition under Ind AS 109. This indicates that both, collecting contractual cash flows and selling financial assets are integral to achieving the objective of the business model within which the loans are held. Consequently, on transition to Ind AS, company S determines that its automobile loan portfolio is held with a business model to collect contractual cash flows as well as sell the financial assets. This would continue to be the case for similar loans that are originated subsequently, unless the entity amends its policy/manner of managing its business. Business model assessment for retained portion of the loan portfolio As per RBI guidelines, when assigning assets with original maturity of above 24 months, NBFCs need to retain 10 per cent of the cash flows from the assets transferred on pari-passu basis. Accordingly, a portion of the loan will continue to be held by the company, and contractual cash flows will be collected thereon. Therefore, on transition to Ind AS, company S determines that a portion, being 10 per cent of its automobile loan portfolio is held within a business model with an objective to collect contractual cash flows. Company S expects to continue managing similar loans (newly originated) in the same manner. The Working Group* report clarifies that where the bank s internal policy documents require a single financial instrument to be split into two parts, with each part being managed differently, each of these parts may have a different classification. Company S would therefore, bifurcate its automobile loan portfolio into two sub-portfolios, and assess their business model separately. One sub-portfolio (representing 10 percent of the loan amount), is assessed as held in a business model to collect contractual cash flows, and the other sub-portfolio (amounting to 90 percent of the loan amount) is assessed to be held in a business model with a dual objective- to collect contractual cash flows and to sell the assets. Assuming that the loan s contractual cash flows are solely in the nature of payments of principal and interest on the principal amount outstanding, the held-to-collect sub-portfolio is subsequently measured at amortised cost and the dual objective sub-portfolio is measured at FVOCI. Newly originated loans would therefore be split into two business models in this manner. * Report of the Working Group on Implementation of Ind AS by Banks in India published in September 2015.

18 13 Securitisation A portfolio of financial assets originated with the objective of being sold to a securitisation vehicle may be consistent with a held-to-collect business model, depending on the circumstances and the terms of contract with the securitisation vehicle. If securitised assets would result in derecognition when sold, then the objective would be inconsistent with a held-to-collect business model. Generally in India, assignment of loan portfolios to a securitisation vehicle is with recourse to the originator. Hence, the originator would be liable in case of defaults in receipt of inflows from the underlying assets. Thus, the originator generally retains substantially all risks and rewards in the loan portfolio and would not be permitted to derecognise them from the balance sheet. Assessment for derecognition If in the example above, the portfolio of automobile loans had been assigned to a trust (acting as a securitisation vehicle or a Special Purpose Vehicle (SPV)), and the company had provided a first loss facility to the trust, this would indicate that the risk and rewards in the loan had not been transferred. Hence, the portfolio of loans would not qualify for derecognition from the company s separate financial statements, in accordance with Ind AS 109. Business model assessment For assessing the business model within which the portfolio of automobile loans and newly originated loans of similar nature are held, company S needs to assess how it would manage those loans to achieve its business objectives. A scenario where company S is in the practice of entering into securitisation transactions (with recourse) for such loans, where risks and rewards are retained by the company, could be consistent with a held-to-collect business model. This is because company S would continue to recognise the securitised assets in its financial statements, and would ultimately be responsible in case of non-payment by the obligors. Consider this A company may hold a mixed portfolio of loans, where certain loans may be directly assigned, certain loans securitised and the balance would continue to be held to collect their contractual cash flows. In this scenario, the company would have to bifurcate the loans into sub-portfolios- each of which would be separately assessed for determining the objective of the business model. The loans held within those sub-portfolios and newly originated loans of a similar nature would be allocated to an appropriate sub-portfolio based on the manner in which the loans are to be managed by the company. Where there is no specific basis for bifurcating the loans into sub-portfolios, the entire loan portfolio would be considered as a single unit and the business model assessed for all existing loans held within that portfolio as well as newly originated loans. Considering that certain loans would be held for collection and the balance may be sold, such a portfolio of loans may be assessed as held within a business model with an objective of held to collect and for sale. If in the example above, company S transferred its portfolio of loans to a consolidated subsidiary (e.g., a securitisation trust), the loans would continue to be recognised in its consolidated financial statements. Accordingly, the business model for the loan portfolio and newly originated loans of a similar nature may differ at the consolidated level. For instance, the company may assess the loans as held within a business model with a held to collect objective at the consolidated level, although they may be considered as held to collect and for sale in the separate financial statements of company S.

