- Ind AS Implication on MAT - Recent Ind AS Updates

Transcription

1 Indian Accounting Standards (Ind AS) WIRC Study Group Meeting - 20 May Ind AS Implication on MAT - Recent Ind AS Updates CA Santosh Maller and CA Jugal Joshi 20 May 2017

2 MAT Thank Impact you Due to Ind for your AS time and attention 2

3 MAT Implementation June 2015 March 2016 First Interim Report on MAT Framework Committee was formed July 2016 Second Interim Report on MAT Framework Dec 2016 Final Report submitted by Committee after considering the recommendation from MCA and Public Finance Act 2017 Rationalization of Provision of MAT in line with Ind AS Clarity on First time adoption of Ind AS 3

4 Key Dates and timelines - Phase I companies Date of transition and opening balance sheet date 1 April 2015 Cumulative Ind AS impact recognised in Retained Earnings Ind AS Comparative period Comparative P&L as per Ind AS 31 March 2016 First Ind AS financial statements 31 March 2017 Reporting date MAT Assessment as per previous Indian GAAP 4 MAT as per previous Ind AS

5 Ind AS issues for MAT u/s 115JB of Income Tax Act MAT provision is a Book Profit based taxation; Substantial changes in accounting pursuant to Adoption of Ind AS How would it Impact Book Profit calculation for levy of MAT? Companies adopting Ind AS on 1 April 2016 required to prepare an opening balance sheet as of 1 April 2015 and restate the financials for comparative period Will the Companies require to true up the First Time Adoption (FTA) adjustment made upto 31 March 2016? MAT impact will be on transition amount as on 31 March 2016 Enacted provisions clarifies this aspect 5

6 Comparative Statement of P&L IGAAP Statement of P&L Amount Ind AS Statement of P&L Amount Revenue from Operations XXXX Revenue from Operations XXXX Expenses (XXXX) Expenses (XXXX) Profit Before Tax XXXX Profit Before Tax XXXX Less: Current Tax Deferred Tax (XXXX) (XXXX) Less: Current Tax Deferred Tax (XXXX) (XXXX) Profit After Tax XXXX Profit after Tax XXXX - Other Comprehensive Income a) Items that will not be reclassified to P&L XXXX / (XXXX) b) Items that will be reclassified to P&L XXXX / (XXXX) - Total Comprehensive Income XXXX 6

7 Composites of Ind AS Adjustments impacting MAT Total Comprehensive Income Net Profit or loss for the year (including notional / unrealised gains and losses) Other Comprehensive income Starting Point for Computation of Book Profit for purpose of MAT Items to be reclassified subsequently Items which will never be reclassified Included in the year of reclassification FTA Subsequent Year 7

8 Computation of Book Profit for Ind AS compliant Cos Particulars Profit / (Loss) as per Statement of Profit & Loss Increased / Decreased by Adjustments as per Section 115JB(2A) Adjustments as per sub-section (2A) of Section 115JB (a) Increased by all amounts credited to OCI in the Statement of P&L under the head "Items that will not be re-classified to profit or loss (b) Decreased by all amounts debited to OCI in the Statement of P&L under the head "Items that will not be re-classified to profit or loss (c) Increased by amounts or aggregate of the amounts debited to the Statement of Profit & Loss on distribution of non-cash assets to shareholders in demerger in accordance with Appendix A of the Indian Accounting Standards 10 (d) Decreased by amounts or aggregate of the amounts credited to the Statement of Profit & Loss on distribution of non-cash assets to shareholders in demerger in accordance with Appendix A of the Indian Accounting Standards 10 8

9 Demerger Schemes Appendix A to Ind AS 10 Demerger of a business/segment not under common control Demerged company Resulting company Recognises gains/ loss on fair value difference on net assets demerged in P&L at the date of demerger Recognises net assets obtained at fair value Gain/ loss ignored for MAT computation (s/115jb (2A)) Fair value differential ignored for MAT computation (s/115jb (2B)); MAT based on book value of demerged company No consequential amendment in s/2(19aa)!!! 9

10 Computation of Book Profit for Ind AS compliant Cos Book Profit after adjustment of Components of OCI Adjustments as per sub-section (2C) of Section 115JB Particulars Amount Amount Book profit of the year of convergence and each of the following four previous years, shall be further increased or decreased, as the case may be, by onefifth (1/5th) of the Transition Amount Transition Amount means the amount or aggregate of the amounts adjusted in Other Equity (OE) (excluding capital reserve and securities premium) on the convergence date but does not include the following amounts. 10

