18 February 2015
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 2
Your speaker Madhu Sudan Kankani Partner Accounting Advisory Services KPMG in India Nirav Patel Director Accounting Advisory Services KPMG in India 3
Agenda 1 Overview of Income Computation and Disclosure Standards (ICDS) 2 Significant impact areas of ICDS 3 Next steps for ICDS implementation 4
Setting the context Twelve new Income Computation Disclosure Standards: ICDS (previously termed as Tax Accounting Standards TAS) issued on 8 January 2015 Addresses a significant roadblock in the adoption of Ind AS which to some extent provide stability in tax treatments of various items It is expected that ICDS will be applicable from assessment year 2016 17 onwards. First time implication is to be analysed before 15 June 2015, it being the due date for first quarter advance tax payment i.e. effective 1 April 2015 Central Board of Direct Taxes (CBDT) had earlier constituted a committee to study and formulate the accounting standards. The committee concluded on 14 standards being relevant for the computation of taxable income and had issued its recommendation in October 2012 via public domain, inviting comments from stakeholders and the general public The updated draft addresses some of the concerns raised by the stakeholders and provides transitional provisions to follow ICDS The government had invited comments from stakeholders on the updated draft ICDS by 8 February 2015. 5
ICDS: journey towards adoption The CBDT constituted AS Committee to Final report of the Committee suggest the following: 2 and 14 ICDS published 2 AS to be notified under the Act Amendments to the Act Method to determine book profit for MAT purposes on transition to Ind AS. Comments invited from the public on the Draft ICDS. July 2014 January 2015 October 2012 The central government notified two accounting standards under Section 145(2) of the Income Tax Act, 1961 (the IT Act). 2 December 2010 Finance Bill 2014 amended Section CBDT issued a draft of 12 ICDS, after incorporating 145(2) of the IT Act. suggestions from the 1996 ICDS applicable from FY 1 April 2015 1 stakeholders and providing transitional provisions for ICDS to be notified these ICDS 3 separately The draft ICDS were open Compliance expected to be required in 2015 first quarter. for comments and the comment period ended on 8th February, 2015. 6
Highlights of the ICDS: A step in the right direction A significant impediment to the adoption of Ind AS. Uniform basis of taxable income computation One set of books of account with adjustments for ICDS ICDS are subordinate to the IT Act Legislations/Judicial pronouncements follow thereafter Addresses issues subject to litigation and diversity There are areas of differences between the ICDS and the current set of Accounting Standards/Policies Impact on MAT on adoption of Ind AS needs to be considered 7
Approach for the formulation of ICDS Committee deliberated on 31 AS issued by the ICAI and notified ICDS equivalent to 12 AS 4 Certain standards were relevant for disclosure purposes only (e.g. AS 17, AS 20) Act separately contained specific provisions on issues covered by AS (e.g. AS 14) AS on consolidation were not relevant for tax purposes (AS 21, AS 23, AS 27) AS on financial instruments are not yet notified; hence not considered (AS 30, AS 31, AS 32). Committee shall issue ICDS on the following topics in the future 4 Share-based payment Revenue recognition by real estate developers Service concession arrangements Exploration for and evaluation of mineral resources. 8
Recommendations in the 2012 report To maintain harmony with the Act, ICDS to be notified under the Act; may vary from the AS ICDS to lay down specific rules that will enable computation of taxable income with certainty and clarity 4 To ensure horizontal equity and uniformity, ICDS should eliminate alternatives, as much as possible 4 No separate books to be maintained for ICDS ICDS to apply to all taxpayers In case of conflict between ICDS and the Act, the Act will prevail Amending form 3CD to include assertion on computation of taxable income as per ICDS Suitable amendments to the Act to provide clarity on certain issues, e.g., goodwill amortisation, leases. 9
Implementation matters No concept of materiality: unrecorded audit adjustments No concept of prudence Significant differences may require multiple record keeping: system implications Status of Guidance notes/asi s Incremental differences: Ind AS Dual transitional approaches: Prospective/ Retrospective Clarity on standards/principles yet to be announced Definition of Income under the IT Act: concept of real income Judicial proceedings and interpretations Disclosures 10
