Accounting and Auditing Update Issue no. 07/2017 February 2017

Transcription

1 Accounting and Auditing Update Issue no. 07/2017 February

2 Editorial

3 Sai Venkateshwaran Partner and Head Accounting Advisory Services KPMG in India Ruchi Rastogi Executive Director Assurance KPMG in India The Insolvency and Bankruptcy Code (Code) was recently enacted. The Code overhauls the current highly fragmented insolvency regime and provides a unified framework and is expected to have a number of implications on the companies in India. Our article on this topic provides an overview of the requirements and implications of the Code e.g. explains triggers of insolvency resolutions, resolution plan and timelines, transitional provisions, etc. The article also highlights that all categories of companies are in its ambit and allows both financial as well as operational creditors to initiate the process. An entity may extinguish its financial liability either by issuing an equity instrument or renegotiating terms of the instrument resulting in its reclassification as an equity instrument. We have explained the accounting of debt for equity swap with the help of illustrative examples and flowcharts. The Companies Act, 2013 (2013 Act) mandates the Board of Directors of every company to lay standalone and Consolidated Financial Statements (CFS) at every annual general meeting of the company. Over last two years, the Ministry of Corporate Affairs issued a number of amendments and clarifications to various sections of the 2013 Act. Our article on CFS summarises all the revised requirements relating to CFS under the 2013 Act and Securities and Exchange Board of India regulations. The preparation of CFS under Ind AS also impacts the accounting of deferred taxes of a group in relation to intra-group transactions and undistributed profits of a subsidiary, associate and joint venture. Our article explains the accounting under Ind AS with the help of worked examples. Oil and gas producing activities throw a number of accounting challenges both under Indian GAAP (Accounting Standards) and Ind AS. Therefore, to deal with the accounting of oil and gas producing activities under Indian GAAP, the Institute of Chartered Accountants of India (ICAI) issued a guidance note in 2003 (later on revised in 2013). Internationally, there is no specific guidance under International Financial Reporting Standards (IFRS) on accounting of oil and gas producing activities post exploration. Therefore, recently ICAI issued a guidance note on accounting of oil and gas producing activities under the accounting framework of Ind AS. Our article highlights key differences in accounting of oil and gas producing activities under guidance note (Indian GAAP) vis-à-vis guidance note (Ind AS). As is the case each month, we also cover a regular round-up of some recent regulatory updates in India. We would be delighted to receive feedback/suggestions from you on the topics we should cover in the forthcoming issues of the Accounting and Auditing Update.

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5 Table of contents Insolvency and Bankruptcy Code, 2016 Accounting for extinguishment of a financial liability with an equity instrument Consolidated financial statements requirements of the Companies Act, 2013 Oil and gas producing activities - Guidance under Ind AS Tax effects of intra-group transactions in consolidated financial statements Regulatory updates

6 1 Insolvency and Bankruptcy Code, 2016 This article aims to: Provide an overview of the requirements of the Insolvency and Bankruptcy Code, 2016 (the Code) Highlight key implications arising from the requirements of the Code for the companies in India. The Insolvency and Bankruptcy Code, 2016 (the Code) has been enacted at a very critical time with the Indian banking sector struggling to cope up with mounting bad debts. The Code overhauls the current highly fragmented insolvency resolution regime and provides a unified framework, harmonising insolvency and bankruptcy related matters for corporate persons, partnership firms and individuals. Early identification of incipient stress, creditor focussed resolution process, crucial role of an Insolvency Professional (IP), timely and effective resolution and automatic trigger of liquidation on failure to arrive at a resolution strategy makes the law an indispensable reform to provide a solution to the problem plaguing Indian economy. It has been drafted for a quick, efficient and equitable resolution process and is expected to have farreaching implications for restructuring and formal insolvency in India. The speed at which the Code has been enacted and operationalised reflects that it has been a key policy priority for the government. Key provisions Trigger for insolvency resolution Under the Code, an Insolvency Resolution Process (IRP) can be initiated by a holder of financial debt or an operational creditor (employees, workmen, trade creditors) or a shareholder or the management of corporate debtor, on occurrence of default of repayment of dues exceeding INR1 lakh. A financial creditor whose loan is not in default but the debtor has defaulted on any other financial debt can also make an application for IRP. This is a shift from net worth based assessment under the Sick Industrial Companies Act (SICA) to cash flow based assessment and is expected to lead to early detection of insolvency trends. Also, while SICA remained a rescue mechanism only for industrial companies, the Code covers all other category of companies in its ambit that have remained remediless. It is important to note that the Code allows both financial as well as operational creditors to initiate the process. This will enable operational creditors like vendors or trade creditors to flag off early signs of stress. Therefore, corporates will need to be diligent in adhering to payment schedules for all their debts and liabilities bearing in mind that any type of creditor, including a vendor can potentially trigger IRP on default.

7 2 Moratorium of 180 days One of the significant feature of the Code is grant of moratorium of 180 days on acceptance of the application by the Adjudicating Authority as a result of which all pending actions against the debtor will be stayed and no new actions can be initiated. In the past, a resolution process typically ended in a gridlock between various stakeholders leaving less opportunities for arriving at a consensual resolution plan. However, moratorium under the Code is expected to allow all the creditors to decide on future course of action without having to deal with multiple enforcements by creditors as well as safeguarding the debtor from the chaos. Creditors in possession approach The Code follows a creditor focussed insolvency resolution approach where the debtor ceases to have control on the business and the decision making power shifts to the Committee of Creditors (CoC), which has the power to approve a resolution strategy. The CoC shall consist of only financial creditors (secured and unsecured) who shall have voting rights proportionate to the value of their debt. To ensure that CoC remains independent, related party members in CoC will not have voting rights in the decision making. As the decision making power with respect to resolution process resides with the financial creditors only, the Code protects rights and interests of operational creditors and dissenting financial creditors by envisaging payment of at least a minimum liquidation value to them. This will ensure balanced and equitable decisions by CoC thereby safeguarding interests of operational and minority creditors. Role of an Insolvency Professional (IP) The Code provides appointment of an independent insolvency professional to manage the business of the debtor on behalf of CoC during the resolution process. Though an applicant while making an application for IRP appoint an IP as a Resolution Professional (RP), such person can continue acting as a RP till CoC (on its formation) ratifies of such appointment. A RP will have the responsibility to preserve the value of assets and business of the debtor and coordinate with CoC for effectively implementing resolution process. An RP shall call for and verify claims of creditors, prepare information memorandum with details of financial information about the debtor, appoint registered valuers for calculation of minimum liquidation value, conduct CoC meetings and do all such other things for conduct of the resolution process. The RP will be also responsible to conduct the business of the corporate debtor on a going concern basis and can appoint accountants, legal or other professionals to carry out necessary business functions. Under the Code, RP has power to enter into fresh contracts, amend existing ones and disclaim unprofitable contracts and unsaleable properties so as to maximise value to stakeholders. Implication of this shift in management of the business of the corporate debtor on preparation of financial statements and statutory reporting is not clear and will have to be considered as and when cases progress under the Code. Resolution plan and timelines Under the provisions of the Code, any person can submit a resolution plan to RP who shall put it before CoC for consideration. The resolution plan may include individually or in combination, sale/transfer of assets, acquisition/ merger/consolidation of the corporate debtor, curing or waiving of terms of debt. Additionally, the resolution plan shall also identify specific sources to pay for insolvency resolution costs and minimum liquidation value, define term of the plan and implementation schedule as well as manner of management of the business during the resolution term. The Code stipulates strict timeline of maximum of 180 days for arriving at a consensus on a resolution plan. Trigger for liquidation A resolution plan should be approved by CoC by 75 per cent of majority by value before submission to the Adjudicating Authority. Where CoC fails to arrive at a consensus within 180 days (with one time extension of 90 days) of acceptance of commencement of IRP, the company automatically enters liquidation. This will push the creditors to decide on a resolution strategy within prescribed timelines. Liquidation can also be triggered where the Adjudicating Authority rejects the submitted resolution plan or CoC votes for company to enter into liquidation. Priority of claims The Code clearly defines the waterfall mechanism for payment of debt in case of liquidation of the company. A significant change in the priority of claims is that the government dues have moved lower down the chain, below the claims of unsecured financial creditors. In the earlier regime, government dues ranked prior to secured claims. Timelines for liquidation The Code envisages a time period of two years for completion of liquidation process from commencement of liquidation. Any delay from stipulated timelines will have to be reported to the Adjudicating Authority explaining causes of delays and taking permission for continuing the process for extended time. The Code also has provisions for fast-tracking of liquidation in case of insufficient assets of corporate debtor. Lack of timelines has resulted in liquidation cases to be dragged on for years in the past. A timeline of two years is expected to ensure wrap up liquidation proceeding within a reasonable timeframe and also improve recovery rate. Specialised Adjudicating Authority Unlike current judicial system with concurrent and overlapping jurisdiction, the Code envisages a clearly defined and distinct judicial system. The National Company Law Tribunal and Appellate Tribunal will act as the exclusive Adjudicating Authority to decide upon corporate insolvency resolution and liquidation case. Corresponding authority for non-corporate entities will be Debt Recovery Tribunal and Appellate Tribunal. Certainty and clarity in judicial system will reduce overlap and conflict with other bankruptcy procedures. Information utilities A notable feature of the Code is institution of an independent authority called an information utility to collect and disseminate financial information and act as repository for financial information. Information obtained from such utility on existence of debt will constitute a proof of debt and will remove information asymmetry and dependency on the debtor for crucial information. A draft report has been issued by the working committee on 17 January 2017 recommending rules, regulations and other matters around formation of information utilities.

