Agenda 1 Opening Remarks 2 Regulatory updates 3 Ind AS 4 Q & A 2
1. Opening Remarks 3
2. Regulatory updates 4
Integrated reporting in India SEBI reporting requirement for top 500 companies (by market cap.) 2015 2017 Business Responsibility Report Mandatory Integrated Reporting* Voluntary * SEBI Circular dated February 6, 2017: SEBI/HO/CFD/CMD/CIR/P/2017/10 5
IR vs. current reporting model Current model Integrated Reporting/ Future model Focus Past, financial Future, connected, strategic Timeframe Short term Short, medium and long term Detail Long and complex Concise and material Compliance Rule bound Responsive to circumstances Presentation Paper based Technology based Thinking Silos Integrated Stewardship Financial capital All capital (Finance Capital, Intellectual Capital, Human Capital, Natural Capital, Manufactured Capital, Social and Relationship Capital) 6
What is an Integrated Report? An integrated report is a concise communication about how an organization s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value over the short, medium and long term 7
The corporate reporting model Finance Capital Performance Strategy Value drivers Performance Intellectual Capital External Drivers Technological Economic Competitive Environmental Social Human Capital Manufactured Capital Governance and oversight Stakeholder engagement Management insight Integrated reporting, that supports the business from top to bottom and presents a consistent picture externally. Social and Relationship Capital Strategy Governance Remuneration Risk Investor Regulators Supplier/Buyers Employee Resources and relationship Financial resources Non-financial resources Stake holder relationships Natural Capital 8
Guiding principles and content elements Operating context including risks and opportunities Future outlook Organisational overview and business model Strategic objectives Performance Governance and remuneration Source: IIRC (ed.). Towards Integrated Reporting Communicating value in the 21 st Century, 2011 Responsiveness and stakeholder inclusiveness 9
Regulatory updates Ministry of Corporate Affairs Companies Act 2013 Amendment in Companies (Meetings of Board and its Powers) Rules, 2014 clarifying the threshold in Rule 15 sub rule 3 in clause (a) in respect of related party transaction requiring approval by special resolution. [Notification dated 30 th March 2017] Disclosure of and reporting on specified bank notes Amendment to Schedule III requires companies to disclose the details of Specified Bank Notes held and transacted during the period from 8 November 2016 to 30 December 2016 in the specified format (Division I and Division II). [Notification dated March 30, 2017] Companies (Audit and Auditors) Amendment Rules, 2017 require auditors to report on whether the company had provided requisite disclosures in its financial statements as to holdings as well as dealings in specified bank notes during the period from 8 November 2016 to 30 December 2016 and if so, whether these are in accordance with the books of accounts maintained by the company. [Notification dated March 30, 2017] 10
Regulatory updates Institute of Chartered Accountants of India Effective date of applicability of revised / new auditing standards [Announcement dated April 1, 2017] - ICAI council has decided to defer applicability of following standards by one year and consequently following standards shall be effective/ applicable for audits of financial statements for periods beginning on or after April 1, 2018 instead of April 1, 2017. - SA 700 (Revised), Forming an Opinion and Reporting on Financial Statements - SA 701, Communicating Key Audit Matters in the Independent Auditor s Report - SA 705 (Revised), Modifications to the Opinion in the Independent Auditor s Report - SA 706 (Revised), Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor s Report - Till such time existing SA 700, 705 and 706 will continue to apply. 11
Regulatory updates Others The Payment of Wages (Amendment ) Act, 2017 [Notification dated February 16, 2017] Central Government has amended the Payment of Wages Act, 1936 to include payment of wages by cheque or crediting the wages in the bank account of employee. Further the Central Government may specify, by notification in the Official Gazette, the industrial or other establishment, where the employer shall pay wages only by cheque or crediting wages in the bank account of employee. 12
