INDEX. Cost. S. No. Topic. 1. Concept of Materiality. 2. Assurance of True and Fair View. 3. Ind AS Capital Gain on Shares and Mutual Funds

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2 Cost INDEX S. No. Topic 1. Concept of Materiality 2. Assurance of True and Fair View 3. Ind AS Capital Gain on Shares and Mutual Funds KGS

3 CONCEPT OF MATERIALITY This article aims to: Provide a brief Description on Materiality Concept while performing an audit of Financial Statement

4 Concept of Materiality Introduction Information is material if its misstatement (i.e. omission or erroneous statement) could influence the economic decision of uses on the basis of financial information. Judgment about Materiality depends on size and nature of item, judged in the particular circumstances of its misstatement. Thus it provides the cutoff point. The concept of materiality recognizes some matters either individually or in the aggregate. SA 320 Materiality in Planning and performing an audit, Auditor considers materiality at both the overall financial information level and in relation to individual account balances and classes of transaction. Materiality also be influenced by other considerations, such as legal and regulatory requirements, non-compliances with which may have a significant bearing on the financial information and consideration relating to individual account balances and relationships. Relationship between Materiality & Audit Risk Different type of Materiality Specific Materiality Disclosure Guidance Summarize SA Requirement on Materiality i. Relationship between materiality & Audit risk (1) The auditor s assessment of materiality and audit risk may be different at the time of initially planning the engagement; at the time of evaluating the result. Hence, assessment of materiality and audit risk may also change. The listed entity shall ensure that all activities in relation to both physical and electronic (Removed) share transfer facility are maintained either inhouse or by Registrar to an issue and share transfer agent registered with the Board. (2) There is an inverse relationship between materiality and the degree of audit risk. Higher the materiality level, the lower the audit risk and vice versa.e.g. The risk of particular account KGS

5 balance or classes of transaction could be misstated by extremely large amount might be very low. But the risk of misstated extremely small amount might be very high. ii. Different Type of Materiality 1. Overall Materiality Determine benchmarks Apply benchmark % Apply weighting factors 2. Overall Performance Materiality Apply performance materiality % 1. Overall Materiality 2. Overall Performance Materiality 3. Specific Materiality 3. Specific Materiality Determine items requiring specific materiality Apply specific materiality % Overall Materiality (for the Financial Report as a whole) The highest amount of information that if omitted, misstated or not disclosed, then that information has the potential to affect the economic decisions of users of the financial report or the discharge of accountability by management or those charged with governance. The determination of overall materiality should be made with the following questions in mind: Who are the major users of the financial report? What information is important to their economic decision making and discharging of their responsibilities? In addition to quantitative amounts, what qualitative factors might impact upon the users financial reporting requirements as they relate to materiality? Overall Performance Materiality The amount set by us as auditor at less than the Overall Materiality, to reduce to an appropriately low level, the probability that the aggregate of undetected misstatements exceeds Overall Materiality. Overall Performance Materiality must be set at a % of the Overall Materiality so as to allow us a margin or buffer for the possible undetected misstatements that may occur during the engagement. We use a sliding scale of % based upon an estimate of the engagement risk associated with the client. KGS

6 Specific Materiality (for particular classes of transactions, account balances or disclosures) The misstatements or events that are used by the auditor to identify misstatements at lesser than the Overall Materiality. Specific Materiality could relate to sensitive areas such as particular note disclosures (that is, management remuneration or industry-specific data), compliance with legislation or certain terms in a contract, or transactions upon which bonuses are based. It could also relate to the nature of a potential misstatement such as an illegal act, non-compliance with loan covenants and statutory/regulatory reporting requirements. Other times we may wish to use Specific Materiality for particularly high risk items such as cash, revenue or related party transactions. On such occasions the history of material misstatements in relation to a particular balance or class of transaction is also relevant. Specific Materiality Disclosure Guidance Disclosure of the following transactions, balances or events would normally be subject to a Specific Materiality level lower than Overall Materiality: Related party transactions and balances Disclosure of items such as those related to financial instrument risk Significant management estimates or valuations including sensitivity analysis Director s remuneration Director s expense accounts Auditor s remuneration, particularly non-audit services Significant accounting policies or changes in accounting policies Sensitive income and expense accounts such as management fees and commissions. Summarize SA Requirement on Materiality Determine the Materiality Accumlate the Misstatements Evaluate Misstatemets based on the size and Nature Reassess Overall Materiality Communicate those charge with Governance KGS