11 Example: PPE- Deemed cost exemption Yr Cost Fair Value 1 Apr Retained Earnings Book P&L Book Profit for MAT Fair valuation 50 in MAT neutral; considered only at time of disposal 31 Mar 16 (15) (10) 31 Mar 17 (15) (10) No depreciation allowed in MAT on fair valuation 31 Mar 18 (15) (10) 31 Mar (15) (10) Profit on sale MAT Gain = 50 (110-60) 11

12 Example: FVOCI Equity investments Yr Cost Fair Value 1 Apr Retained Earnings Book OCI Book Profit for MAT Fair valuation 50 in MAT neutral; considered only at time of disposal 31 Mar 16 (15) - 31 Mar No depreciation allowed in MAT on fair valuation 31 Mar Mar (sold) MAT Gain = 100( ) 12

13 Example: FVPL Equity investments Yr Cost Fair Value 1 Apr Retained Earnings Book P&L Book Profit for MAT Fair valuation 50 offered for MAT over 5 years 31 Mar 16 (15) 31 Mar i.e Mar i.e Mar i.e Mar 20 (15) (8)i.e (15)+7 31 Mar 21 (20) (13) i.e. (20)+7 13

14 Exclusions from Transition Amount Sr. No. A B C D E F Particulars Amount or aggregate of the amounts adjusted in OCI on the convergence date which shall be subsequently re-classified to profit or loss Revaluation surplus for assets in accordance with Ind AS 16 and Ind AS 38 adjusted on the convergence date Gains or losses from investments in equity instruments designated at fair value through OCI in accordance with Ind AS 109 adjusted on the convergence date Adjustments relating to items of property, plant and equipment and intangible assets recorded at fair values as deemed cost in accordance with paragraphs D5 and D7 of the Ind AS 101 on the convergence date Adjustments relating to investments in subsidiaries, joint ventures and associates recorded at fair value as deemed cost in accordance with paragraph D15 of the Ind AS 101 on the convergence date Adjustments relating to cumulative translation differences of a foreign operation in accordance with paragraph D13 of the Ind AS 101 on the convergence date 14

15 Transition Amount Practical Issues Equity component of Compound Instrument not excluded included in transition amount Significant impact due to CCD and CCPS There are other impact areas in retained earnings which are capital in nature Proposed dividend Share application money 15

16 Provisions for ongoing Ind AS reporting Item Changes in revaluation surplus Re-measurement of defined benefit plans Gains or losses arising from translating financial statements of foreign operations (including foreign branches) Gains and losses on equity investments designated as at Fair value through OCI Gains and losses on debt investments measured at Fair value through OCI Effective portion of gains and losses on hedge instruments in a cash flow hedge and the gains and losses on hedging instruments For particular financial liabilities designated as at fair value through profit and loss, the amount of change in fair value that is attributable to changes in the liability s credit risk Changes in time value of options when separating the intrinsic value and time value of option contracts designated as hedging instruments Changes in the value of forward elements of forward contracts when separating the forward element and spot element of a forward contract designated as hedging instruments Whether recycling permitted/ required? No No Yes No Yes Yes Yes Yes Yes 16

17 Provisions for ongoing Ind AS reporting Whether OCI items will be included for MAT computation Provision No further adjustments to the net profits before OCI of Ind AS compliant companies, other than those already specified under section 115JB of the Act shall be made. In other words, MAT calculations would continue to be based on profit before tax. 17

18 Provisions for ongoing Ind AS reporting MAT incidence on OCI items will never be recycled back to profit and loss Provision Item Changes in revaluation surplus of PPE and Intangible assets Gains and losses from investments in equity instruments designated at fair value through other comprehensive income Re measurements of defined benefit plans Any other item Point in time of MAT incidence To be included in book profits at the time of realisation/ disposal/ retirement or otherwise transferred To be included in book profits at the time of realisation/ disposal/ retirement or otherwise transferred To be included in book profits every year as the re measurements gains and losses arise To be included in book profits every year as the gains and losses arise 18

19 Provisions for ongoing Ind AS reporting MAT applicability for demerger schemes Under Ind AS a company measures a liability (dividend payable) to distribute non-cash assets or business at the fair value of the assets to be distributed. When the company completes the distribution, it shall recognise the difference between the carrying amount of the assets distributed and the dividend payable amount recorded based on fair value. Correspondingly, the reserves are debited at fair value to record distribution as a deemed distribution. Not applicable a distribution of a non-cash asset that will ultimately be controlled by the same party or parties before and after the distribution. Provision Difference between the fair value and carrying value of the assets of the undertaking should be excluded from book profits. In the case of a resulting company, any change between book value of demerged company and fair value shall be ignored for the purpose of computing of book profit of the resulting company. 19

