22 April 2015
Agenda 1 ICDS - Overview and implementation 2 Significant impact areas 3 Next steps for ICDS implementation 4 Year end reminders: Key changes to the Companies Act, 2013 2
Welcome Series of knowledge sharing calls Covering current and emerging reporting issues Scheduled towards the end of each month Look out for our Accounting and Auditing Update, IFRS Notes and First Notes publications 3
Agenda 1 ICDS - Overview and implementation 2 Significant impact areas 3 Next steps for ICDS implementation 4 Year end reminders: Key changes to the Companies Act, 2013 4
ICDS implementation in India Story so far Final report of the Committee The CBDT constituted AS Committee to suggest the following : AS to be notified under the Act and 14 ICDS published Comments invited from public on the Draft ICDS January 2015 March 2015 Amendments to the Act Method to determine book profit for MAT purposes on transition to Ind AS July 2014 The Central Government October 2012 notified two accounting standards under section 145(2) of the Income Tax Act, 1961 (the IT Act). 1996 December 2010 Finance Bill 2014 amended section 145(2) of the IT Act. ICDS applicable from FY 1 April 2015 Compliance required in 2015 1st quarter CBDT issued draft of 12 ICDS, after incorporating suggestions by stakeholders and providing transitional provisions for these ICDS The draft ICDS were open for comments and suggestions till 8 Ten Final ICDS notified on 31 March 2015 ICDS on Leases and Intangibles not notified Applicable from FY 2015-16 February 2015 All legal entities in India would be required to comply with ICDS from 1 April 2015 5
Highlights of the ICDS A step in the right direction A significant impediment to adoption of Ind AS. Uniform basis of taxable income computation One set of books of account with adjustments for ICDS Income Tax Act ~ ICDS ~ Subordinate legislations /Judicial pronouncements To address issues subject to litigation and diversity Areas of differences with current set of Accounting Standards/Policies Impact on MAT on adoption of Ind AS 6
Agenda 1 ICDS - Overview and implementation 2 Significant impact areas 3 Next steps for ICDS implementation 4 Year end reminders: Key changes to the Companies Act, 2013 7
ICDS - Significant impact areas Elimination of Concept of Prudence (MTM losses) and materiality Early taxation of Revenues Classification of a Qualifying Asset Higher capitalisation of Borrowing cost Recognition of Government grants Accounting for Forward contracts Capitalisation of exchange differences Changes in accounting for provisions and contingent assets Many other specific differences could arise No clarity on standard on leases at present 8
Significant impact areas (1/8) Elimination of Concept of Prudence and materiality Transitional provision ICDS I on Accounting policies eliminates the concept of Prudence Disallows recognition of expected losses or mark to market losses unless specifically permitted by any other ICDS ICDS is silent on the treatment of mark to market gains Result in higher taxable income as mark to market losses and losses on onerous contracts are disallowed All contracts or transactions existing on the 1st day of April, 2015 or entered into on or after the 1st day of April, 2015 shall be dealt with in accordance with the provisions of ICDS I Taxation impact Mark to market loss unless specifically covered in other ICDS allowed only on settlement 9
Significant impact areas (2/8) Early taxation of Revenues ICDS on revenues and construction contracts does not permit accounting under completed contract method and requires percentage of completion (POC) to be mandatorily followed Unlike AS-7 on construction contracts, ICDS prohibits the deferral of recognition of margins if the stage of completion exceeds twenty five percent Transitional provision Cumulative catch up of revenue after the date of transition for all open contracts ICDS on revenue recognition and construction contracts does not permit recognition of losses on onerous contracts Retention money also to be accounted for as per POC method Taxation impact Deduction for future / anticipated / estimated losses (including onerous contract) not allowed unless actually incurred Taxability of service contracts on percentage completion method 10
Significant impact areas (3/8) Classification of a Qualifying Asset Unlike AS-16 on borrowing cost, the ICDS on borrowing cost does not provide any minimum period criteria for classification as a qualifying asset except for Inventories Could result in significant difference between AS and ICDS Transitional provision Prospective from date of transition after taking into account the borrowing cost capitalised earlier Capitalisation of borrowing cost under ICDS would increase as larger number of assets would now come under the ambit of a qualifying asset Current year charge to the profit and loss would reduce as borrowing costs would get capitalised Taxation impact Tax impact in line with provisions of the Income Tax Act 11