7 Concept of Materiality 1. According to SA 200 (Revised) Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing, Financial reporting frameworks often discuss the concept of materiality in the context of the preparation and presentation of financial statements. Although financial reporting frameworks may discuss materiality in different terms, they generally explain that: Misstatements, including omissions, are considered to be material if they, individually or in the aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements; Judgments about materiality are made in the light of surrounding circumstances, and are affected by the size or nature of a misstatement, or a combination of both; and Judgments about matters that are material to users of the financial statements are based on a consideration of the common financial information needs of users as a group. The possible effect of misstatements on specific individual users, whose needs may vary widely, is not considered. 2. Such a discussion, if present in the applicable financial reporting framework, provides a frame of reference to the auditor in determining materiality for the audit. If the applicable financial reporting framework does not include a discussion of the concept of materiality, the characteristics referred to in paragraph 2 provide the auditor with such a frame of reference. The auditor s determination of materiality is a matter of professional judgment, and is affected by the auditor s perception of the financial information needs of users of the financial statements. In this context, it is reasonable for the auditor to assume that users: (a) Have a reasonable knowledge of business and economic activities and accounting and a willingness to study the information in the financial statements with reasonable diligence; (b) Understand that financial statements are prepared, presented and audited to levels of materiality; (c) Recognize the uncertainties inherent in the measurement of amounts based on the use of estimates, judgment and the consideration of future events; and (d) Make reasonable economic decisions on the basis of the information in the financial statements. 3. The concept of materiality is applied by the auditor both in planning and performing the audit, and in evaluating the effect of identified misstatements on the audit and of uncorrected misstatements, if any, on the financial statements and in forming the opinion in the auditor s report. KGS

8 Assurance of True and Fair View This article aims to: What points we may consider to ensure that Accounts show True and Fair View. CA Gaurav Bhatia and Shivam Sharma

9 Assurance of True and Fair View Meaning True and fair view in auditing means that the financial statements are free from material misstatements and faithfully represent the financial performance and position of the entity. True suggests that the financial statements are factually correct and have been prepared according to applicable reporting framework such as the IFRS and they do not contain any material misstatements that may mislead the users. Misstatements may result from material errors or omissions of transactions & balances in the financial statements. Fair implies that the financial statements present the information faithfully without any element of bias and they reflect the economic substance of transactions rather than just their legal form. Specific Attributes Attributes Authority Accurate Complete Explanation All transactions are official and person authorized for the same could validate it. All information provided is in exact terms both qualitatively and quantatively. There should be no missing dockets in the accounting system. Loopholes is the system are to be identified and corrected Requisite for True and Fair View: 1) In preparing the financial statements, all mandatory provision of Companies Act and other relevant laws have been followed. 2) The financial statements that have been prepared by the company are in conformity with the books of account. 3) The books of accounts have been in accordance to the principles of accountancy and have followed accounting standards issued by different regulatory body. 4) The book of accounts have recorded all business transactions correctly. When all the above facts are taken care by a concern in preparing the financial statements, it wil be said that these statements show True and Fair View of the affairs of that business concern.