20 MAT incidence during first time adoption Ind AS and comparative financial year Ind AS adjustment in comparative financial year Provision For the purposes of computation of book profits under section 115JB in the year of adoption, the amounts adjusted as of the opening date of the first year of adoption shall be considered. Example: A company applying Ind AS in FY , comparative year is The company would have to prepare an Ind AS opening balance sheet as of 1 April 2016 and restate the financial statements for the comparative period under Ind AS. First time adoption adjustments as of 31 March 2016 shall be considered for computation of MAT liability for previous year (assessment year ) and thereafter. 20

21 MAT incidence during first time adoption Ind AS and comparative financial year MAT implications for first time adoption transition adjustments Ind AS transition adjustments are required to be recorded directly in Other Equity at the date of transition to Ind AS. Several of these items would subsequently never be recycled / reclassified to profit and loss / included in the computation of book profits. Provision Item Changes in revaluation surplus of property, plant and equipment (PPE) and Intangible assets Gains and losses from investments in equity instruments designated at fair value through OCI Re measurements of defined benefit plans Any other item (Eg, lease adjustments, effective interest method adjustment, discounting of long term provisions, fair valuation of sale consideration, deferral of revenue under Ind AS) Point in time To be included in book profits at the time of realisation/ disposal/ retirement or otherwise transferred To be included in book profits at the time of realisation/ disposal/ retirement or otherwise transferred To be included in book profits equally over a period of five years starting from the year of first time adoption of Ind AS i.e. previous years to for phase-ii Ind AS companies (Ind AS effective FY onwards) 21

22 MAT incidence during first time adoption Ind AS and comparative financial year Fair valuation of PPE and intangible asset as deemed cost upon first time adoption of Ind AS An entity may use fair value in its opening Ind AS balance sheet as deemed cost for an item of PPE or an intangible asset as per provisions of Ind AS 101, wherein the items of PPE or intangible asset are fair valued at the transition date with a corresponding impact on the retained earnings/reserves. Provision Existing provisions for computation of book profits under section 115JB of the Act provide that in case of revaluation of assets, any impact on account of such revaluation shall be ignored for the purposes of computation of book profits. Further, the adjustments in retained earnings on first time adoption with respect to items of PPE and Intangible assets shall be ignored for the purposes of computation of book profits. Depreciation shall be computed ignoring the amount of retained earnings adjustment. Similarly, gain/loss on realisation/ disposal/ retirement of such assets shall be computed ignoring the aforesaid retained earnings adjustment. 22

23 MAT incidence during first time adoption Ind AS and comparative financial year Investments in subsidiaries, joint ventures and associates at fair value as deemed cost upon first time adoption of Ind AS Ind AS 101 allows an entity either to fair value its investments in subsidiary, associate and joint venture companies or to measure them at cost in its separate financial statements. Provision If the fair value option is used the investments are measured at fair value at the transition date with a corresponding impact on retained earnings/reserves. In such cases retained earnings adjustment shall be included in the book profit at the time of realisation of such investment. 23

24 MAT incidence during first time adoption Ind AS and comparative financial year Cumulative translation differences arising on first time adoption of Ind AS Under Ind AS 101, an entity may elect a choice whereby the cumulative translation differences for all foreign operations are deemed to be zero at the date of transition to Ind AS. Further, the gain or loss on a subsequent disposal of any foreign operation shall exclude translation differences that arose before the date of transition to Ind AS and shall include only the translation differences after the date of transition. Provision These shall be included in the book profits at the time of disposal of foreign operations. 24

25 MAT incidence during first time adoption Ind AS and comparative financial year Deferred tax Section 115JB of the Act already provides for adjustments on account of deferred tax and its provision. The Bill clarifies that any deferred tax adjustments arising on first time adoption of Ind AS recorded in reserves and surplus shall also be ignored for the purpose of MAT. 25

26 Key Impact Items of Adjustment Ind AS impact Impact on MAT Property, Plant & Equipment PPE to be recognised at Fair Value and difference between Fair Value and Cost to be recognised in Retained Earnings Difference to be ignored and included only at time of disposal Investments (not held for trading) Investments to be recognised at Fair Value through OCI and difference between Fair Value and Cost to be recognised in Retained Earnings Investments to be recognised at Fair Value through P&L and difference between Fair Value and Cost to be recognised in Profit & Loss Difference to be ignored and included only at time of disposal Increase in book profit resulting in increasing in MAT Whether loss MAT deductible?? 26