Significant impact areas (4/8) Higher capitalisation of Borrowing cost ICDS IX on borrowing cost requires commencement of capitalisation of borrowing cost to be earlier as compared to the AS Specific borrowing From the date of borrowing Transitional provision Prospective from date of transition after taking into account the borrowing cost capitalised earlier General borrowing Date of utilisation of funds ICDS requires capitalisation even if active deployment of the qualifying asset is interrupted Unlike AS-16, Under ICDS capitalisation of borrowing cost would cease only when the asset is put to use resulting in higher capitalisation of borrowing cost Taxation impact Tax impact in line with provisions of the Income Tax Act 12
Significant impact areas (5/8) Capitalisation of exchange differences Under existing AS, foreign exchange differences can be capitalised along with the underlying asset under certain circumstances Under ICDS, capitalisation of exchange differences relating to fixed assets shall be in accordance with section 43A and other similar provisions of the act. Transitional provision Prospective from date of transition Taxation impact Mostly in line with the current provisions of the Income-tax Act, 1961 13
Significant impact areas (6/8) Recognition of Government grants Initial recognition of government grants cannot be postponed beyond the date of actual receipt This would result in recognition of government grants under ICDS even though all the recognition conditions in accordance with AS is not met Transitional provision Prospective from date of transition ICDS does not permit capital approach for recording of government grants Grants to be either reduced from the cost of assets or recognised as income either immediately or over a period of time Taxation impact To understand whether purpose test - capital vs. revenue, held by judicial precedents would continue to apply 14
Significant impact areas (7/8) Accounting for Forward contracts ICDS on Effects of changes in foreign exchange rates requires premium, discount or exchange differences on Forward contracts for trading, speculation or hedging purposes to be recognised only at the time of settlement Transitional provision Prospective from date of transition Significant difference from current practice under AS where, recognition of gains or losses are done on mark to market basis Accounting for foreign currency option contracts and other similar contracts to be similar to forward exchange contracts Taxation impact Currently discount / premium is recorded in Profit and Loss Account and offered / claimed in tax return Losses / gains to be deferred in case of contracts overlapping two years 15
Significant impact areas (8/8) Changes in accounting for provisions and contingent assets ICDS on provisions, contingent liabilities and contingent assets requires recognition of provision only if the outflow of economic benefit is reasonably certain. Result in significant difference from AS, where provisions are recognised when they are probable Transitional provision Prospective from date of transition Unlike AS, under ICDS, recognition of contingent assets and the related income is done when the inflow of economic benefit is reasonably certain arise Changes brought in presumably with the intention to bring in consistency to the tax treatment of losses and gains Taxation impact Intention appears to bring tax treatment of losses and gains on par 16
Ind AS and ICDS Revenue recognition criteria under Ind-AS (IFRS 15 principles) Accounting for financial instruments (including derivatives, hedge accounting etc.) Accounting for provisions under Ind AS to be significantly different from ICDS (Discounting, Additional Provisions on Asset retirement obligation, Decommissioning liability etc.) Ind AS puts forward the concept of functional currency which, if different from Indian Rupee could have significant implications on the computation of taxable income as well as deferred taxes Business combination and common control transaction accounting Unlike ICDS, for non-monetary government grants, Ind AS requires the grant and the asset to be recorded at fair value Arrangement containing a lease Fixed asset accounting including componentisation Major repairs and overhaul, a separate non physical component.. And many more 17
Agenda 1 ICDS - Overview and implementation 2 Significant impact areas 3 Next steps for ICDS implementation 4 Year end reminders: Key changes to the Companies Act, 2013 18