8 3 Transitional provisions Post operationalisation of the Code, steps have been taken to ensure smooth transition of ongoing cases relating to inability of payment of debts to the resolution process under the Code. All winding up petitions pending with the High Court for inability to repay debt and where the petition is not served will be transferred to a tribunal having jurisdiction over the matter and will be treated as an application under the Code. The petitioner will have to submit additional documents required under the Code along with the name of proposed resolution professional for continuance of petition under the Code, failing which the petition will get abated. By implementing the Code, the government aims to establish a robust legal framework and improve the business environment. It is expected to address concerns over regulatory risks raised in the past by lenders (including foreign investors) providing finance to companies in India. It will also help in achieving certainty in recovery and enforcement proceedings thereby boosting confidence of lenders and encourage growth in exposure to Indian entities. The Code is anticipated to be a game changer reform for the Indian business environment. Consider this. Financial discipline: The Code is expected to instill a greater sense of financial discipline among borrowers which is likely to push corporates to imbibe a no default culture. This will also lead to early identification and professional management of stressed companies. Domestic and foreign lenders: The Code protects interests of both domestic and foreign lenders, and unlike earlier regime extends right for initiation of resolution and participation in proceedings to foreign creditors. This will allow foreign lenders to take action against companies defaulting in external borrowings/convertible bonds. Time bound process: The time bound resolution process under the Code is expected to benefit not just the creditor and debtor companies but also incentivise overall economy with fast redeployment of capital for productive resources. Order of priority: In contrast with the earlier regime, the Code makes a significant change by giving unsecured creditors priority over dues such as taxes in the priority chain of repayment. Recovery of tax dues beyond two years old will now have last priority. This is also intended to promote alternative sources of finance and consequent deepening of bond market in India. Precedence: While it has been sufficiently developed and the institutional framework to support the implementation of the Code is in place, first few cases will set precedent on future effectiveness of the legislation.

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10 5 Accounting for extinguishment of a financial liability with an equity instrument This article aims to: Illustrate the accounting treatment for a debt for equity swap and for reclassification of a financial liability into equity. An issuer of a financial instrument is required to classify it on initial recognition as a financial liability or an equity instrument under Ind AS 32, Financial Instruments: Presentation based on its contractual terms. The terms of a financial liability may be renegotiated such that an issuer either settles the liability by issuing its own equity instruments or amends the contractual terms resulting in its reclassification as an equity instrument. Ind AS 32 requires an issuer (borrower) to reclassify a financial liability as equity from the date the instrument has all the features of an equity instrument or vice versa. Accordingly, when an entity amends the contractual terms of a financial instrument (being a financial liability or equity instrument), the entity should assess the requirement for reclassification of such a financial instrument as a financial liability or an equity instrument. Appendix D (Extinguishing Financial Liabilities with Equity Instruments) to Ind AS 109, Financial Instruments specifies the accounting treatment when an entity issues equity instruments to a creditor of the entity to extinguish all or part of a financial liability. This transaction is referred to as a debt for equity swap. In this article, we illustrate the accounting treatment on renegotiation/restructuring of two financial liabilities. Key terms of the financial instruments X Limited (the company) is an Indian company operating in the construction sector. Due to recent losses that have been incurred and reduced forecasts of cash inflows, the company has entered into renegotiations with its lenders and investors for restructuring certain financial instruments. The company has reached an agreement with its lenders/investor to restructure a term loan and preference shares as on 31 March Following is a summary of the original and modified terms of two financial instruments.

11 6 Table 1: Key terms of the financial liabilities on 31 March 2017 Particulars Term loan 100, per cent cumulative redeemable preference shares Carrying amount of loan/preference shares INR60,000,000 INR9,892,640 Interest rate 11 per cent per annum (effective interest rate) 10.5 per cent per annum cumulative distribution Original maturity date 31 March March 2020 Fair value of the loan/preference shares INR55,000,000 INR9,076,353 Restructured terms The lenders have agreed to accept 3,200,000 equity shares (face value of INR10 per share) as payment towards extinguishment of 60 per cent of the term loan. For the balance 40 per cent, the lender has extended the term of the loan by two years at a lower interest rate of 6.5 per cent per annum. The remaining loan is now repayable on 31 March Conversion of the cumulative preference shares into 6 per cent non-cumulative, compulsorily convertible preference shares. The dividends are payable at the discretion of the company. Each preference share will be converted into 10 equity shares on maturity. Fair value of the new liability INR17,150,000 NA Fair value of the equity instruments issued INR40,000,000 (INR 12.5 per share) INR11,000,000 * (Source: KPMG in India s analysis, 2017) *In this illustration, as part of restructuring, the company has agreed to exchange the redeemable preference shares held by investors with equity instruments that have a higher fair value on the date of modification. This is intended to compensate the investors for giving up their right to return of capital in exchange for a greater equity stake. However, in other scenarios, borrowers that are in financial distress may be unable to provide equity instruments with an equivalent fair value in exchange for their financial liability to lenders/investors. Accounting issue The company is required to determine the appropriate accounting treatment under Ind AS for the following: Partial extinguishment of the term loan by issuance of equity shares and modification of the terms of the remaining loan and Change in the contractual terms of the preference shares issued by the company to its investors.

12 7 Accounting guidance Figure 1 illustrates the accounting guidance provided in Ind AS 109 (including in Appendix D of Ind AS 109) on accounting for extinguishment of a financial liability by issuance of equity instruments: Figure 1: Extinguishment of financial liability with equity instruments under Ind AS 109 Yes Are equity instruments issued to fully extinguish a financial liability? No No Has the balance amount of the loan been modified? Yes Allocate the consideration paid between Can the fair value of the equity instruments be measured reliably? Part of the loan which has been extinguished Part of the loan which has been modified Yes Extinguish original liability and recognise a new liability at fair value Do the change in terms result in a substantial modification Yes Derecognise extinguished loan and recognise difference between the fair value of equity shares and the carrying amount of the loan as gain/loss No Derecognise extinguished loan and recognise difference between the fair value of the financial liability derecognised and the carrying amount of the loan as gain/loss No Adjust carrying amount of the original financial liability (Source:Insights into IFRS, 13th edition, 2016/17 and KPMG in India s analysis, 2017) Analysis Term loan As mentioned above, 60 per cent of the term loan liability has been extinguished and the remaining 40 per cent has been modified by extending the term by two years and reducing the interest rate for the remaining term to 6.5 per cent per annum. The company has issued 3.2 million equity shares (fair value of INR12.5 per share, i.e INR40 million) to the lender for restructuring the liability. The equity shares are issued towards extinguishment of 60 per cent of the loan as well as modification of the terms for the remaining 40 per cent. While the aggregate fair value of the equity shares issued to the lender is INR40 million, the company is required to estimate the shares issued towards the portion of the loan that has been extinguished and the shares issued as consideration for modifying the terms of the remaining loan. This is determined with reference to the fair value of the portion of the loan that has been extinguished. The fair value of entire loan on the date of restructuring was INR55 million. Therefore, the fair value of the extinguished portion of the loan is INR33 million (INR55 million *60 per cent). The carrying amount of the extinguished portion of the loan is INR36 million (INR60 million *60 per cent). The company should recognise the following accounting impact on extinguishment of the loan as on 31 March 2017.