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20 15 Private companies Relaxations under the Companies Act, 2013 This article aims to: Provide an overview of the exceptions/ modifications/adaptations made to the provisions of the Companies Act, 2013 for private companies. Introduction In the past, the Ministry of Corporate Affairs (MCA) vide Section 462(1) of the Companies Act, 2013 (2013 Act) issued two notifications dated 5 June 2015 and 13 June 2017 and provided various exceptions/ modifications/adaptations to the provisions of the 2013 Act for private companies. In this article, we would provide an overview of the exceptions/ modifications/adaptations made to the 2013 Act for the private companies. Overview of the exceptions/ modifications/adaptations to the 2013 Act The relaxations provided to private companies have been categorised under the given heads: Sections/sub-sections that are amended for private companies Sections/sub-sections that would not apply to any private company Sections/sub-sections that would not apply to certain class of private companies. Sections/sub-sections that are amended for private companies The following sections/sub-sections of the 2013 Act have been amended for private companies: Definition of financial statements: Financial statements, in relation to a company, include: a. A balance sheet as at the end of the Financial Year (FY) b. A statement of profit and loss, or in the case of a company carrying on any activity not for profit, an income and expenditure account for the FY

21 Accounting and Auditing Update - Issue no. 17/ c. Cash flow statement for the FY d. A statement of changes in equity, if applicable and e. Any explanatory note annexed to, or forming part of, any document referred to in (a) to (d) above. However, financial statements of a one person company, small company, dormant company and a private company which is a startup1 are not required to include a cash flow statement. (Section 2(40)) The exemption became effective from 13 June Further issue of share capital: Section 62(1)(a) of the 2013 Act provides time limit for rights offer that is not less than 15 days and not exceeding 30 days from the date of offer. It further states that offer not accepted within the specified time period would be deemed to have been declined. The amendment to the 2013 Act provided that in case a private company wants to reduce the time period for the rights issue to less than the period prescribed in Section 62(1)(a) and Section 62(2), it can do so provided 90 per cent of its members have given their consent in writing or via an electronic mode. Section 62(1)(b) deals with a situation when a company proposes to increase its subscribed capital by the issue of further shares, and the shares are offered to employees under a scheme; employee stock option plan. Such an offer is subject to the specified conditions which, inter alia, require a special resolution by the company. However, for private companies, passing of an ordinary resolution would be sufficient as per the amendment to the 2013 Act. These exemptions became effective from 5 June It is important to note that in the erstwhile Companies Act, 1956 (1956 Act), these provisions were not at all applicable to private companies (including a private company which is a subsidiary of a public company) i.e. private companies were allowed to offer its further issue of capital to any person and in any manner as they deemed fit. Annual return: Every company is required to prepare an annual return in the prescribed form and contain the particulars as they stood on the close of the FY. Private companies which are small companies 2 are required to provide details of aggregate amount of remuneration drawn by directors instead of providing details of remuneration of directors and key managerial personnel of the company. Additionally, the annual return of a private company which is a startup is required to be signed by the company secretary, or where there is no company secretary, by the director of the company. (Section 92) These amendments became effective from 13 June Mandatory rotation of auditors: Section 139(2) of the 2013 Act read with Rule 5 of the Companies (Audit and Auditors) Rules, 2014 (Audit Rules) provides that the following class of companies cannot appoint or reappoint an individual as an auditor for more than one term of five years or an audit firm as an auditor for more than two consecutive terms of five years each: a. Listed companies b. All unlisted public companies having paid-up share capital of INR10 crore or more c. All private limited companies having paid-up share capital of INR50 crore (earlier INR20 crore) or more d. All companies having paidup share capital of below threshold limit mentioned in (b) and (c) above, but with public borrowings from financial institutions, banks or public deposits of INR50 crore or more. The mandatory rotation of auditors requirement is not applicable to small companies and one person companies. The Companies Law Committee (CLC) in its report dated 1 February 2016 highlighted that the threshold for private companies for rotation of auditors has been prescribed for the purposes of good corporate governance and larger public interest. Accordingly, the CLC did not propose that to increase the threshold of auditor rotation for private companies in its report. However, MCA has still amended the threshold. The notification amending the limit for mandatory auditor rotation became effective from 22 June Start-up or start-up company means a private company incorporated under the 2013 Act or the Companies Act, 1956 and recognised as start-up in accordance with the notification issued by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry. 2. Small company means a company, other than a public company which meets both the given conditions: a. Paid-up share capital does not exceed INR50lakh or such higher amount as may be prescribed which should not be more than INR5 crore and b. Turnover as per last statement of profit and loss does not exceed INR2 crore or such higher amount as may be prescribed which should not be more than INR20 crore. However, these conditions would not be applicable to the following class of companies: a. A holding company or a subsidiary company b. A company registered under Section 8 of the 2013 Act or c. A company or body corporate governed by any special Act.