What you need to consider? Taxable income now visibly delinked from Accounting Income No clarity on the impact of the ICDS on Minimum Alternate Tax ICDS based on existing Accounting Standards leading to significant differences with Ind-AS Clarity required in several areas where guidance note, ICAI directives Some judicial pronouncements may no longer be operative Timing of taxable income under the new standards would significantly differ Modifications to be made to Form 3CD and Income Tax returns to facilitate changes brought in by ICDS Considering the differences between ICDS and AS may warrant the need to maintain additional set of records 19
Agenda 1 ICDS - Overview and implementation 2 Significant impact areas 3 Next steps for ICDS implementation 4 Year end reminders: Key changes to the Companies Act, 2013 20
Key changes to Companies Act, 2013 01 Focus on 4 06 The impact on M&A/ restructurings Emphasis Related Party Transactions 05 Increased reporting framework Focus on six critical themes 02 Emphasis on investor 03 2 protection critical themes Enhanced responsibility of directors 04 Corporate Social Responsibility Impact on auditors 21
Increased reporting framework 22
Increased reporting framework Internal financial controls (IFC) - Provisions Section 134 Directors to make an assertion in board s report that they have laid down internal financial controls to be followed and that such IFC are adequate and operating effectively. Section 143 Auditors to provide comments in auditor s report that the Company has laid down internal financial controls and that such IFC are adequate and operating effectively. Section 177 Duties of the audit committee include evaluation of internal financial controls. Schedule IV The roles and functions codified in the Schedule IV state that independent directors shall satisfy themselves on the integrity of financial information and that financial controls and the systems of risk management are robust and defensible. 23
Increased reporting framework Reporting on internal financial controls No relaxation for reporting by directors Listed companies Reporting requirement for directors Report on internal financial controls as defined in explanation to Section 134(5)(e) in the board s report: special comment on internal financial controls with reference to the financial statements in the directors responsibility statement (Rules). Other companies Reporting requirement for directors Report on internal financial controls with reference to the financial statements only (Rules). Auditor reporting on adequacy and operating effectiveness of internal financial controls will be required for financial years beginning on or after 1 April 2015. 1 24
Increased reporting framework Internal financial controls: Focus area Focus areas Key requirements on internal financial controls Directors role Policies and procedures Safeguarding of assets Prevention and detection of frauds and errors Accuracy and completeness of the accounting records Timely preparation of reliable financial information Define process and control guidelines Assignment of responsibility, delegation of authority, segregation of duties to provide a basis for accountability and controls Assets and ownership interests exist at a specific date Enable proactive anti-fraud controls and a fraud risk management framework to mitigate fraud risks to the company All transactions occurred during a specific period have been recorded Assets, liability, revenue and expense components are recorded at appropriate amounts Financial items are properly described, sorted and classified Financial information is provided as per the timelines defined by the relevant stakeholders Lay down internal financial controls Monitor adequacy of internal financial controls Monitor operating effectiveness of internal financial controls Make an assertion in the board s report 25
Increased reporting framework Key provisions of the Companies Act, 2013 that have a direct relation to increased emphasis on Board's risk oversight responsibilities: Directors responsibility statement (Sec 134) Audit Committee terms of reference (Sec 177) Code for independent directors (Section 149(8) - Schedule IV) The Board of Directors report to indicate development and implementation of risk management policy The Board of Directors to submit a report in general meeting including, inter alia, A statement indicating development and implementation of a risk management policy for the company including identification therein of elements of risk, if any, which in the opinion of the Board may threaten the existence of the company The audit committee should specifically evaluate the company s internal financial controls and risk management systems The independent directors judgement to bear on the Board s deliberations especially on issues of strategy, performance, risk management, resources, key appointments and standards of conduct 26