13 8 Date Accounting entry Amount in INR 31 March 2017 On extinguishment of 60 per cent of the loan Term loan liability Equity Gain on extinguishment of loan (P&L) (Source: KPMG in India s analysis, 2017) Dr 36,000,000 Cr 33,000,000 Cr 3,000,000 The balance equity shares, with a fair value of INR7 million (INR40 million INR33 million) are considered to have been issued as consideration towards modification of the remaining loan (carrying amount of INR24 million). The company is required to assess if the modification of terms of the remaining loan is substantial in order to determine if this portion should also be derecognised. This is determined by comparing the carrying amount of the remaining loan with the net present value of the modified cash flows (discounted at the original effective interest rate). This difference amounts to 19 per cent of the original carrying amount or amortised cost indicating that the modification is substantial. The company should therefore derecognise this portion of the original loan liability and recognise a new financial liability at its fair value, i.e. INR15 million as mentioned above. The difference between the carrying amount and the consideration paid (fair value of equity shares issued and new loan liability) should be recognised in the statement of profit and loss as a modification gain or loss. Following is the accounting entry to be recognised on modification: Date Accounting entry Amount in INR 31 March 2017 On modification of the remaining 40 per cent of the loan Term loan liability Loss on modification Equity New term loan liability (Source: KPMG in India s analysis, 2017) Dr 24,000,000 Dr 150,000 Cr 7,000,000 Cr 17,150,000 Preference shares In accordance with the original terms, the preference shares were cumulative and redeemable in nature and were therefore classified as a financial liability. Based on the revised terms the preference shares are non-redeemable with a discretionary dividend component and are mandatorily convertible into a fixed number of equity shares of the company. This indicates that the preference shares would be classified as an equity instrument of the company after the change in contractual terms. We consider that the change in classification of the preference shares from a financial liability to an equity instrument due to a change in contractual terms is, in substance, an extinguishment of the financial liability by issue of equity instruments. Therefore, this should be accounted for on the basis of the guidance in Appendix D of Ind AS 109. The financial liability should be derecognised and the resulting gain or loss, being the difference between the carrying amount of the financial liability and the fair value of equity instruments issued should be recognised in profit or loss. The carrying amount of the preference shares (financial liability) on the date of modification in terms is INR9,892,640 and the fair value of the preference shares (equity instruments) based on the amended contractual terms is INR12,500,000. The company should therefore recognise the following accounting entry:

14 9 Date Accounting entry Amount in INR 31 March 2017 On amendment of the contractual terms of the preference shares Preference share liability Loss on derecognition Equity (preference shares) Dr 9,892,640 Dr 1,107,360 Cr 11,000,000 (Source: KPMG in India s analysis, 2017) Consider this. In a debt for equity swap, identifying the part of the liability extinguished and the part that remains outstanding (as well as allocation of consideration received to both) requires judgement. While a simple allocation method based on the change in the nominal amount of the financial liability may be appropriate in some circumstances, it could also lead to unreasonable results, particularly if the interest payable on the remaining portion of the loan has been increased. The guidance on derecognition of a financial liability, including the guidance on accounting for a debt for equity swap, would not apply to issuance of equity instruments to settle a financial liability in accordance with its original contractual terms. For example, conversion of a convertible bond into equity shares in accordance with the original conversion terms results in derecognition of the liability and recognition of the equity instrument at the carrying amount of the liability, with no gain or loss being recognised. Apart from a change in the contractual terms, reclassification between equity and financial liability may also arise on a change in the effective terms of an issued instrument. This may occur when certain contractual provisions become effective or cease to be effective due to factors such as the passage of time, occurrence of contingent events, change in the group structure of an entity, etc. We consider that the reclassification of an instrument from financial liability to equity due to a change in effective terms may be recognised by analogy to Appendix D of Ind AS 109 (similar to the accounting treatment of a debt for equity swap). Alternatively, the reclassification may be accounted in a manner similar to that of conversion of a convertible instrument in accordance with its original terms.

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16 11 Consolidated financial statements requirements of the Companies Act, 2013 This article aims to: Provide updated requirements of the Companies Act, 2013 (2013 Act) relating to the preparation and filing of the Consolidated Financial Statements (CFS) by a company Highlight the related key provisions prescribed by the Securities and Exchange Board of India (SEBI). Several companies in India are growing in size and complexity. Many medium to large companies now have investments in subsidiaries, associates or joint ventures. From an investor s perspective, it is therefore, not only important to know the performance of the legal entity in which they have invested but also of the entire economic entity. The true value of the group can be better evaluated only if the management prepares and presents CFS. Accordingly, the 2013 Act mandates that the Board of Directors (BOD) of every company are required to lay financial statements (stand-alone and CFS) prepared for every financial year at every Annual General Meeting (AGM) of the company. The CFS would be prepared by a company including unlisted company that has one or more subsidiaries. Previously, SEBI required only listed companies to prepare CFS. A company would prepare CFS in addition to the stand-alone financial statements and the Ministry of Corporate Affairs (MCA) has clarified that Schedule III to the 2013 Act does not envisage that a company while preparing its CFS should repeat the disclosures made by it under the stand-alone financial statements. In the CFS, the company would need to give all disclosures relevant to CFS only 1. The 2013 Act requires that CFS should be prepared even for companies who do not have any subsidiary(ies) but only have associates and/or joint ventures. Additionally, Ind AS 110, Consolidated Financial Statements also mandates that CFS should be prepared by parent that does not have subsidiary but has associates and joint ventures. However, AS 21, Consolidated Financial Statements did not require a company with no subsidiaries but with associates and joint ventures to prepare CFS. Accordingly, on 30 March 2016, MCA amended AS 21 to ensure that there is no inconsistency between the 2013 Act and Accounting Standards (AS). Therefore, AS 21 (amended) too requires a company that does not have a subsidiary but has an associate and/or joint venture to prepare CFS MCA notification dated 14 October MCA notification dated 30 March 2016.