Agenda 1 Overview of Income Computation and Disclosure Standards (ICDS) 2 Significant impact areas of ICDS 3 Next steps for ICDS implementation 11
Significant Impact Areas: A Snapshot Effects of changes in Foreign Exchange Rates Intangible assets Government Grants Provisions, Contingent Liabilities and Contingent Assets Accounting Policies Securities Derivatives treatment Inventories Borrowing costs Leases Tangible Fixed Assets Revenue Recognition and Construction Contracts Many industry specific differences could arise 12
Significant Impact Areas (1/9) Accounting Policies No recognition to the concept of Materiality Eliminates the concept of Prudence : disallows recognition of expected losses or mark to market losses unless specifically permitted by any other ICDS No changes in accounting policies without reasonable cause No guidance on impact of change in policies on the computation of income Treatment and presentation of transactions and events shall be governed by their substance and not merely by the legal form. 4 Transitional provision All contracts or transactions existing on the first day of April, 2015 or entered into on or after the first day of April, 2015 shall be dealt with in accordance with the provisions of this standard. Taxation impact Mark to market loss unless specifically covered in other ICDS allowed only on settlement. 13
Significant Impact Areas (2/9) Borrowing Cost No minimum period required for classification as a qualifying asset, except inventories Exchange differences not included as borrowing costs Specific borrowings: income from temporary deployment of unutilised funds to be treated as income Specific formula introduced for capitalisation of general borrowing cost: updated vis a vis old TAS Transitional provision: Prospective from date of transition after taking into account the borrowing cost capitalised earlier. Taxation impact Tax impact in line with provisions of the Income Tax Act. Capitalize borrowing cost even if active development is interrupted. 14
Significant Impact Areas (3/9) Leases Lessee to be entitled to depreciation in case of finance lease: suitable amendments may be required to the Act Joint confirmation for same lease classification For operating leases with escalation clauses, straight lining of lease rentals required An asset given on finance lease would now be considered to have been sold by the lessor with a corresponding recognition of revenues and profits. Only the finance income component of the lease rental would be recognised as income over the lease term Definition of minimum lease payment does not include residual value guaranteed by any party other than the lessee: ensures that there is a uniform lease classification. Transitional provision: ICDS to apply to all lease transactions undertaken on or after 1 April, 2015 and the lease transactions undertaken on or before 31 March, 2015 shall continue to be governed by the provisions of the Income Tax Act. Taxation impact Intention to bring consistency in tax treatment of finance lease.. 15
Significant Impact Areas (4/9) Construction Contracts and Revenue recognition Retention money recognised using percentage of completion method: whether it overrides Accrual Income concept? Completed contract method not permitted Non-recognition of margins permitted up to 25 per cent of stage of completion Does not permit recognition of expected losses on onerous contracts 4 Revenue recognition on reasonable certainty of ultimate collection (updated vis a vis old TAS) No guidance on principal vs agent Straight lining for certain contracts Risk and reward basis of revenue recognition vs IFRS 15/Ind AS. Transitional provision: Cumulative catch up of revenue after the date of transition for all open contracts. Taxation impact Deduction for future / anticipated / estimated losses (including onerous contract) not allowed unless actually incurred Taxability of service contracts on percentage completion method. 16
Significant Impact Areas (5/9) Effects of changes in foreign exchange rates All foreign exchange losses on borrowings to be allowed, except borrowings used to import fixed assets An average rate for a week or a month that approximates the actual rate at the date of the transaction may be used (updated vis a vis old TAS) Forward Exchange Contracts for trading/ speculation or to hedge foreign currency risk of a firm commitment or a highly probable forecast transaction: premium or discount on contracts shall be recognized at the time of settlement Other Forward Exchange Contracts: premium or discount arising at inception shall be amortised over the life of the contract Other Derivative contracts: MTM shall not be recognized unless permitted by other ICDS. MTM deferred till settlement. Transitional provision: Prospective from date of transition after taking into account amount recognised as on 31 March 2015, which is carried forward from the PY. Taxation impact Currently discount / premium is recorded in the Profit and Loss Account and offered / claimed in tax return Losses / gains to be deferred in case of contracts overlapping two years. 17