Increased reporting framework Consolidated financial statements (CFS) required for all companies Mandate for all companies to prepare CFS having, one or more, - Subsidiary - Associate, or - Joint venture company Preparation of complete CFS by a company having an associate and/or joint venture but no subsidiary is not required for a period of one year commencing from 1 April 2014 and ending on 31 March 2015 2 - However, it will have to attach a separate statement containing salient features of financial statements of associates/joint ventures for the year ended 31 March 2015 - It will have to give additional disclosures required as per schedule III regarding associates/joint venture from FY 2015-16 Exemption from CFS preparation only for intermediate wholly owned subsidiary whose immediate parent is incorporated in India 2 Disclosures relevant for CFS to be given 2 - Companies preparing CFS need not repeat additional statutory disclosures made under stand-alone financial statements being consolidated (e. g., break-up of value of imports, foreign exchange earnings) Transitional relief for preparation of CFS 3 - Companies having only associates and no subsidiaries, not required to prepare CFS for the year ended 31 March 2015 only - Unlisted companies having subsidiary/ies outside India can avail exemption from presenting consolidated financial statements - Exemption available only for first financial year commencing on or after 1 April 2014 - Would extend to joint ventures and associates outside India - No exemption under the Listing Agreement for listed companies. 27
Increased reporting framework Depreciation Schedule II requirements 5 Useful life prescribed in schedule II of the Companies Act, 2013 are indicative At present schedule II requires the following: - the useful life of an asset should not be longer than the useful life prescribed in Part C of schedule II, and - the residual value of an asset should not be more than five per cent of its original cost unless the company adopting a useful life or using a residual value different from the above limits, discloses the justification for the difference in the financial statements. As per the MCA s amendment: - the useful life of an asset should not ordinarily be different from those prescribed in Part C of schedule II, - if a company adopts a useful life different from those prescribed in Part C of schedule II or uses a residual value higher than five per cent of the original cost of the asset, the financial statements would need to disclose the fact and provide a justification for different useful life or residual value duly supported by technical advice. Mandatory component approach If cost of part of asset is significant and has useful life different from the remaining asset, useful life for that part could be determined separately for depreciation (mandatory from 1 April 2015) Transitional provisions Depreciate carrying value less residual value over balance life. Adjusting net worth if useful life exhausted is optional for companies. Application guidance issued by Institute of Chartered Accountants of India, recently 28
Enhanced Related party disclosures 29
Emphasis on related party disclosures Definition of related party now includes: Private company in which relative of a director is a member or director 11 Public company in which a director is a director and holds along with his relatives more than two per cent of paid up share capital 12 (previously all directors or all holders of two per cent shares were related parties) A director (other than independent director) or KMP of the holding company or his relative 13 (previously all directors were included). Threshold for shareholder approval for related party transactions rationalised 14 Material transactions which are not at arm s length or in ordinary course of business are required to have prior approval of shareholders in specified cases Requirement of prior approval of shareholders if paid-up share capital >= INR 10 crores removed (except for transactions as per revised thresholds) This limit meant that all companies having share capital of INR 10 crores or more had to get prior shareholder approval for even immaterial transactions Transaction level thresholds for prior approval of shareholders for different categories revised. Obtain omnibus approval for all related party transaction for the year 2015-2016 preferably at the first audit committee and board of directors meeting 30
Emphasis on related party disclosures Others 15 : Restriction on voting by a related party to apply only for the contracts it is interested in Section 188 of the Act does not apply to corporate restructuring and amalgamation transactions Past contracts in compliance with Section 297 of 1956 Act no fresh approval required under Section 188 till expiry of original term of the contract modifications to be approved as per Section 188. 31