17 12 Requirements prescribed by SEBI Financial results to be submitted: Following financial results are to be submitted as per SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations): Quarterly and year-to-date stand-alone/consolidated financial results (in case of equity listed companies): Every equity listed company should submit quarterly/year-to-date stand-alone financial results to the stock exchange. These quarterly and year-to-date financial results need to be either audited or limited reviewed. Additionally, an equity listed company with subsidiaries could submit consolidated quarterly/ year-to-date financial results along with the stand-alone financial results. A listed entity should intimate to the stock exchange, whether or not it opts to additionally submit quarterly/ year-to-date consolidated financial results in the first quarter of the financial year and this option should not be changed during the financial year. In case of change of option, comparatives for the previous year in accordance with the option exercised for the current financial year to be given. Half-yearly financial results (in case of debt-listed companies): Debt listed companies are required to prepare and submit audited/unaudited financial results on a half-yearly basis. Unaudited financial results are to be accompanied by limited review report. Further, if the debt listed company opts to submit unaudited financial results for the last halfyear accompanied by limited review report by the auditors, audited financial results for the entire financial year should also be submitted as soon as they are approved by BOD. Annual audited consolidated results (in case of equity as well debt listed companies): Listed companies are also required to submit annual audited standalone financial results and annual audited consolidated financial results along with the audit report and Statement on Impact of Audit Qualifications (applicable only in case of an audit report with modified opinion) as per the Listing Regulations. In case of an audit report with an unmodified opinion, a declaration of the fact should be submitted by the company to the stock exchange while publishing the results. Companies following Ind AS: In the first year of Ind AS implementation, SEBI has provided certain relaxations to listed (equity or debt) companies falling under both phase I and II of the Ind AS road map to facilitate smooth transition to submit their financial results prepared on the basis of the Ind AS 3. SEBI has provided following relaxations for: Equity listed companies Extension of timelines for reporting of financial results for the quarter ended 30 June and 30 September by one month Relaxation for the formats for disclosing financial results by dropping the requirements to present balance sheet as on 31 March 2016 and quarter ended 31 March 2016 Aligned the format for the balance sheet presentation with Schedule III to the 2013 Act for the half-year ended 30 September 2016 and year ending 31 March Also aligned the format for the statement of profit and loss for the period ending 31 March 2017 with the format prescribed in Schedule III to the 2013 Act No requirement for audit or review of comparatives for the quarter ended 30 June 2016 and 30 September Similarly no audit or limited review is required for companies that opts to provide Ind AS comparatives for the year ended 31 March 2016 along with the quarter ended 30 June 2016 and 30 September However, the listed company is required to provide adequate disclosures about the fact the said comparative results have not been audited/limited reviewed and the management has exercised due diligence to ensure that the comparative results provide a true and fair view of its affairs Companies are required to get their comparatives either audited/reviewed by the auditors for the quarter ended 31 December Similarly, if a company opts to provide Ind AS compliant financial results for the period ended 31 March 2016 along with the quarter ended 31 December 2016, then such Ind AS comparatives would be required to be either reviewed or audited by the auditors. Debt listed companies (For the first half year ended 30 September 2016) Extension of timeline for reporting of financial results for the quarter ended 30 September 2016 by one month Comparative half-yearly and annual results are not required to be audited/ limited reviewed. However, the listed company is required to provide adequate disclosures about the fact the said comparative results have not been audited/limited reviewed and the management has exercised due diligence to ensure that the comparative results provide a true and fair view of its affairs. 3. SEBI circular no. CIR/CFD/FAC/62/2016 dated 5 July 2016 and CIR/IMD/ DF1/69/2016 dated 10 August 2016.

18 13 Companies exempt from preparation of CFS Initially, the way 2013 Act was written there was no exemption available for companies from preparing CFS unlike International Financial Reporting Standards (IFRS). Companies in India were required to prepare CFS even for intermediate holding companies notwithstanding the fact that ultimate parent company prepares CFS that are publicly available. This would have led to preparation of CFS at multiple levels of companies with multi-layered structures. The Companies (Accounts) Rules (Accounts Rules) exempt the following companies from the preparation of CFS: An intermediate parent company which meets the following conditions 4 : It is a wholly-owned subsidiary, or is a partially-owned subsidiary of another company and all its other members (including those not otherwise entitled to vote) have been intimated in writing and for which the proof of delivery of such an intimation is available with the company, do not object to the company not presenting CFS It is a company whose securities are not listed or are not in the process of listing on any stock exchange, whether in India or outside India, and Its ultimate or any intermediate holding company files CFS with the Registrar of Companies (ROC) which are in compliance with the applicable AS. These conditions are similar to the conditions specified under Ind AS 110. However, the Rules do not grant an exemption to the partially-owned companies or wholly-owned subsidiaries of foreign companies in India. Requirements prescribed under the Listing Regulations Every listed company is mandatorily required to prepare CFS under the Listing Regulations (there is no exemption for an intermediate-listed company). Definition of a subsidiary, associate, joint venture The definition of what constitutes a subsidiary, associate or joint venture are not aligned between current AS/Ind AS and the 2013 Act. For instance: Subsidiary As per AS 21, subsidiary means an enterprise that is controlled by another enterprise (known as the parent), where control is defined to mean: The ownership, directly or indirectly through subsidiary(ies), of more than one-half of the voting power of an enterprise or Control of the composition of BOD in the case of a company or of the composition of the corresponding governing body in case of any other enterprise so as to obtain economic benefits from its activities. As per Ind AS 110, a subsidiary is an entity that is controlled by another entity. However, as per the 2013 Act, subsidiary company or subsidiary in relation to any other company (i.e. the holding company), means a company in which the holding company: Controls the composition of BOD or Exercises or controls more than onehalf of the total share capital either at its own or together with one or more of its subsidiary companies. Provided that such class or classes of holding companies as may be prescribed should not have layers of subsidiaries beyond such numbers as may be prescribed. The area of conflict between AS/Ind AS is the term one-half of the total share capital used in the 2013 Act and it includes both equity and convertible preference share capital. Both AS/Ind AS define a subsidiary using the voting share capital. Associate As per AS 23, Accounting for Investments in Associates in Consolidated Financial Statements, an associate is defined as an enterprise in which the investor has significant influence and which is neither a subsidiary nor a joint venture of the investor. Under Ind AS 28, Investments in Associates and Joint Ventures, an associate is an entity over which the investor has significant influence. However, as per the 2013 Act, an associate company in relation to another company, means a company in which that other company has a significant influence (control of at least 20 per cent of total share capital, or of business decisions under an agreement), but which is not a subsidiary company of the company having such influence and includes a joint venture company. Additionally, with a view to bring more clarity on the consideration of relationship for being an associate company, MCA through a notification 5 clarified that shares held by a company in another company in a fiduciary capacity should not be counted for the purpose of determining the relationship of an associate company. As mentioned above, the 2013 Act considers 20 per cent of the total share capital (which includes both equity and convertible preference share capital) to determine an associate company. This would be different from the voting share capital criteria considered by the AS/Ind AS. Joint venture As per AS 27, Financial Reporting of Interests in Joint Ventures, a joint venture is a contractual arrangement whereby two or more parties undertake an economic activity, which is subject to joint control. Under Ind AS 28 a joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. While under the 2013 Act, a joint venture does not have a specific definition and is included within the definition of an associate. 4. Companies (Accounts) Amendment Rules, 2016 dated 27 July 2016 issued by the MCA. 5. MCA notification dated 25 June 2014