22 17 Eligibility/qualifications/ disqualifications of auditors: Section 141(3)(g) specifically prohibits a person who is in full time employment elsewhere or a person or a partner of a firm holding appointment as an auditor of more than 20 companies, from being appointed as an auditor of a company. However, while calculating the limit of 20 companies, following companies should be excluded: One person company Dormant companies Small companies and Private companies having paid-up share capital less than INR100 crore. The relaxation became applicable from 5 June The 1956 Act, on the other hand, specifically excluded all private companies from the ceiling of number of audits to be conducted by an auditor i.e. an auditor/audit firm was allowed to conduct audit of any number of private companies under the 1956 Act. Meetings of board: Every company is required to hold first meeting of its board of directors within 30 days of the date of its incorporation and thereafter required to hold a minimum number of four board meetings every year in such a manner that not more than 120 days should intervene between two consecutive board meetings. However, in case of a one person company, small company, dormant company and a private company which is a start-up, holding of at least one board meeting in each half of a calendar year with the gap between two meetings being not less than 90 days would be deemed to be in compliance with the provisions of the Section 173. (Section 173(5)) The provision became applicable from 13 June Quorum for meetings of board: The quorum for a meeting of the board of a company should be higher of the following limits: One-third of the total strength of the board or Two directors. However, where at any time the number of interested directors exceeds or becomes equal to two-thirds of the total strength of the board, the number of directors who are not interested directors and present at the meeting, being not less than two, should be the quorum during such time. (Section 174(3)) In case of private companies, even interested directors could also be counted towards quorum in such a meeting after disclosure of his/her interest in accordance with Section 184 of the 2013 Act. This is in line with the recommendation of the CLC and is applicable from 13 June Additionally, the interested director of a private company could also participate in the board meeting in which the contract or arrangement (in which he/she has direct/indirect interest) is being discussed after disclosure of his/her interest. The provision came into force 5 June Sections/sub-sections that would not apply to any private company Related Party Transactions (RPTs): Section 2(76)(viii) of the 2013 Act provides definition of a related party and Section 188 requires that specified transactions with related parties that are not in the ordinary course of business and which are not at an arm s length would require consent of the board of directors of the company. In case of private companies, following companies would not be considered as related parties: a. Any company which is a holding, subsidiary or an associate company of such company, or b. Any company which is a subsidiary of a holding company to which it is also a subsidiary. It is important to take note of the fact that the Companies (Amendment) Bill, has proposed to amend the definition of a related party (as given in Section 2(76)(viii). According to it, any body corporate which is an investing company or the venturer of the company will also be a related party. Section 2(76)(viii) does not apply to private companies. Therefore, it implies that in case of private companies, any body corporate which is an investing company or the venturer of the company would not be considered as a related party once the Companies (Amendment) Bill, 2017 gets notified. Further, second proviso to Section 188(1) requires a related party (who is a member) to abstain from voting on a resolution of a company to approve a contract/ arrangement entered into by the company. However, such a proviso is not applicable to a private company i.e. in the case of a private company, members who are related parties are also allowed to vote. These amendments are applicable from 5 June Additionally, above restriction would not apply to cases where 90 per cent or more members, in number, are relatives of promoters or are related parties as per the Companies (Amendment) Bill, Passed by the Rajya Sabha on 19 December 2017 and adopted by the Lok Sabha on 27 July 2017; the President s assent is pending.