10 Supporting Concepts and Conventions There are some Concepts and Conventions which help to ensure that accounting information is present accurately and consistently. Accounting Concepts Accounting Conventions 1) Going Concern 2) Consistency 3) Prudence 4) Accruals (Matching) 1) Monetary Measurement 2) Separate Entity 3) Realization 4) Materiality Accounting Concepts and Contraventions Go hand in hand to accomplish true and fair view Do small errors show that accounts don t show true and fair view 1) It is based on subjective and objective judgements depending on familiarity with the organisation. The accounts can be manipulated in many ways. The more experienced management the easier for them to hide mistakes an frauds. 2) There are inherent risks in each accounting system or there might not be system of control due to which detection of fraud becomes almost impossible. Limited sampling can give only little assurance to the auditor and conclude that accounts show true and fair view. Approach to be taken by Auditors The obligations of an auditor when giving an opinion on a company s financial statements are set out in company s act. Those obligations include: Stating whether in opinion the account show true and fair view. It is clear that if auditors are to discharge properly their legal and professional duties. They should stand back as they approach finalisation of those accounts and consider on view of the issues that they have addressed in course of the audit, the accounts do indeed give a true and fair view.

11 Ind AS-115 [Revenue from Contracts with Customers] This article aims to Introduction & Scope to Ind AS 115 Provide overview of Ind AS-115 five step model Contract cost Disclosures w.r.t Ind AS-115 Lakshay Chugh & CA Gaurav Bhatia

12 Ind AS-115 [Revenue from Contracts with Customers] Introduction The Ministry of Corporate Affairs (MCA), on 28 March 2018, notified Ind As -115, Revenue from Contracts with Customers as a part of Companies (Indian Accounting Standards) Amendment Rules, 2018.It is aligned to IFRS 15 issued by International Accounting Standard Board. Ind AS 115 is effective from accounting period beginning on or after 1 April, 2018 and Scope Replaces Ind AS 18, Revenue and Ind AS 11, Construction Contracts Establishes a new control-based revenue recognition model Provides more guidance for deciding whether revenue is recognized at a point in time or over time Provides new and more detailed guidance on specific topics such as multiple element arrangements, variable consideration, rights of return, warranties,, consignment arrangements and licensing Ind AS 115 applies to contracts with customers to provide goods or services, licensing of intellectual property and exchanges of non-monetary assets other than scoped out exchanges, but it excludes Lease contract within scope of Ind AS-104, Leases Insurance contracts within the scope of Ind AS 104, Insurance Contracts Financial instruments and other contractual rights or obligations within the scope of Ind AS 109 Overview of Ind AS 115 Five Step Model Identify the contract with the customer Identify the performance obligation in the contract Determine the transaction price Allocate the transaction price to the performance obligation Recognise revenue when (as or) the entity satisfies its performance obligations KGS

13 Step 1: Identify the contract with the customer The standard defines the term contract as an agreement between two or more parties that creates enforceable rights and obligations. Contract can be written, oral, or implied by customary business practices. An entity shall account for a contract with a customer that is within the scope of this Standard only when all of the following criteria are met: Parties to the contract have approved the contract and are committed to perform their respective obligations Entity can identify each party s rights and payment term for the goods or services to be transferred The contract has commercial substance It is probable that the entity will collect the consideration. If a customer contract does not meet these criteria and an entity receives consideration from the customer, revenue is recognized only when either:- The entity s performance is complete and substantially all of the consideration in the arrangement has been collected and is non-refundable The contract has been terminated and the consideration received is non-refundable. Combination of Contract An entity shall combine two or more contracts entered into at or near the same time with the same customer (or related parties of the customer) and account for the contracts as a single contract if one or more of the following criteria are met: The contracts are negotiated as a package with a single commercial objective. The amount of consideration to be paid in one contract depends on the price or performance of the other contract. The goods or services promised in the contracts are a single performance obligation. Step 2: Identify the performance obligation in the contract A performance obligation is a promise in a contract with a customer to transfer either A good or service, or a bundle of goods or services, that is distinct A series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer KGS