Regulatory updates Income Computation and Disclosure Standards Clarifications CBDT issued clarification addressing the queries raised by the stakeholders (25 FAQs) - ICDS not meant for maintenance of books of accounts/preparing financial statements - Judicial precedents vis-à-vis ICDS ICDS shall be applicable - ICDS to apply to person computing income under relevant presumptive taxation scheme - Conflict between ICDS and other specific provisions of IT Rules provision of IT Rules to prevail - ICDS to apply irrespective of the accounting standards adopted by companies (AS/Ind-AS) - Provisions of ICDS not applicable for computation of MAT however would apply for AMT - General provisions of ICDS shall apply to all persons (bank; NBFCs, power sector etc.) unless there are sector specific provisions contained in the ICDS or Act - Other clarification derivatives, retention money, real estate developer etc. 13
Regulatory updates Income Computation and Disclosure Standards - Reminder AS 1 and ICDS 1 The long accepted concept of Prudence and materiality in financial reporting are no longer acknowledged in ICDS Mark to market and expected losses shall not be recognized, which is against well-established principles in financial reporting No change in accounting policy permitted unless reasonable clause not defined? AS 2 and ICDS 2 Specific provisions for valuation of service inventory to be aligned with ICDS Revenue Recognition Specially mentioned about opening inventory which shall be the same as closing inventory; Standard cost & retail method permitted, if the results approximate the actual cost Retail method can be used where it is impracticable to use other methods 14
Regulatory updates Income Computation and Disclosure Standards - Reminder AS 7 and ICDS 3 Revenue recognition cannot be deferred beyond 25% of completion Contract revenue once recognized cannot be reversed but needs to be written off as bad debt Retention money to be included in the sales turnover Incidental income like interest/ dividend and capital gains need to be recognized as income separately Provision for foreseeable losses not allowed as deduction AS 9 and ICDS 4 Revenue recognition cannot be postponed in ICDS in case of significant uncertainty on measurability of consideration that will be derived from sale of goods or rendering of services Revenue from Service contract to be recognized only based on POCM the requirements of ICDS - construction contract shall mutatis mutandis apply to service transaction. Completed Service Contract Method permitted where the contract duration is not more than 90 days 15
Regulatory updates Income Computation and Disclosure Standards - Reminder AS 10 and ICDS 5 Only deals with Tangible fixed assets In case of assets exchanged, fair value of cost of asset acquired needs to be considered Revaluation of assets has not been permitted under ICDS Depreciation, Disposal/write off the assets to be recorded as per the provisions of the Act AS 11 and ICDS 6 Premium/discount, Exchange difference on forward contracts (highly probable/firm commitment) are to be recognized only on settlement AS 12 and ICDS 7 Grant has been defined to include subsidies, cash incentives, drawbacks, waiver, reimbursements by whatever name called either in cash or kind Consistent with S.43(1), All government grants related to depreciable fixed assets needs to be reduced from cost of the asset In all other cases (including non-depreciable assets) to be recognized as income 16
Regulatory updates Income Computation and Disclosure Standards - Reminder AS 13 and ICDS 8 ICDS mandates category approach (not by individual security) for valuation of security at lower of cost or Net Realisable Value (NRV). Securities to be classified into categories shares, debt securities, convertible securities, any other securities (para 10 of ICDS). However, in paragraph 15 of AS 13, it is acknowledged that a more prudent and appropriate method is to carry investments individually at the lower of cost and fair value. FIFO and Weighted Average Cost Method permitted for ascertainment of actual cost of securities Separate sub-chapter on securities held by a scheduled bank or public financial institutions. AS 16 and ICDS 9 Prescribes formula w.r.t general borrowing and does not require suspension of capitalisation even if active development is interrupted. Does not prescribe 12 months as period to be considered for purpose of determining the qualifying asset except in case of inventories. AS 29 and ICDS 10 Criteria of recognition of provision is based on reasonable certainty as compared to AS-29 requiring probable certainty. In practical view, both the terms should have a meaning of more likely than not? No upfront provision of onerous contract to be allowed 17
Key Indian GAAP year end reminders Reminders Revised standards that come into effect for year ended March 31, 2017 1. Accounting Standard (AS) 2: Valuation of Inventories 2. Accounting Standard (AS) 4: Contingencies and Events Occurring After the Balance Sheet Date 3. Accounting Standard (AS) 6: Depreciation Accounting omitted 4. Accounting Standard (AS) 10: Property, Plant and Equipment (the entire accounting standard has been revised in line with Ind AS 16) 5. Accounting Standard (AS) 13: Accounting for Investments 6. Accounting Standard (AS) 14: Accounting for Amalgamations 7. Accounting Standard (AS) 21: Consolidated Financial Statements 8. Accounting Standard (AS) 29: Provisions, Contingent Liabilities and Contingent Assets Guidance Note on accounting for derivatives 18