Corporate social responsibility 32
Corporate social responsibility Clarity on provisions relating to corporate social responsibility (CSR) 16 Applicability - Companies meeting thresholds under section 135 in any financial year are required to constitute CSR committee - any financial year means any of the three preceding financial years Schedule VII provides - activities to be interpreted liberally - activities to be in project/programme mode - one-off events such as awards/ charitable contribution, etc. not to qualify as CSR expenditures CSR expenditure - CSR expenditure in India by the foreign holding company would qualify as CSR expenditure of the Indian subsidiary Provided CSR expenditure is routed through the Indian subsidiary - Contribution to corpus of a registered trust/ registered society/companies with charitable objects, etc. would qualify as CSR expenditure if: - such entity is created exclusively for undertaking CSR activities or - corpus is created exclusively for a purpose directly relatable to a subject covered in schedule VII. - Expenditure pursuant to any Act/statute/regulations is not CSR expenditure 33
Corporate social responsibility Clarity on provisions relating to corporate social responsibility (CSR) CSR rules amended to permit further collaboration 18 A company can also undertake CSR activities through company established by it along with: - any other company or - holding or subsidiary or associate company of such other company. Plan for disclosures with respect to CSR related expenditure in the board of director s report. Companies that have a short fall in spending 2% of net profits to provide reasons for short-spend. Further, disclosures on CSR expenses in the financial statements to be given. 34
Links to previous recordings of Voices on Reporting Month Topics Link April 2014 May 2014 June 2014 Companies Act Implementation questions SEBI corporate governance norms Companies Act - Matters for first board and general meetings ICAI s roadmap for adoption of Ind AS Companies Act, 2013 clarifications issued by the Ministry of Corporate Affairs (MCA) Click here Click here Click here July 2014 Tax accounting standards implementation challenges Click here August 2014 Related party transactions the Companies Act, 2013 Click here September 2014 November 2014 Recent amendments in tax audit forms Key amendments to clause 49 of the Equity Listing Agreement Exposure draft on Ind AS 101, First time adoption of Indian Accounting Standards Probable benefits and challenges of Ind AS conversion Click here Click here January 2015 Ind AS implementation roadmap Revised drafts Income Computation and Disclosure Standards (ICDS) Click here February 2015 Overview of Income Computation and Disclosure Standards (ICDS) Significant impact areas of ICDS Next steps for ICDS implementation Click here 35
Q&A 36
KPMG India IFRS Institute Re-launched KPMG India IFRS Institute website re-launched KPMG in India is pleased to re-launch IFRS Institute - a web-based platform, which seeks to act as a wide ranging 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 thought leadership publications on the evolving global financial reporting framework. In addition to proprietary KPMG content, the website provides links to several other sources of information related to IFRS and its implementation. The site can be accessed by all interested parties at no cost. Additionally, the site provides the facility to register as a member by providing certain minimal information. To download KPMG content, become registered members of the website following few easy steps. https://www.in.kpmg.com/ifrs You can reach us for feedback and questions at in-fmkpmgifrsinst@kpmg.com 37
Sources 1. Notification by MCA dated 14 October 2014 2. Notification by MCA dated 12 June 2014 3. Notification by MCA dated 14 October 2014 4. Notification by MCA dated 16 January 2015 5. Notification by MCA dated 29 August 2014 6. General Circular No. 15/07 issued by MCA dated 10 April 2015 7. General Circular No. 25/2014 issued by MCA dated 26 June 2014 8. General Circular No. 14/2014 issued by MCA dated 9 June 2014 9. General Circular No. 14/2014 issued by MCA dated 9 June 2014 10. Notification by MCA dated 18 March 2015 11. Companies (Removal of Difficulties) Sixth Order, 2014 dated 24 July 2014 12. Notification by MCA dated 9 July 2014 13. Notification by MCA dated 17 July 2014 14. Notification by MCA dated 14 August 2014 15. General Circular No. 30/2014 issued by MCA dated 17 July 2014 16. General Circular No. 21/2014 issued by MCA dated 18 June 2014 17. Notification by MCA dated 12 September 2014 18. Notification by MCA dated 19 January 2015 19. Press Release by MCA dated 9 December 2014 20. Companies (Share Capital and Debentures) Rules, 2014 published by MCA dated 3 April 2014 21. General Circular No. 05/2015 issued by MCA dated 30 March 2015 22. Order by MCA dated 13 February 2015 23. Notification by MCA dated 31 March 2015 24. General Circular No. 05/2015 issued by MCA dated 30 March 2015 25. Notification by MCA dated 18 June 2014 26. Order by MCA dated 13 February 2015 27. Notification by MCA dated 25 July 2014 28. Notification by MCA dated 9 June 2014 38