23 Accounting and Auditing Update - Issue no. 17/ Resolutions and agreements to be filed: Section 117 pertains to resolutions and agreements to be filed with the Registrar of Companies (ROC). Section 117(3) (g) states that resolutions passed in pursuance of Section 179(3) (Powers of board) should follow the requirements of Section 117. Private companies are no longer required to file with the ROC resolutions passed by the board which are covered in Section 179(3) of the 2013 Act which are as follows: a. To make calls on shareholders in respect of money unpaid on their shares b. To authorise buy-back of securities under Section 68 c. To issue securities, including debentures, whether in or outside India d. To borrow monies e. To invest the funds of the company f. To grant loans or give guarantee or provide security in respect of loans g. To approve financial statements and the board s report h. To diversify the business of the company i. To approve amalgamation, merger or reconstruction j. To take over a company or acquire a controlling or substantial stake in another company k. Any other matter which may be prescribed. The amendment came into effect from 5 June Rights of persons other than retiring directors to stand for directorship: Section 160 relates to right of persons other than retiring directors to stand for directorship. This Section is not applicable to private companies with effect from 5 June The provisions were not applicable to private companies (not being a subsidiary of public company) under the 1956 Act as well. Appointment of directors to be voted individually: Section 162 requires that directors should be appointed individually. This section is not applicable to private companies with effect from 5 June Restriction on powers of board: Section 180 that deals with the restrictions on the powers of the board and this section is not applicable to private companies with effect from 5 June Appointment and remuneration of managerial personnel: Section 196(4), inter alia, states that subject to the provisions of Section 197 and Schedule V to the 2013 Act, a Managing Director (MD), Whole-time Director (WTD) or manager should be appointed and the terms and conditions of such appointment and remuneration payable be approved by the board of directors at a meeting which should be subject to approval by a resolution at the next general meeting of the company and by the Central Government in case such appointment is at variance to the conditions specified in the Schedule V to the 2013 Act. Additionally, a return in the prescribed form should be filed with the ROC within 60 days of such an appointment. Section 196(5) states that where an appointment of a MD, WTD or manager is not approved by the company at a general meeting, any act done by him/her before such approval should not be deemed to be invalid. The provisions of Section 196(4) and 196(5) are not applicable to the private companies with effect from 5 June Sections/sub-sections that would not apply to certain class of private companies Prohibition on acceptance of deposits from public: Clauses (a) to (e) of the Section 73(2) deal with the conditions to be fulfilled by the companies for accepting deposits from the public or from its members. The provisions of clauses (a) to (e) of Section 73(2) of the 2013 Act are not applicable to a private company with effect from 13 June 2017, if it meets any of the given criterion: a. It accepts monies from its members not exceeding 100 per cent of aggregate of the paid-up share capital, free reserves and securities premium b. It is a start-up company for five years from the date of its incorporation, or c. It fulfils all the following conditions: i. The private company is not an associate or a subsidiary company of any other company ii. The borrowings of such a company from banks or financial institutions or any body corporate is less than twice of its paid-up share capital or INR50 crore, whichever is lower and iii. Such a company has not defaulted in the repayment of such borrowings subsisting at the time of accepting deposits under Section 73. Additionally, the private company would be required to file the details of monies accepted to the ROC in such a manner as may be specified.

24 19 Apart from providing relief to private companies which are start-ups to raise funds without complying with the prescribed conditions, the CLC also recommended to grant relief to the private companies which are engaged in the infrastructure sector to accept deposits from its members without any upper limit. However, no such specific exemption to private companies in the infrastructure sector has been provided in the Companies (Amendment) Bill, Internal Financial Controls (IFC): An auditor of a private company is not required to report on the adequacy and operating effectiveness of IFC in the auditor s report (as required under Section 143(3)(i) of the 2013 Act) provided such a private company meets either of the given conditions: a. It is a one person company or a small company, or b. It has a turnover of less than INR50 crore as per the latest audited financial statements and the borrowings of such a company from banks or financial institutions or any body corporate at any point of time during the FY is less than INR25 crore. The exemption from reporting on IFC has been made applicable for auditor s reports in respect of financial statements pertaining to FYs commencing on or after 1 April 2016 that are made on or after 13 June 2017 (i.e. the date of notification of the amendment) 4. An auditor of a specified private company is not required to report on IFC, but it would be advisable that such companies should also internally evaluate their processes/systems as part of better corporate governance. Kinds of share capital: Section 43 with respect to the kinds of share capital namely equity and preference shares will not apply to a private company if memorandum or articles of association of the private company provide that Section 43 does not apply. The amendment came into effect from 5 June Voting rights: Section 47 on voting rights attached to shares would not apply to a private company if memorandum or articles or association of the private company provides that Section 47 does not apply. The amendment came into effect from 5 June Restrictions on purchase by company or giving