19 14 Amendment The MCA addressed the concern arising out of the various definitions and accordingly, amended the Accounts Rules 6 to provide that the financial statements of a company should be in a form specified in Schedule III to the 2013 Act and should comply with AS or Ind AS, as applicable. Therefore, the items contained in the financial statements should be prepared in accordance with the definitions and other requirements as specified in the AS/Ind AS, as the case may be. Meaning of subsidiary, associate and joint venture as per the Listing Regulations As per the Listing Regulations: A subsidiary carries the same meaning as defined in the 2013 Act. An associate means any entity which is an associate under the 2013 Act or under the applicable AS. However, this definition shall not be applicable for the units issued by mutual fund which are listed on a recognised stock exchange(s) for which the provisions of the SEBI (Mutual Funds) Regulations, 1996 shall be applicable. Disclosures Financial statements (including CFS) of a company should be prepared in accordance with Schedule III to the 2013 Act (Section 129(1)) and should be approved by BOD and shareholders of the company (Section 134(1) of the 2013 Act). Additionally, following statements should be attached to the financial statements: An auditors report Report by BOD which inter alia, includes Directors Responsibility Statement. Further, Rule 12(1) of the Accounts Rules require that every company should file the stand-alone financial statements with the ROC together with Form AOC-4 and CFS with Form AOC-4 CFS. Statement containing the salient feature of the financial statements of a company s subsidiary(ies), associate company(ies) and joint venture(s) should be prepared in Form AOC-1 as per Rule 5 of the Accounts Rules and attached to the financial statements while filing from AOC-4. As mentioned above, a company preparing CFS would not repeat the disclosures made by it under the stand-alone financial statements and prepare CFS with all disclosures relevant to CFS only. Requirements prescribed by SEBI The Listing Regulations prescribe following with respect to: Quarterly and year-to-date financial results (in case of equity listed companies): Quarterly and year-to-date results to be submitted within 45 days of the end of each quarter to the recognised stock exchange(s). However, in the first year of adoption of Ind AS, extension of timelines for reporting of financial results for the quarter ended 30 June and 30 September by one month. Half yearly financial results (in case of debt listed companies): To be submitted within 45 days from the end of the halfyear to the recognised stock exchange(s). However, in the first year of adoption of Ind AS, extension of timeline for reporting of financial results for the half-year ended 30 September by one month. Annual audited financial results (in case of equity as well as debt listed companies): Annual audited (stand-alone and/ or consolidated) financial results should be submitted within 60 days from the end of the financial year along with the audit report and the statement on impact of audit qualifications (applicable only in case of modified opinion). Recommendation of the Company Law Committee (CLC) and Companies (Amendment) Bill, 2016 (Amendment Bill) CLC: Following were the proposals of the CLC in its report dated 1 February 2016: The CLC proposed that the term total share capital (i.e. equity and convertible preference share capital) should be replaced with the term total voting power (i.e. equity share capital) as the basis for deciding holding/ subsidiary relationship. Additionally, it recommended that definition of an associate as significant influence means control of at least 20 per cent of the total voting power, or control of or participation in taking business decisions under an agreement. Further, the term joint venture should be assigned the same meaning as under Ind AS 28. The provisions with regard to CFS should be reviewed with respect to attachment of stand-alone financial statements of foreign subsidiaries. However, such an attachment would not be required if the foreign subsidiaries consolidate financial statements as per the law of the jurisdiction in which they are established, and such financial statements are placed on the website in the statutory format. No exception would be provided in other cases. Amendment Bill: Following changes have been incorporated in the Amendment Bill: The Amendment Bill accepted the recommendations of the CLC and modified the definitions of associate company, subsidiary, joint venture and holding company. Accordingly, the revised definitions are as follows: Subsidiary: The term total share capital (i.e. equity and preference share capital) would be replaced with the term total voting power (i.e. equity share capital) as the basis for deciding holding/subsidiary relationship. 6. MCA notification no. G.S.R. 680(E) dated 4 September 2015.

20 15 Holding company: The definition of company would include any body corporate. This change would widen the scope of the term holding company, by including, body corporates (foreign companies) too. Associate company: Significant influence would mean control of at least 20 per cent of the total voting power, or control of or participation in business decisions under an agreement. Joint venture: The definition would be in accordance with Ind AS 28. Additionally, it proposes to grant relief to unlisted companies in a way that only listed companies having a subsidiary/ subsidiaries would be required to place separate audited accounts in respect of each of its subsidiary on its website (presently, this is required for every company with a subsidiary). In relation to placement of separate audited accounts of overseas subsidiaries, the Bill accepted the recommendation of the CLC and proposes that the attachment of stand-alone financial statements would not be required when such foreign subsidiaries consolidate the financial statements as per the law of the jurisdiction in which they are established and place their financial statements on the website in the statutory format. It further proposes that every company having a subsidiary/subsidiaries would provide a copy of their separate audited/unaudited financial statements, as the case may be, as prepared in respect of each of its subsidiary to any member of the company who asks for it. Consider this. Careful evaluation is required for identifying subsidiaries, associates and joint ventures for presenting CFS. The CFS is also required to be prepared by a company which does not have a subsidiary but has an associate and/or joint venure. Companies should consider applicability of exemptions from preparing CFS provided under the 2013 Act.

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22 17 Oil and gas producing activities Guidance under Ind AS This article aims to: Summarise the principles highlighted in the Guidance Note on oil and gas producing activities and compare it with the Guidance Note issued in Before Indian Accounting Standards (Ind AS) were made mandatory for certain class of companies, all the Indian entities engaged in oil and gas producing activities were following the Guidance Note on Accounting for Oil and Gas Producing Activities, issued by the Institute of Chartered Accountants of India (ICAI) in 2003 (later on revised in 2013) (referred to as GN 2013). This has been the only authoritative literature in India to deal with oil and gas producing activities and there was no specific accounting standard to deal with this area. However, under Ind AS, there is a specific accounting standard, i.e., Ind AS 106, Exploration for and Evaluation of Mineral Resources. It may be noted that unlike GN 2013 which deals with the accounting for all the phases of oil and gas producing activities, i.e., exploration, development and production phases, Ind AS 106 deals only with the accounting for exploration and evaluation phases. Under Ind AS framework, accounting for development and production phases are covered by other Ind AS, primarily, Ind AS 16, Property, Plant and Equipment and Ind AS 38, Intangible Assets. However, these standards only lay down general principles and do not deal specifically for accounting for oil and gas producing activities. The absence of specific guidance in relation to oil and gas activities could lead to divergent practices being followed by different companies. In order to provide guidance in relation to accounting for costs incurred on activities relating to acquisition of interests in properties, exploration, development and production of oil and gas, ICAI recently issued a Guidance Note on Accounting for Oil and Gas Producing Activities for entities to whom Ind AS are applicable (referred to as GN (Ind AS)). It should be noted that GN 2013 would continue to be applicable to entities to whom Ind AS is not applicable.

23 18 Applicability of GN (Ind AS) The GN (Ind AS) comes into effect in respect of accounting periods commencing on or after 1 April 2017; its earlier application is encouraged. The GN (Ind AS) would apply to entities to whom Ind AS is applicable. The GN (Ind AS) contains certain transitional provisions, as below: Entities falling in the phase II of the Ind AS road map (from accounting periods commencing on or after 1 April 2017), the GN (Ind AS) will be applicable from the same date. Therefore, such entities would be required to apply Ind AS read with GN (Ind AS) in their first Ind AS financial statements from the accounting periods commencing on or after 1 April Accordingly, any change in accounting policies by such companies would be governed by Ind AS 101, First-time Adoption of Indian Accounting Standards Entities falling in the phase I of the Ind AS road map (from accounting periods commencing on or after 1 April 2016), the following are the two options: Early adoption of GN (Ind AS), i.e. simultaneously from the date of Ind AS becoming applicable. In such a situation, any change in accounting policy from previous GAAP should be dealt with in accordance with Ind AS 101 Adopt from accounting periods commencing on or after 1 April In such a situation, the entity would have already applied Ind AS 101 in its first Ind AS financial statements covering period commencing on 1 April Therefore, any change in accounting policies, as compared to those adopted in the first Ind AS financial statements, arising due to application of GN (Ind AS) should be accounted for in accordance with Ind AS 8, Accounting Policies, Changes in Accounting Estimates and Errors. Key differences between GN 2013 and GN (Ind AS) The GN (Ind AS) provides guidance on the application of general principles of Ind AS to entities engaged in oil and gas producing activities. In view of this, the provisions of GN (Ind AS) are within the overall Ind AS framework so that there is no inconsistency between the guidance and the general principles laid down by Ind AS. Although the revision of GN in 2013 aligned certain requirements to Ind AS framework, some of the requirements of GN 2013 are not consistent with overall Ind AS framework. Consequently, there are certain significant differences between GN 2013 and GN Ind AS, which are summarised as below: Accounting for costs incurred for oil and gas producing activities Under GN 2013, the accounting for costs incurred for oil and gas producing activities depends on the method followed by the entity. The entity can follow either the Successful Efforts Method (SEM) or Full Cost Method (FCM). However, GN (Ind AS) does not specify these methods. It requires that exploration and evaluation expenditure should be accounted for in accordance with the requirements of Ind AS 106. Accordingly, an entity should determine an accounting policy, specifying which expenditures are recognised as exploration and evaluation assets and which are expensed. The policy of capitalising or expensing takes into consideration the extent to which the type of expenditure can be associated with finding specific mineral resources. The accounting for various costs under GN 2013 and GN (Ind AS) is summarised as below: GN 2013 GN (Ind AS) FCM SEM I Acquisition cost Capitalise Capitalise Capitalise as intangible asset or tangible asset based on its nature II Exploration cost: P Geological and geophysical costs Capitalise Expense P Cost of carrying unproved properties Capitalise Expense P Dry hole/well Capitalise Expense P Dry hole/bottom hole contributions Capitalise Expense P Drilling exploratory/appraisal wells Capitalise Capitalise As per Ind AS 106, to be accounted as per accounting policy adopted by an entity (policy selection considers the degree to which the expenditure can be associated with finding specific mineral resources) P Drilling exploratory-type stratigraphic test wells Capitalise Capitalise III Development costs Capitalise Capitalise Capitalise IV Production costs Expense Expense Expense (Source: KPMG in India s analysis, 2017)