3. Ind-AS 19
Ind-AS Finance Act 2017: MAT framework for Ind AS compliant companies ITFG Bulletin 7 Companies (Indian Accounting Standards)(Amendment) Rules, 2017 20
Finance Act 2017: MAT framework for Ind AS compliant companies Computation of book profit in the first year of adoption of Ind AS Background The CDBT had constituted a Committee to suggest a framework for computation of book profit for levy of MAT for Ind AS compliant companies. The Committee after deliberation provided its recommendations. After consideration of the final recommendations from the committee, Finance Act 2017 amended Section 115 JB of the Income Tax Act; 1961 (the Act ) to provide a framework for computation of book profit for Ind AS compliant companies. A. Computation of book profit in the first year of adoption of Ind AS For companies applying with Ind AS in Phase I (FY 2016-2017), transition adjustments as of 31 March 2016 shall be included in the computation of book profit for MAT purposes as follows: i. Transition adjustments recorded in other comprehensive income (OCI) which would subsequently be reclassified to the profit or loss, will be included in the book profit of the financial year in which these items are reclassified to profit or loss. 21
Finance Act 2017: MAT framework for Ind AS compliant companies Computation of book profit in the first year of adoption of Ind AS ii. Transition adjustments recorded in OCI which would never be subsequently reclassified to the profit or loss will be included in the book profit as under: Sr. No. 1 2 3 Items of OCI Revaluation surplus of Property, plant and equipment (PP&E) and intangible assets Gains or losses on investments in equity instruments designated at fair value through OCI (FVOCI) Any other item such as remeasurement of defined benefit plans Point of taxation for MAT To be included in the book profit of the year in which the asset is disposed, retired, realised or otherwise transferred. To be included in book profit of the year in which the investment is disposed, realised or otherwise transferred. To be included in the book profit equally over a period of five years starting from the first year of Ind AS adoption. 22
Finance Act 2017: MAT framework for Ind AS compliant companies Computation of book profit in the first year of adoption of Ind AS iii. Other transition adjustments recorded in other equity (excluding capital reserve and securities premium reserve) will be included in the book profit, equally over a period of five years starting from the first year of Ind AS adoption, except for: Sr. No. 1 2 3 Transition adjustments in other equity PP&E and intangibles recorded at fair value as deemed cost Investments in subsidiaries, JVs and associates recorded at fair value as deemed cost Cumulative translation differences of a foreign operation reset to zero Point of taxation for MAT To be included in the book profit of the year in which the asset is disposed, retired, realised or otherwise transferred. To be included in the book profit of the year in which the investment is disposed, realised or otherwise transferred. To be included in the book profit of the year in which the foreign operation is disposed or otherwise transferred. 23
Finance Act 2017: MAT framework for Ind AS compliant companies Computation of book profit in subsequent years B. Computation of book profit in subsequent years i. No further adjustment to profit before comprehensive income, other than those already specified under Section 115JB of the Act, transition adjustments discussed above and gains or losses arising on demerger. ii. OCI items that will be reclassified to profit or loss shall be included in book profit of the year of reclassification. iii. OCI items that will be not reclassified to profit or loss shall be included in book profit for MAT purposes in the year they arise except for : 1 2 Item of OCI Revaluation of PPE & intangibles Gains or losses on FVOCI equity investments Point of taxation for MAT To be included in the book profit of the year in which the asset is disposed, retired, realised or otherwise transferred. To be included in book profit of the year in which the investment is disposed, realised or otherwise transferred. 24