of loans by it for purchase of its shares: Section 67 provides certain restrictions on companies for buyback of its shares or giving of loans by it for purchase of its shares. These restrictions would not apply to private companies provided following conditions have been met: a. No other body corporate has invested in its share capital b. If the borrowings of such a company from banks or financial institutions or any body corporate is less than twice its paid-up share capital or INR50 crore, whichever is lower, and c. If such a company is not in default in repayment of such borrowings subsisting at the time of making transactions under this Section. The amendment came into effect from 5 June Management and administration: Following sections would apply to private companies unless otherwise specified in respective Sections, or unless articles of the private company otherwise provide: Section 101: Notice of meeting Section 102: Statement to be annexed to notice Section 103: Quorum for meetings Section 104: Chairman of meetings Section 105: Proxies Section 106: Restriction on voting rights Section 107: Voting by show of hands Section 109: Demand for poll. The amendment came into effect from 5 June Loans to directors, etc.: Section 185 of the 2013 Act deals with loans to directors and companies in which directors are interested. This Section will not apply to private companies subject to the following conditions: a. No other body corporate has invested in its share capital b. If the borrowings from banks or financial institutions or any bodies corporate is less than twice of their paid-up share capital or INR50 crore, whichever is lower, and c. If such a company has not defaulted in repayment of such borrowings subsisting at the time of making transactions under this Section. The amendment came into effect from 5 June MCA general circular no. 08/2017 dated 25 July 2017.

25 Accounting and Auditing Update - Issue no. 17/ Specified private companies have been exempted from the requirements of Section 185 relating to granting of loan to any of its directors or to any other person in whom the director is interested. It is important to note that the Companies (Amendment) Bill, 2017 has also granted similar relief to other companies as well. According to it, a company is allowed to give loan to any person in whom the director is interested, subject to prior approval by a special resolution and loans should be utilised by the borrowing company for its principal business activities. Consider this Private companies form the backbone of the corporate structure prevalent in India. The relaxations from various provisions of the 2013 Act are expected to ease out the hardships faced by private companies and would reduce the cost of compliances. Exemptions to private companies which are start-ups are expected to attract more investments in such companies. Additionally, a private company, in general, should take note of the following important points: A private company could prescribe lesser time for rights issue (i.e. less than 15 days) when 90 per cent of its members have given their consent in writing or in electronic mode. It could increase its subscribed share capital by offering the shares to its employees (under a scheme of employees stock option) by passing an ordinary resolution. Mandatory auditor rotation norms are applicable to all private companies with paid-up share capital of INR50 crore or more. Interested directors of private companies are allowed to be counted towards quorum in a board meeting and are allowed to participate in the board meeting in which the contract or arrangement (in which he/she has direct/indirect interest) is being discussed subject to disclosure of his/her interest. Members of private companies who are related parties are also allowed to vote on a resolution of a company to approve a contract/arrangement entered into by the company. Auditor of a private company (other than small company, one person company or with turnover and borrowings less than INR50 crore and INR25 crore) are mandatorily required to report on the adequacy and operating effectiveness of IFC. Private companies are allowed to buy-back its own shares or could grant loans for purchase of its own shares without any restrictions. Similarly, no restriction is applicable to them while granting loans to directors and companies in which directors are interested.

26 21 Decommissioning costs This article aims to: Discuss important factors to be considered while recognising decommissioning costs. Many entities have obligations to dismantle, remove and restore items of property, plant and equipment (decommissioning costs). Entities often construct assets on land or premises. The land or premises on which assets are constructed could be taken on lease, whereby the users could be obligated (e.g. under the lease agreement) to reinstate the land or premises at the end of the agreed term. Similarly, there could be environmental laws that may require companies to incur cleaning costs. Decommissioning costs typically arise in various industries including power and utilities, extractive, oil and gas, chemical and telecommunications. Summary of the requirements under Ind AS Timing of recognition As per Ind AS 16, Property, Plant and Equipment the cost of an item of property, plant and equipment includes among other things, an initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period. Consequently, the obligation to make good environmental or other damage incurred in installing an asset is recognised immediately because the damage arises from a past event i.e. installation of the asset. For example, a provision is recognised for the expected cost of dismantling an oil rig when the rig is installed. If an obligation to restore the environment or dismantle an asset arises on the initial recognition of the asset, the amount is included in the cost of the related asset and is not recognised immediately in profit or loss. The cost of an item of property, plant and equipment includes not only the initial estimate of the costs related to dismantlement, removal or restoration of property, plant and equipment at the time of installing the item but also amounts recognised during the period of use for purposes other than producing inventory e.g. certain additional obligations for restoration costs.