27 Key Impact Other items which may or may not have impact on book profits Items of Adjustment Ind AS impact Impact on MAT Long term employee benefit plans Government grant received for purchasing specific asset Government grant in nature of promoter contribution Gain or loss on change in actuarial assumption instead of charging to income statement is to be charged to reserves thereby increasing book profit Grant should be recognized as income over the period which bears the cost of meeting the obligation instead of reducing the same from asset Grant should be recognized as income over the period which bears the cost of meeting the obligation instead of transferring to capital reserve Increase / Decrease in book profit resulting in MAT impact Increase in book profit along with increase in depreciation cost. Increase in book profit resulting in increasing in MAT 27

28 Key Impact Other items which may or may not have impact on book profits (cont) Items of Adjustment Ind AS impact Impact on MAT Sale of vehicle along with free service and warranties Exchange fluctuation on Long term foreign currency monetary assets Instead of recognizing revenue upfront, for all services revenue to be recognized separately at the time of performance Instead of capitalizing to value of asset, the exchange fluctuation is charged to income statement. Since revenue is deferred, MAT liability will also be deferred It reduces asset value as well as book profit thereby reducing the MAT profit Borrowing Cost - General Borrowing Capitalization of Interest on working capital loan resulting instead of routing through P&L Deferment of interest cost due to capitalization to asset. Increase in Initial tax outflow. 28

29 Key Impact Other items which may or may not have impact on book profits (cont) Items of Adjustment Ind AS impact Impact on MAT Translation difference in Foreign Operations Recognised in OCI Difference to be ignored and included only at time of disposal Deferred Tax Adjustment recorded in Reserves & Surplus on FTA Any other item FTA adjustment in Retained Earnings Subsequent Years recognised in OCI To be ignored FTA to be added / reduced in book profit over period of 5 years Subsequent years increase / decrease in book profit resulting in MAT impact 29

30 Recent Thank you Ind AS Updates for your time and attention 30

31 ITFG Bulletin 8 Provision towards Corporate Social Responsibility (CSR) obligation u/s 135 of Companies Act,2013 Disclosure of impact of Ind AS 115 Revenue from Contracts with Customers in notes to accounts Date of transition balance sheet whether to be prepared at the end of the transition day or the start of the transition day? Deemed cost exemption on first time adoption for asset erroneously capitalized property, plant and equipment (PPE) under previous GAAP 31

32 ITFG Bulletin 8 (contd.) Reversal of PPE impairment under previous GAAP upon use of deemed cost option Implications of business combinations exemption on non-controlling interest for subsidiaries with accumulated losses Treatment of revaluation reserve under previous GAAP upon availing previous GAAP deemed cost exemption Deferred tax arising on account of foreign currency exchange differences 32

33 ITFG Bulletin 9 Deferred tax on undistributed earnings of subsidiaries on account of - dividend distribution tax (DDT) Accounting for common control business combinations Government grant in the nature of promoters contribution 33

34 Ind AS Exposure Drafts ED Ind AS 101 amendment Ind AS 101.D7AA Where there is no change in its functional currency on the date of transition to Ind ASs, a first-time adopter to Ind ASs may elect to continue with the carrying value for all a class of its property, plant and equipment as recognised in the financial statements as at the date of transition to Ind ASs, measured as per the previous GAAP and use that as its deemed cost as at the date of transition after making necessary adjustments in accordance with paragraph D21 and D21A, of this Ind AS. For this purpose, if the financial statements are consolidated financial statements, the previous GAAP amount of the subsidiary shall be that amount used in preparing and presenting consolidated financial statements. Where a subsidiary was not consolidated under previous GAAP, the amount required to be reported by the subsidiary as per previous GAAP in its individual financial statements shall be the previous GAAP amount. If an entity avails the option under this paragraph, no further adjustments to the deemed cost of the property, plant and equipment so determined in the opening balance sheet shall be made for transition adjustments that might arise from the application of other Ind ASs. This option can also be availed for intangible assets covered by Ind AS 38, Intangible Assets and investment property covered by Ind AS 40, Investment Property. 34

35 Ind AS Exposure Drafts ED Ind AS 101 amendment (contd.) An entity shall apply the amendments relating to paragraph D7AA for annual periods beginning on or after 1st April, Since these amendments to Ind AS will be notified by the Ministry of Corporate Affairs (MCA), the effective date as mentioned in paragraph 39ZA, is subject to the notification of MCA with the same effective date. 35

36 Ind AS Exposure Drafts ED on GN on Schedule III based on Ind AS for NBFCs ED on clarification to Ind AS

37 Recent Ind AS Full Financial Statements Annual financial statements Infosys Ltd. Mindtree IPO IRB Infrastructure (InVIT) IndGrid (InVIT) D Mart (RHP) 37

38 Thank You