24 19 Level of aggregation- concept of cost centre: Under GN 2013, for level of aggregation of costs incurred for applying depletion and impairment assessment is cost centre. If an entity is applying SEM, a cost centre should not be larger than a field. In case an entity is applying FCM, the cost centre should not be smaller than a country. This aggregation is used for all the three phases, i.e., exploration, development and production. On the other hand, GN (Ind AS) does not have a concept of a cost centre. For exploration and evaluation assets, an entity determines policy for level of aggregation provided that it should not be larger than an operating segment. After exploration/ evaluation phase, field is considered as the unit of account for applying depletion and impairment related requirements. Depletion: Both GN 2013 and GN (Ind AS) require the use of Unit Of Production (UOP) method. The GN 2013 requires the use of proved reserves for depleting acquisition cost and for other costs, the reserve base is dependent on whether the entity is following FCM or SEM. For an entity following FCM, proved reserves should be used while for an entity following SEM, proved developed reserves should be used. It may be noted that the use of proved reserves requires estimation of future costs to develop the proved reserves. The GN (Ind AS) also considers proved reserves for depletion of acquisition costs; however, for other costs, requires the use of proved developed reserves. Therefore, it does not involve estimation of future costs. Impairment assessment: Besides the level of aggregation, as discussed above, another significant difference is that GN 2013 requires the use of proved and probable reserves for estimating future cash flows for impairment assessment. On the other hand, GN (Ind AS) requires the use of up to proved and probable reserves. Therefore, entities can carry out impairment assessment by using proved developed reserves or proved reserves also. Functional currency: The GN 2013 does not provide any guidance with regard to determination of functional currency. The GN (Ind AS) provides guidance on this aspect since entities involved in oil and gas producing activities carry out significant transactions in USD. The GN (Ind AS) provides guidance that in such cases, merely the fact that the transactions are denominated in a currency which may be different from the currency of the primary economic environment of transacting parties may not necessarily be the factor to determine the functional currency since such a currency may be used due to it being a widely traded currency and may not be reflective of a currency of the primary economic environment in which transacting parties operate. In such cases, determination of functional currency involves judgement based on consideration of all the factors specified in Ind AS 21, The Effects of Changes in Foreign Exchange Rates in the context of specific facts and circumstances. Form of joint arrangements: Unlike AS 27, Financial Reporting of Interests in Joint ventures, Ind AS 111, Joint Arrangements, requires an entity to apply significant judgement when assessing whether a joint arrangement is a joint operation or a joint venture. In this regard, GN (Ind AS) provides guidance that, subject to evaluation of specific facts and circumstances, generally, in the Indian context, unincorporated joint ventures constituted under the production sharing contracts are likely to be in the form of joint operations. Conclusion Accounting for oil and gas producing activities has always been a subjectmatter of discussion at international and national level. Internationally, in the absence of specific guidance under International Financial Reporting Standards (IFRS), divergent practices are prevalent in many areas of accounting for oil and gas producing practices. In Indian context, issuance of GN (Ind AS) should be useful in bringing about consistency in practices by Ind AS entities engaged in oil and gas producing activities.

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26 21 Tax effects of intra-group transactions in consolidated financial statements This article aims to: Highlight the deferred tax implications of intra-group transactions in consolidated financial statements including the undistributed profits of a component in a group under Ind AS. Introduction Companies often sell or transfer tangible assets such as inventory and fixed assets as well as other assets such as goodwill of acquiree and intangible assets from one company to another in a group that may have consequential tax benefits arising either from an asset that had already been recognised in financial statements or from an asset that was not previously recognised. In the preparation of Consolidated Financial Statements (CFS) of a group, the intra-group transactions including profits and losses resulting from intra-group transactions are eliminated, though such transactions may have bearing on the tax expense. In respect of companies to which Ind AS is not applicable, with regard to the preparation of CFS, the principles of AS 21, Consolidated Financial Statements are applicable. As per the principles of AS 21, the amounts of tax expense, in the CFS, is simply, a line by line aggregation of the amounts of the current tax and deferred tax expense appearing in the separate financial statements of the parent and its subsidiaries. Current tax amount is not affected by the intra-group eliminations since it represents a transaction with the tax authorities. Additionally, there is no difference in accounting between the existing Indian GAAP (Accounting Standards (AS)) and Ind AS in so far as CFS are concerned. However, with regard to deferred tax adjustments, recognition of deferred taxes under Ind AS is significantly different as compared to the existing ASs. Such tax adjustments also include the impact of tax differences arising out of undistributed profits of a subsidiary, associate, branch or joint arrangement in case of CFS prepared under Ind AS.

27 22 Intra-group transactions: Recognition and measurement principles of Ind AS The preparation of CFS of a parent is governed by Ind AS 110, Consolidated Financial Statements. One of the consolidation adjustments made by companies is that intra-group transactions and balances i.e. intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between entities of a group are eliminated in full on consolidation. For example, sales, purchases, unrealised profits or losses included in inventory and fixed assets are fully eliminated. The elimination of profits and losses resulting from intra-group transactions may give rise to either taxable or deductible temporary differences as per Ind AS 12, Income Taxes, because there is no corresponding change in the carrying amount of the assets or liabilities in the CFS. When assets or liabilities are transferred between entities in a group, CFS are affected by the recognition of deferred tax when the intra-group transaction Alters the tax base of assets or liabilities Changes the expected manner of recovery or settlement of the tax when the assets or liabilities are sold to a third party outside the group or Affects recognition of deferred tax assets and recoverability thereof. Let us look at two examples to understand the recognition and measurement principles of Ind AS. Example 1 A Ltd sells inventory to its subsidiary B Ltd for INR100. This results in a profit of INR60 in A s separate financial statements. Assuming a corporate tax rate of 30 per cent, A Ltd pays current tax of INR18 on the profit on sale of inventory. At the time of consolidation, the profit of INR60 is reversed against the carrying amount of the inventory of INR100 and thus the carrying amount of the inventory on consolidation is INR40. The current tax of INR18 is reflected in CFS of A Ltd since this is a transaction with the tax authorities. The question is, how the intragroup transaction affects the computation of deferred tax in CFS. The sale of inventory between the two companies is a taxable event that changes the inventory s tax basis. Assuming that the carrying amount of the inventory for tax purposes is INR100, from A s financial statements perspective, a deductible temporary difference of INR60 is recognised as a deferred tax asset in CFS subject to the recognition criteria for deferred tax assets i.e. reversal of temporary differences in the foreseeable future through availability of sufficient taxable profits. The deferred tax asset would be recovered when the inventory is sold by B Ltd to a third party outside the group. Deferred tax on temporary differences arising from intra-group transfers of assets or liabilities is usually measured at the tax rates and laws applicable to the transferee company when such assets or liabilities are sold or transferred. The measurement of the deferred tax is also impacted when the parent and subsidiary are not resident in the same tax jurisdiction. Example 2 X Ltd has an internally generated intangible asset which is not recognised in its separate financial statements. X Ltd sells this asset to its subsidiary, Y Ltd for INR1 million. X Ltd earns a profit of INR1 million on the sale and pays a current 30 per cent i.e. INR0.3 million to the income tax authorities. Y Ltd is entitled to claim a tax depreciation of 25 per cent on the intangible asset acquired for INR1 million. The tax effects of this intra-group transaction in the separate financial statements of Y Ltd and the CFS of X Ltd is as follows: Accounting in the separate financial statements of Y Ltd: Y Ltd has acquired an intangible asset for INR1 million with a tax base of the same amount. Accordingly, there is no temporary difference and hence, no deferred tax is accounted for in the separate financial statements of Y. Accounting in CFS of X Ltd: In CFS of X Ltd, the sale of the intangible asset from X to Y would be eliminated on consolidation and therefore, there would be no carrying amount of such intangible asset in CFS. A current tax of INR0.3 million paid by X Ltd to the tax authorities would be reflected in CFS. The intangible asset does not have a tax base in CFS. Rather, its tax base is linked to the intangible asset recognised in the separate financial statements of Y Ltd. Based on the principles of Ind AS 12, there arises a deductible temporary difference of INR1 million, being the difference between the carrying value of the intangible asset (Nil in the consolidated balance sheet) and its tax base i.e. INR1 million. This results in a deferred tax asset of INR 0.25 million (considering the tax rate applicable to Y Ltd.) subject to the general recognition criteria for deferred tax assets. Overall, in CFS, a net tax expense of INR 0.05 million is reflected i.e. INR 0.3 million current tax expense less INR 0.25 million deferred tax income. Undistributed profits of the investee: Factors for consideration as per Ind AS Temporary differences also arise when undistributed profits in the investee increase the parent or investor s investment in the investee to above the tax cost or reduce the carrying amount of the investment to below the tax cost due to an impairment or when the carrying amount of the investment changes owing to a change in foreign exchange rates where the parent or investor and investee are based in different countries. The key principles of Ind AS 12 enunciate that the tax effects on taxable temporary differences in respect of investments in subsidiaries, branches, associates and joint arrangements are not recognised as a deferred tax liability in CFS if two conditions are met i.e: the parent or investor is able to control the timing of the reversal of the temporary differences and it is probable that the temporary differences will not reverse in the foreseeable future. However, the parent or investor is required to disclose the amount of temporary differences not recognised in CFS. Conversely, the tax effects on deductible temporary differences in respect of investments in subsidiaries, branches, associates and joint arrangements are recognised as a deferred tax asset in the CFS if both conditions are met i.e.:

28 23 when it is probable that the temporary differences will reverse in the foreseeable future and sufficient taxable profit will be available against which such temporary differences can be utilised. The relevant factors that merit consideration by the parent or investor to determine whether or not it is able to control the timing of the reversal of the temporary differences include its ability to demonstrate that the undistributed earnings of the investee would continue to be reinvested for the foreseeable future through formal board resolutions, communication to shareholders and future management plans for reinvesting the funds, evaluation of remittance restrictions, if any, imposed by the government and tax consequences thereof. In cases where the parent or investor has the ability to recover the carrying amount of its investment in its investee, management should evaluate the deferred tax implications based on the manner in which the investment is expected to be recovered, for example either through dividends or by disposing off the investment. Other requirements In addition to the accounting principles of Ind AS 110 and Ind AS 12, ICAI recently issued a Guidance Note on Audit of CFS (Revised 2016). It is an authoritative guidance which casts additional responsibility on management and auditors as following: Understand of the group structure and the group-wide controls to monitor, control, reconcile, and eliminate intragroup transactions Assess the appropriateness and completeness of consolidation adjustments including the elimination of intra-group transactions Evaluate and verify the adjustments relating to deferred tax on account of temporary differences arising out of elimination of profits and losses resulting from intra-group transactions and undistributed profits of a component in a group i.e. subsidiary, branch, associate and joint arrangement Provide management representations on the consolidation adjustments including the tax effects thereof. Consider this. The elimination of profits and losses resulting from intra-group transactions may give rise to either taxable or deductible temporary differences as per Ind AS 12 because there is no corresponding change in the carrying amount of the assets or liabilities in the CFS. Temporary differences arise when undistributed profits of subsidiaries, branches, associates and joint arrangements investee that increase the parent or investor s investment in the investee to above the tax cost or reduce the carrying amount of the investment to below the tax cost or when the carrying amount of the investment changes owing to a change in foreign exchange rates where the parent or investor and investee are based in different countries. The requirements of the Guidance Note on Audit of CFS (Revised 2016) issued by ICAI should be followed by the management and auditors.

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30 25 Regulatory updates The Finance Bill, 2017 a financial reporting perspective With the adoption of Indian Accounting Standards (Ind AS) that are converged with International Financial Reporting Standards (IFRS), as per the road map laid down by the Ministry of Corporate Affairs (MCA), the companies covered in the first phase of this transition to Ind AS are mandatorily required to prepare financial statements as per Ind AS from 1 April 2016 with the transition date as 1 April The introduction of Ind AS necessitated the need for horizontal equity from a taxation point of view, for companies following Ind AS. To meet this objective, the Central Board of Direct Taxes (CBDT) formed, Minimum Alternate Tax (MAT) - Ind AS Committee (the Committee) in 2015, and the Committee proposed a framework for computation of book profits for Ind AS compliant companies (the Framework) for the computation of book profit for the purpose of levy of MAT under Section 115JB of the Income-tax Act, 1961 (IT Act) vide its report dated 18 March This was followed up by a second report, which was released by CBDT on 5 August 2016, announcing certain modified recommendations/suggestions on select matters submitted by the committee. The comments/suggestions received in respect of the first and second interim reports were examined by the Committee. After taking into account all the suggestions/comments received, the Committee submitted its final report on 22 December New development On 1 February 2017, the Finance Minister presented the Finance Bill, 2017 (the Bill) which contains a number of proposals. The Bill included proposals relating to following: Computation of book profit for Ind AS compliant companies for the purpose of levy of MAT under Section 115JB of the IT Act Change in base of cost inflation index from 1 April 1981 to 1 April 2001 MAT credit allowed to be carried forward to 15 Assessment Years (AYs). Overview of the proposals in the Bill in relation to MAT (Proposed to apply from AY ) The Bill proposes a separate formulae for computation of book profit for companies that prepare financial statements under Ind AS. These proposals should be read together with the existing provisions for computation of MAT under Section 116JB of the IT Act, in particular the

31 26 adjustments discussed in Explanation 1 to sub-section 2. When computing book profits from the Ind AS profit, it proposes the following: No further adjustments should be made to the net profits of Ind AS compliant companies, other than those specified in Section 115JB of the IT Act Certain items included in Other Comprehensive Income (OCI), that are permanently recorded in reserves and never reclassified into the statement of profit and loss, be included in book profits for MAT at an appropriate point in time Certain adjustments relating to values of assets and liabilities transferred in a demerger to be made by both the demerged company as well as the resulting company Certain adjustments recorded in retained earnings (other equity) on first-time adoption of Ind AS, that would never subsequently be reclassified into the statement of profit and loss should be included in book profits (for the purpose of levy of MAT) in a deferred manner. Adjustments to book profits for MAT computation can be grouped into following two categories: Adjustments relating to annual Ind AS financial statements Adjustments relating to first-time adoption of Ind AS. For detailed analysis, refer KPMG in India s IFRS Notes dated 7 February (Source: The Finance Bill, 2017 introduced on 1 February 2017) SEBI advises listed companies to adopt integrated reporting voluntarily On 2 September 2015, Securities and Exchange Board of India (SEBI) notified the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations). Clause 34(2)(f) of the Listing Regulations requires mandatory submission of Business Responsibility Report (BRR) for top 500 listed entities based on market capitalisation (calculated as on 31 March of every year). The BRR should describe the initiatives taken by the companies from an environmental, social and governance perspective, in the format as specified by SEBI from time to time. Integrated reporting The International Integrated Reporting Council (IIRC) was formed in August 2010 and aims to reduce the gap between current reporting and information needs of investors and other stakeholders through the introduction of the concept of Integrated Reporting (IR). There are now over 750 participants in the IR networks worldwide, with, for example, 180 businesses currently practicing IR in Japan alone. More than 1,000 businesses globally are using it to communicate with their investors and there is increasing interest in IR by pioneers in the public sector. Regulators in countries such as Japan, India and the U.K. are among those taking a greater interest in IR as a route towards achieving more cohesive reporting and promoting financial stability, with the European Commission labelling IR as a step-ahead 1. The IIRC has prescribed the following guiding principles which underpin the preparation of an integrated report, specifying the content of the report and how information is to be presented: Principles Strategic focus and future orientation Connectivity of information Stakeholder relationships Materiality Conciseness Reliability and completeness Consistency and comparability Disclosure of capital Overview An insight into the organisation s strategy and how it relates to an organisation s ability to create value in the short, medium and long term, and its use of and effects on capital should be provided. A holistic picture of the combination, interrelatedness and dependencies between the factors that affect the organisation s ability to create value over time should be shown. An insight into the nature and quality of the organisation s relationships with its key stakeholders, including how and to what extent the organisation understands, takes into account and responds to their legitimate needs and interests should be provided. Information about matters that substantively affect an organisation s ability to create value over the short, medium and long-term should be disclosed. An integrated report should be concise. All material matters, both positive and negative, in a balanced way and without material errors should be included The information in an integrated report should be presented: On a basis that is consistent over time and In a way that enables comparison with other organisations to the extent it is material to the organisation s own ability to create value over time IIRC has categorised the forms of capital as follows: Financial capital Manufactured capital Intellectual capital Human capital Social and relationship capital Natural capital advocate-for-global-adoption