27 Accounting and Auditing Update - Issue no. 17/ The provision recognised for dismantlement, removal and restoration of an item of property, plant and equipment is not reduced by the item s expected salvage value, instead, any salvage or other residual value would be taken into account when measuring the depreciable amount under Ind AS 16. Another common example of such costs is obligations under lease contracts. Generally, the lessee is obliged to return the premises to the owner of the premises in its original/ agreed condition. Measurement of the obligation Estimation of decommissioning costs is a significant area of judgement. Following factors should be considered while measuring the decommissioning costs: A provision is recognised only if there are past events. Therefore, a provision reflects only damage incurred at the reporting date; a provision is not recognised for expected future damage. Decommissioning will often take place far away in the future. Therefore, the effect of discounting is generally material and will have a significant impact on the size of the obligation and the equivalent asset recognised. The aforesaid obligation is discounted at a pre-tax rate that reflects the time value of money and the risks specific to the liability, unless the future cash flows are adjusted for these risks. In determining the timing of the outflow, the expected useful life of the related asset is considered. Assumptions about future events should be supported by sufficient objective evidence because of the uncertainty of predicting events far into the future. The assumptions also need to be consistent with the other assumptions about the use of the asset. An entity may not be required to, and may not be able to, decommission an asset immediately after it stops using the asset. In this case, the best estimate of the timing of the cash flows is used to measure the present value of the obligation. Changes to existing provisions Changes in the obligation would be on account of the following reasons: Changes in the estimate of the amount or timing of expenditure required to settle the obligation Changes in the current marketbased discount rate The unwinding of the discount. The effect of any changes to an existing obligation because of changes in the estimated timing or amount of expenditure or changes in the discount rate are added to or deducted from the cost of the related asset and depreciated prospectively over the asset s remaining useful life (under the cost model). If the adjustment leads to a deduction from the cost of the asset then it should not exceed its carrying amount. If a decrease in the liability exceeds the carrying amount of the asset, the excess should be recognised immediately in profit or loss. If the adjustment results in an addition to the cost of an asset, the entity should consider whether this is an indication that the new carrying amount of the asset may not be fully recoverable. If there is such an indication, the entity should test the asset for impairment by estimating its recoverable amount and account for any impairment loss in accordance with Ind AS 36, Impairment of Assets. The periodic unwinding of the discount should be recognised in profit or loss as a finance cost. Consider this Ind AS does not address how to account for new obligations e.g. those triggered by a law enacted after an asset was acquired. An entity should consider to develop an appropriate accounting policy for such costs. Uncertainty about the useful life of the assets should not lead to an inability to measure the provision for decommissioning cost reliably. Ind AS does not provide clear guidance on the accounting treatment of exchange differences related to an obligation denominated in a foreign currency to settle a decommissioning obligation. An entity should consider to develop an appropriate accounting policy for such costs. Costs incurred as a consequence of the production of inventory in a particular period are part of the cost of that inventory. The effect of any changes to an existing obligation for decommissioning related to items that have been sold is recognised in the statement of profit and loss.