Introducing IFRS Notes Issue 2015/02 IFRS convergence a reality now! MCA notifies Ind AS standards and implementation roadmap This issue of our IFRS Notes provides a high level analysis of the much awaited Indian Accounting Standards (Ind AS) that are converged with International Financial Reporting Standards (IFRS), which was finally notified by the Ministry of Corporate Affairs on 16 February 2015. The notification of these IFRS converged standards fills up significant gaps that exist in the current accounting guidance, and India can now claim to have financial reporting standards that are contemporary and virtually on par with the best global standards. This is expected to in turn improve India s place in global rankings on corporate governance and transparency in financial reporting. With the new government at the centre, there has been a flurry of activities which started off by the announcement in the Finance Minister s budget speech last year of an urgent need to converge with IFRS, which has now culminated with the notification of 39 Ind AS standards together with the implementation roadmap. With this notification, coupled with the progress made on finalising the Income Computation and Disclosure Standards (ICDS), the government has potentially addressed several hurdles which possibly led to deferment of Ind AS implementation in 2011. Companies should make an impact assessment and engage with all stakeholders, both internal and external, to deal with their respective areas of impact and ensure a smooth transition. 39
Topics discussed in AAU and First Notes Accounting and Auditing update April 2015 Schemes of Amalgamation: Compatibility with GAAP Accounting for investments in associates and joint ventures ICDS A new paradigm for computing taxable income ICAI provides much awaited guidance on fraud reporting Common errors in Statement of Cash Flows under U.S. GAAP financials Aggregation of related party transactions while seeking approval of shareholders under Clause 49(VII) of the equity listing agreement Year-end reminders Regulatory updates First Notes Section 227(4A) of the Companies Act, 1956 (1956 Act) required that the auditor s report of certain class of companies should include a statement on certain prescribed matters. These reporting requirements were prescribed under the Companies (Auditor's Report) Order, 2003 (CARO 2003) by the Ministry of Corporate Affairs (MCA). Section 227(4A) of the 1956 Act ceased to be operational from 1 April 2014 after notification of section 143(11) under the Companies Act, 2013 (2013 Act). Though section 143(11) of the 2013 Act provides requirements similar to section 227(4A) of the 1956 Act, the MCA had not prescribed CARO related requirements. Consequently, after consulting the ICAI, the MCA on 10 April 2015 issued the Companies (Auditor's Report) Order, 2015 (CARO 2015) prescribing certain reporting requirements for auditors of certain class of companies. CARO 2015 will be effective from the date of its publication in the Official Gazette. Our first notes publication provides an overview of the CARO 2015. 40
Others Missed an issue of the Accounting and Auditing Update? Missed an issue of the First Notes? Coming up next May 2015 New issue of: Accounting and Auditing Update First Notes IFRS Notes Download from www.kpmg.com/in 41
Sai Venkateshwaran Partner and Head, Accounting Advisory Services KPMG in India T: +91 22 3090 2020 E: saiv@kpmg.com Thank you www.kpmg.com/in Feedback/queries can be sent to aaupdate@kpmg.com Madhu Sudan Kankani Partner, Accounting Advisory Services KPMG in India T: +91 (80) 3980 6042 E: mkankani@kpmg.com Nabin Ballodia Partner, Tax KPMG in India T: +91 (124) 3074321 E: nabinb@kpmg.com Nirav Patel Director, Accounting Advisory Services, KPMG in India T:+91 (22) 3090 2417 E: niravp@kpmg.com The views and opinions expressed herein are those of the presenters to the topics covered in today s knowledge sharing call and do not necessarily represent the views and opinions of KPMG in India. The information contained in the slide pack 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. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International Cooperative ( KPMG International ) International ), a Swiss entity. All rights reserved.