32 27 New development The SEBI issued a circular dated 6 February 2017, advising top 500 listed companies which are required to prepare BRR to adopt IR on a voluntary basis from the Financial Year (FY) While disclosing IR, companies should take note of the following points: Placement of IR: The information related to IR may be provided in the following ways: As part of annual report with a separate section on IR Incorporating in management discussion and analysis, or By preparing a separate report (annual report prepared as per IR framework). In case the company has already provided the relevant information in any other report prepared in accordance with national/international requirement/ framework, it may provide appropriate reference to the same in its integrated report so as to avoid duplication of information. Hosting on company s website: Companies may host the integrated report on their website and provide appropriate reference to the same in their annual report. For detailed analysis, refer KPMG in India s First Notes dated 9 February (Source: SEBI circular SEBI/HO/CFD/ CMD/CIR/P/2017/10 dated 6 February 2017) ICAI issues exposure draft of Schedule III for NBFCs as per Ind AS The MCA notified the Companies (Indian Accounting Standards) (Amendment) Rules, 2016 (Ind AS Rules) on 30 March 2016, which included a road map for implementation of Ind AS by Non-Banking Financial Companies (NBFCs). The NBFCs are required to prepare both consolidated and individual financial statements based on Ind AS in two phases beginning from 1 April 2018 onwards with comparatives for the period ending on or after 31 March New development On 6 February 2017, the Accounting Standards Board (ASB) of the Institute of Chartered Accountants of India (ICAI) issued the Exposure Draft (ED) of the Ind AS compliant Schedule III to the Companies Act, 2013 for NBFCs. Overview of the Ind AS compliant Schedule III for NBFCs Applicability Schedule III will apply to every NBFC as defined in the Ind AS Rules to which Ind AS is applicable in preparation of its financial statements. The provisions of Schedule III will also apply when a company is required to prepare consolidated financial statements, in addition to the disclosure requirements specified under Ind AS. Formats The ED provides formats for the following and sets out the minimum disclosures requirements Balance sheet Statement of profit and loss Statement of cash flows Notes containing information in addition to that which is presented in the financial statements. Other key points The disclosure requirements specified in Schedule III would be in addition to and not in substitution of the disclosure requirements specified in Ind AS or required by the 2013 Act It requires financial statements to disclose all material items The financial statements should contain the corresponding amounts for the immediately preceding reporting period for all items shown including Notes. Such comparatives are not required for the first financial statements presented before NBFC after incorporation Additionally, all the line items and sub-totals should be presented as an addition or substitution on the face of the financial statements when such presentation is relevant to an understanding of NBFC s financial position or performance, or to cater to categories of NBFCs as prescribed by the relevant regulator or sectorspecific disclosure requirements, or when required for compliance with the amendments to the relevant statutes or under Ind AS. The ED sought comments and the last date to provide comments is 6 March For detailed analysis, refer KPMG in India s IFRS Notes dated 13 February (Source: ICAI notification dated 6 February 2017) Companies (Incorporation) Amendment Rules, 2017 On 25 January 2017, MCA issued Companies (Incorporation) Amendment Rules, 2017 which inter-alia revises Form No. INC-11, Certificate of Incorporation to be issued by Registrar of Companies. The amendment is applicable with effect from 30 January (Source: MCA notification dated 25 January 2017) Review of Guidelines on Pricing of Credit The Reserve Bank of India (RBI) through its notification dated 2 February 2017, provided that NBFC Micro Finance Institutions should ensure that the average interest rate on loans sanctioned during a quarter does not exceed the average borrowing cost during the preceding quarter plus the margin, within the prescribed cap. (Source: RBI notification RBI/ /219 dated 2 February 2017) SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2017 Background Regulation 37 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations) provides that the listed entity desirous of undertaking a scheme of arrangement or involved in a scheme of arrangement, should file a draft scheme of arrangement (proposed to be filed before any court or Tribunal under the Companies Act, 1956/2013) with the stock exchange(s) for obtaining observation letter or noobjection letter, before filing such scheme with any court or Tribunal. No scheme of arrangement should be filed with any court or Tribunal unless the listed entity has obtained the observation letter or no-objection letter from the stock exchange(s).

33 28 The listed entity is required to place the observation letter or no-objection letter (valid only for six months from the date of issuance) of the stock exchange(s) before the court or Tribunal at the time of seeking approval of the scheme of arrangement. Once the scheme gets sanctioned by the court or Tribunal, the listed entity should submit the documents to the stock exchange(s) as prescribed by the SEBI and/or stock exchange(s). Amendment SEBI through a notification dated 15 February 2017 inserted a new sub clause to the Regulation 37 of the Listing Regulations which provided that the requirements of Regulation 37 will not be applicable to the draft schemes which solely provide for merger of a wholly-owned subsidiary with its holding company. However, such draft schemes should be filed with the stock exchange(s) for the purpose of disclosure. (Source: SEBI notification no. SEBI/LAD/ NRO/GN/ /029 dated 15 February 2017)

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36 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 ICAI issues exposure draft of Schedule III for NBFCs as per Ind AS Missed an issue of Accounting and Auditing Update or First Notes? Companies (NBFCs). 13 February 2017 On 6 February 2017, the Accounting Standards Board (ASB) of the Institute of Chartered Accountants of India (ICAI) issued the Exposure Draft (ED) of the Ind AS compliant Schedule III to the Companies Act, 2013 for Non-Banking Financial The ED sought comments and the last date to provide comments is 6 March This issue of IFRS Notes provide an overview of the Ind AS compliant Schedule III for NBFCs. MCA issued relaxation for an IFSC company located in an SEZ 17 January 2017 On 2 September 2015, Securities and Exchange Board of India (SEBI) notified the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations). Clause 34(2)(f) of the Listing Regulations requires mandatory submission of Business Responsibility Report (BRR) for top 500 listed entities based on market capitalisation (calculated as on 31 March of every year). The BRR should describe the initiatives taken by the companies from an environmental, social and governance perspective, in the format as specified by SEBI from time to time. New development The SEBI issued a circular dated 6 February 2017, advising top 500 listed companies which are required to prepare BRR to adopt IR on a voluntary basis from the Financial Year (FY) This issue of First Notes provide an overview of the SEBI circular and requiremnets of Integrated reporting. KPMG in India is pleased to present Voices on Reporting a monthly series of knowledge sharing calls to discuss current and emerging issues relating to financial reporting. In our recent call, on 8 February 2017, we provided an overview and implications of the proposals given in the Finance Bill, 2017 on the following topics: Computation of book profit for Ind AS compliant companies for the purpose of levy of MAT Income Computation and Disclosure Standards Change in base of cost inflation index from 1 April 1981 to 1 April 2001 MAT credit allowed to be carried forward to 15 Assessment Years. 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. Printed in India. (060_NEW0217)