Finance Act 2017: MAT framework for Ind AS compliant companies MAT implication on demerger Demerged company Gains or losses recognised under Ind AS in the profit or loss on distribution of non-cash assets to shareholders in a demerger shall be excluded from the book profit. Resulting Company If the transferred assets and liabilities are recorded at values different from the values appearing in the books of the demerged company, then any such change shall be ignored for computation of book profit. Tax neutral from MAT perspective 25
ITFG Bulletin 7 1. If a foreign currency loan is partially drawn down before the beginning of the first Ind AS financial reporting period and the remaining amount is drawn down during the first Ind AS reporting period, then the exemption available under para D13AA of Ind AS 101 is available only for foreign currency loans drawn and recognised in the financial statements immediately before the beginning of the first Ind AS financial reporting period. 2. Exemption under Ind AS 101, para D13AA relates to accounting for foreign exchange differences on long term monetary items. The exemption cannot be applied to accounting for long-term forward contracts since these derivatives are within the scope of Ind AS 109. 3. If an entity adopts the previous GAAP deemed cost exemption for PP&E as per para D7AA of Ind AS 101, then it cannot reverse the impact of any exchange differences capitalised under the previous Indian GAAP. 26
ITFG Bulletin 7 4. Accounting of dividend on financial instrument which is classified as financial liability (e.g. preference shares) is governed by classification of such instrument under Ind AS 109. If the liability is subsequently measured at amortised cost, dividend will be accrued as part of the interest expense based on Effective Interest Rate (EIR) method, even if it is declared after the end of the reporting period. 5. Lease of land for 99 years and above shall be classified as finance lease when the lease transfers substantially all risks and rewards incidental to ownership. For instance, when at the inception of the lease the present value of minimum lease payments (MLP) amounts to at least substantially all of the fair value of the leased land. 6. Deferred tax on freehold land should be recognised where the freehold land is not expected to be sold on slump sale. If it is concluded based on evaluation of facts that land will be sold through slump sale, then tax base of such land will be equal to its carrying value (as indexation benefit is not available under slump sale under Income Tax Act) and therefore there will not be any temporary difference. 27
ITFG Bulletin 7 7. If parent company invests in debentures issued by a subsidiary and such debentures meet the definition of equity as per Ind AS 32 from the issuer's perspective (i.e. subsidiary), then such investment can be considered to be part of parent's investment in subsidiary and can be accounted under Ind AS 27 Separate Financial Statements, else it will be accounted under Ind AS 109. 8. Para D22 of Ind AS 101 provides an exemption from retrospective change in accounting policy for amortisation of intangible assets arising from service concession arrangements in respect of toll roads recognised in the financial statements before the beginning of first Ind AS reporting period. The exemption cannot be availed with respect to toll roads which are under development or construction as at beginning of the first Ind AS reporting period and for which amortisation has not begun. 9. Ind AS does not prohibit use of any currency as presentation currency. If a Company is statutorily required to present its financial statements in INR which is different from its functional currency, then the entity may do so by choosing INR as the presentation currency and translating the functional currency transactions/balances to INR. Auditor of such company will be required to give audit report on financial statements in INR. 28
Companies (Indian Accounting Standards) (Amendment) Rules, 2017 MCA has issued the Companies (Indian Accounting Standards) (Amendment) Rules, 2017 on 17 March 2017 notifying amendments to Ind AS 7, Statement of cash flows and Ind AS 102, sharebased payment. These amendments are consistent with the amendments made by IASB in corresponding IFRS and shall be applicable from annual periods beginning on or after 1. Ind AS 7: Additional disclosure incorporated to explain the changes in liabilities arising from financing activities. Ind AS 102: Amendments include: i. Clarification on measurement basis for cash-settled share-based payments ii. Accounting for modifications that change an award from cash-settled to equity settled iii. Introduction of an exception to the principles of Ind AS 102 that will require an award to be treated as if it was wholly equity-settled, where an employer is obliged to withhold an amount for the employee s tax obligation related to share-based payment and pay it to the tax authority 29
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