14 Distinct Separately Identifiable Readily available resource No Int egrat ion Service No modif icat ion or customisation Not highly inter related If a promised goods or service under the contract does not qualify to be separate performance obligation, the entity would need to combine such good or service with the other goods or services until the bundled arrangement qualifies to be a performance obligation. Identification of performance obligation requires significant judgment and entails an assessment of the promised goods and services under the contract. Step 3: Determine the transaction price An entity shall consider the terms of the contract and its customary business practices to determine the transaction price. The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties. When determining the transaction price, an entity shall consider the effects of all of the following: Variable consideration and the constraint: - If the consideration includes variable amount, an entity shall estimate the amount of consideration to which the entity will be entitled in exchange for transferring the promised goods or services to a customer. An amount of consideration can vary because of discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, or other similar items. The existence of a significant financing component in the contract: - In determining the transaction price, an entity shall adjust the promised amount of consideration for the effects of the time value of money if significant financing component exist regardless of financing being explicit or implicit. If a contract contains a significant financing component then entity should consider the relevant facts including both of the following: Difference between the amount of promised consideration and the cash selling price of the goods or services. Prevailing interest rate in the market Non-cash consideration: - To determine the transaction price for contracts in which a customer promises consideration in a form other than cash, an entity shall measure the non-cash consideration at fair value. It may also vary because of the form of consideration. If an entity cannot reasonably estimate the fair value of the non-cash consideration, the entity shall measure the stand-alone selling price of the goods or services promised to the customer in exchange for the consideration. KGS

15 Consideration payable to a customer: - Consideration payable to the customer includes cash amounts, credits or other items (voucher or coupon) and entity account it as a reduction of transaction price (revenue). Step 4: Allocate the transaction price to the performance obligation An entity allocate the transaction price to each performance obligation that depicts the amount of consideration to which the entity expects to be entitled in exchange for transferring the promised goods or services to the customer. On a relative stand-alone selling price basis, an entity shall determine the stand-alone selling price and allocate the transaction price in proportion to those stand-alone selling prices. The stand-alone selling price is the price at which an entity would sell a promised good or service separately to a customer. The best evidence of a stand-alone selling price is the observable price of a good or service when the entity sells that good or service separately in similar circumstances and to similar customers. If not observable then following methods are used:- Adjusted market assessment approach an entity could evaluate the market in which it sells goods or services and estimate the price that a customer in that market would be willing to pay for those goods or services. Expected cost plus a margin approach an entity could forecast its expected costs of satisfying a performance obligation and then add an appropriate margin for that good or service. Residual approach an entity may estimate the stand-alone selling price by reference to the total transaction price less the sum of the observable stand-alone selling prices of other goods or services. KGS Step 5:- Recognize revenue when (as or) the entity satisfies its performance obligations An entity shall recognize revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (i.e. an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset.

16 For each performance obligation identified, an entity shall determine at contract inception whether it satisfies the performance obligation over time or satisfies the performance obligation at a point in time. If an entity does not satisfy a performance obligation over time, the performance obligation is satisfied at a point in time An entity transfers control of a good or service and recognizes revenue over time, if one of the following criteria is met: The customer simultaneously receives and consumes the benefits provided by the entity s performance as the entity performs. The entity s performance creates or enhances an asset An entity transfers control of a good or service and recognizes revenue at a point and satisfies performance obligation. The following are the indication of transfer of control:- Customer has legal title to the Asset The entity has transferred physical possession of the asset The customer has the significant risks and rewards of ownership of the asset Contract cost:- Incremental cost of obtaining a contract with a customer Entity should recognize as an asset if the entity expects to recover those costs. These are expenses which an entity would not have incurred if the contract had not been obtained (e.g. sales commission) Cost to fulfil a contract Entity should recognize an asset from the cost incurred to fulfil a contract if those costs: Relate directly to a contract that an entity can specifically identify Generate or enhance resources of the entity used in satisfying the performance obligation in future. Is expected to recover Disclosures:- The objective of the disclosure requirements is for an entity to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. To achieve that objective, an entity shall disclose qualitative and quantitative information about all of the following: Disaggregation of Revenue Contract balance Performance Obligations Significant Judgment Costs to fulfill the contract KGS

17 TAXABILITY OF CAPITAL GAINS This article aims to: Highlighting concepts of taxation of shares and mutualfunds CA SAHIL BABBAR & PRAKASH MISHRA