28 23 Regulatory updates Enhancing fund governance for mutual funds With a view to strengthen the governance structure for mutual funds, the Securities and Exchange Board of India (SEBI), through its circular dated 30 November 2017 has inter-alia prescribed the following: Tenure of independent trustees and independent directors An independent trustee and independent director should hold office for a maximum of two terms with each term not exceeding a period of five consecutive years. However, such an individual would be eligible for reappointment after a cooling-off period of three years subject to prescribed conditions that such individual should not be associated with the concerned mutual fund, asset management company and its specific related parties during the cooling-off period. Existing independent trustees and independent directors should hold office for a maximum of 10 years (including all preceding years for which such individual has held office) subject to prescribed conditions. Appointment of auditors A mutual fund entity should not appoint an auditor for more than two terms of maximum five consecutive years. Such an auditor may be reappointed after a cooling off period of five years. Existing auditors may be appointed for a maximum of 10 years (including all preceding years for which an auditor has been appointed) subject to prescribed conditions. (Source: SEBI circular SEBI/HO/ IMD/DF2/CIR/P/2017/125 dated 30 November 2017)

29 Accounting and Auditing Update - Issue no. 17/ MCA amends cost records and audit rules The Ministry of Corporate Affairs (MCA) through its notification dated 7 December 2017 amended the Companies (Cost Records and Audit) Rules, 2014 and issued Companies (Cost Records and Audit) Amendment Rules, The amended rules inserted the definition of Indian Accounting Standards (Ind AS), means Ind AS as referred to in Companies (Indian Accounting Standards) Rules 2015, under Rule 2 of the principal rules. Also the amended rules introduces the revised form CRA-1 (deals with Particulars relating to the items of Costs to be included in the Books of Accounts) and CRA-3 which provides form of the Cost Audit Report. (Source: MCA notification G.S.R. 1498(E). dated 7 December 2017) IASB issued annual improvements to IFRS The International Accounting Standards Board (IASB) on 12 December 2017 issued Annual Improvements to IFRS Standards cycle, which makes narrow-scope amendments to four International Financial Reporting Standards. The annual improvements are part of IASB s process for maintaining IFRS and contain interpretations that are minor or narrow in scope. The amendments made during the cycle are: Standard IFRS 3, Business Combinations IFRS 11, Joint Arrangements IAS 12, Income Taxes IAS 23, Borrowing Costs Amendment A company remeasures its previously held interest in a joint operation when it obtains control of the business. A company does not remeasure its previously held interest in a joint operation when it obtains joint control of the business. A company accounts for all income tax consequences of dividend payments in the same way. A company treats as part of general borrowings any borrowing originally made to develop an asset when the asset is ready for its intended use or sale. Effective date: The amendments are effective from 1 January 2019, with early application permitted. (Source: IASB s notification dated 12 December 2017)

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32 KPMG in India s IFRS institute Visit KPMG in India s IFRS institute - a web-based platform, which seeks to act as a wideranging 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. IFRS Notes Ind AS Transition Facilitation Group (ITFG) issues Clarifications Bulletin 12 8 November 2017 With Indian Accounting Standards (Ind AS) being applicable to corporates in a phased manner 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 (Ind AS Rules). Since then, ITFG issued 11 bulletins to provide guidance on issues relating to the application of Ind AS. The ITFG in its meeting considered certain issues received from the members of the ICAI and issued its Clarification Bulletin 12 on 23 October 2017 to provide clarifications on 11 issues in relation to the application of Ind AS. This issue of IFRS Notes provides an overview of the clarifications issued by ITFG through its Bulletin 12. First Notes QRB issued its report on audit quality review of top listed and public interest entities in India 13 December 2017 The Quality Review Board (QRB) was formed by the Central Government (CG) in 2007 to perform audit quality review function of top listed and other public interest entities in India. On 10 November 2017, the QRB issued the Report on Audit Quality Review ( ) (the QRB report). The report comprise of key findings of 74 reviews which were completed by the QRB till June Out of these 74 reviews, 69 reviews pertained to the financial statements for the year ended 31 March 2014 and 5 reviews pertained to the financial statements for the year ended 31 March The findings in the report relate to compliance with the requirements prescribed under: Standards on Auditing (SA) Accounting Standards (AS) and Other relevant laws and regulations including Schedule III to the Companies Act, This issue of First Notes provides an overview of the observations of the QRB with respect to AS and Schedule III to the 2013 Act as provided in the report. Voices on Reporting Webinar KPMG in India invites you to join us for a LIVE webinar on Thursday, 4 January 2018 between 04:00 05:00 PM to discuss key financial reporting and regulatory matters that are expected to be relevant for stakeholders as they approach the quarter ending 31 December In this session of our Voices on Reporting webinar, we will cover updates from the Institute of Chartered Accountants of India (ICAI), the Securities and Exchange Board of India (SEBI), the Ministry of Corporate Affairs (MCA), etc. We look forward to your presence and active participation at this webinar. Please access KPMG in India website for dial in details. Kindly RSVP your confirmations. Previous editions are available to download from: Feedback/queries can be sent to aaupdate@kpmg.com Follow us on: kpmg.com/in/socialmedia Introducing Ask a question write to us at aaupdate@kpmg.com 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 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. This document is meant for e-communication only.