18 CAPITAL GAIN ON SHARES AND MUTUAL FUND A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realized are shared by its unit holders in proportion to the number of units owned by them. Thus, a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. How do Mutual Fund Work? Each fund's investments are chosen and monitored by professionals who use this money to create a portfolio. Professionals are called Fund Managers. That portfolio could consist of stocks, bonds, money market instruments or a combination of those. The Portfolio comprises of the assets the investment is diversified into. The investment objective is the goal that the fund manager sets for the mutual fund when deciding which stocks and bonds should be in the fund's portfolio. For example, an objective of a growth stock fund might be long-term capital appreciation. Advantage of Investing in Mutual Funds

19 Types of Mutual Funds M Mutua Equity funds invest a maximum part of their corpus into equities holdings. The structure of the fund may vary different for different schemes and the fund manager s outlook on different stocks. The objective of Debt Funds is to invest in debt papers. Government authorities, private companies, banks and financial institutions are some of the major issuers of debt papers. By investing in debt instruments, these funds ensure low risk and provide stable income to the investors. A mutual fund scheme can be classified into open-ended scheme or clos ut

20 Balanced Funds are a mix of both equity and debt funds. They invest in both equities and fixed income securities, which are in line with pre-defined investment objective of the scheme. These schemes aim to provide investors with the best of both the worlds. Equity part provides growth and the debt part provides stability in returns. Mutual Fund Taxation : How mutual funds are taxed? The basic motivation behind investing in mutual funds is to earn interest/dividends and capital gains. You need to know that these capital gains are taxed by the income tax authorities. The amount of tax to be paid on capital gains depends on the time for which you stay invested in them. It is referred to as the holding period of mutual funds. Funds Short-term Long-term Equity funds Less than 12 months 12 months and more Balanced funds Less than 12 months 12 months and more Debt funds Less than 36 months 36 months and more

21 Fixed Deposits:- Fixed Deposits (FDs) are a popular form of savings. It allows you to exploit complete potential of Section 80C tax exemption while keeping your money safe for the said period. You can also earn a fair amount of income in the form of interest. But this income is taxable, seldom do investors think about paying tax on the interest income. This article will cover on when and how to pay income tax on FD interest income. How is interest income taxed? Interest income from Fixed Deposits is fully taxable. Add interest income to your total income in your Income Tax Return each year (even though, it may not be paid out) and calculate your tax liability accordingly It is shown under the head Income from Other Sources at Gross amount (i.e. add TDS on amount received) Banks deduct TDS on interest income: when it is accrued and not when the FD matures & interest is paid out. So if you have a FD for 3 years banks shall deduct TDS at the end of each year. Tax on Interest is calculated a per Slab rate of assesses accordingly. FD vs Mutual Funds: With bank FD interest rates around per cent, investors looking for higher returns for their capital often find a good choice in mutual funds. Mutual funds or bank FD (fixed deposits)? Financial planners usually recommend mutual fund investment to investors who have at least a moderate degree of risk appetite Capital Gains on share: General rates: LTCG: It is taxed at 20 per cent (plus education 3 percent for FY /Ay and 4% for FY /AY ). You cannot avail any deductions under Chapter VI-A. Special rates : LTCG: Sale of equity shares and held for more than one year, on or after April 1, 2018 will be chargeable to tax at 10 percent plus 4 percent. Budget 2018 has increased cess from3 percent to 4 percent. No indexation benefit will be allowed on such transactions.

22 STCG: Similarly, STCG from the sale of equity shares STT is charged on sale transaction are taxed at 15 percent (plus education cess) instead of your normal slab rates. Option to the taxpayer : As an individual, you have an option to pay 10% on your LTCG, instead of 20% with some minor changes in computation methodology. Calculate your LTCG without giving effect to indexation. This means that instead of deducting indexed cost of acquisition (ICOA) and indexed cost of improvement (ICOI), you need to deduct the COA and COI from the sale value. Exemption from Capital Gains : There are certain exemptions available under section 54 of the Income Tax Act which helps the assessee reduce his capital gains subject to tax. For example: Buying a new residential house could exempt your capital gains earned from sale of the old house. Also, investment in certain bonds notified by the government (NHAI bonds) could reduce your capital gains up to Rs 50 lakh.