Significant Impact Areas (6/9) Provisions, contingent liabilities and contingent assets Excludes all onerous contracts from its scope ICDS requires recognition of provision only if it is reasonably certain instead of being probable ICDS requires recognition of contingent assets when inflow of economic benefits is reasonably certain. Transitional provision: Prospective from date of transition after taking into account the amount, if any, for the same, recognised before 31 March 2015. Taxation impact Intention appears to bring tax treatment of losses and gains on par. Government grants Capital approach for grants not permitted Initial recognition of grant cannot be postponed beyond the date of actual receipt 4 Non monetary asset grant treatment. Transitional provision: Prospective from date of transition after taking into account the amount, if any, of the said grant recognised earlier. Taxation impact To understand whether purpose test - capital vs. revenue, held by judicial precedents would continue to apply. 18
Significant Impact Areas (7/9) Intangibles Excludes goodwill from its scope Commercial feasibility not a must for capitalisation of development costs For internally developed intangible assets, AS 26 requires that in case the development phase of a project cannot be distinguished from the research phase, then the entire costs are recognised as part of research phase and consequently charged as expense. The Transitional provision: Prospective from date of transition after taking into account the amount recognised, if any, for the said asset earlier. Taxation impact ICDS not to impact taxability of goodwill. ICDS does not provide such guidance 4 Assets acquired in exchange: the value of the intangible asset acquired in such a manner shall be its actual cost. 19
Significant Impact Areas (8/9) Securities Covers only securities held as stock in-trade (also excludes banks, PFIs and mutual funds) Comparison of cost and net realisable value for securities held as stock-in-trade to be assessed category-wise and not for each individual security 4 FIFO Method: cost of securities sold Unquoted / irregularly quoted securities carried at cost Transitional provision: None Taxation impact Notional gains arising on year-end valuations could be taxed. Securities acquired in exchange: value of the security acquired in such a manner shall be its actual cost 20
Significant Impact Areas (9/9) Inventory Dispensation of standard cost method Distribution costs excluded. Transitional provision: Prospective from date of transition. Taxation impact Tax impact in year of change in inventory valuation Tangible Assets Prescribes maintenance of a fixed asset register: all assets for all years Capitalisation of exchange differences relating to fixed assets shall be in accordance with Section 43A and other similar provisions of the Act, which could be materially different from the provisions of AS 10, AS 16 and AS 11 4. Transitional provision: Actual cost of fixed assets, acquisition or construction of which commenced before 31 March 2015 but not completed would be accounted for as per revised ICDS. Taxation impact Mostly in line with the current provisions of the IT Act. 21
Agenda 1 Overview of Income Computation and Disclosure Standards (ICDS) 2 Significant impact areas of ICDS 3 Next steps for ICDS implementation 22
Next steps Standard Setters Final Standards to be notified Notify the changes to the Income Tax Act Internal implementation guidelines and training Stakeholders Impact assessment Develop an implementation plan Bring about changes to the information systems and processes Trainings 23
Q&A 24
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 one-stop 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 25
Sources 1. The Finance Bill, 2014 2. The ITAT website: http://www.itatonline.org/info/wp-content/files/tax_accounting_standards_draft_cbdt.pdf 3. Draft Income computation and disclosure standards as issued by Ministry of Finance on 8 January 2015 4. Link: http://www.kpmg.com/in/en/services/tax/flashnews/tax-accounting-standards-12.pdf 26
Introducing IFRS Notes Issue 2015/01 Government announces a roadmap for implementation of Ind AS On 2 January 2015, the Ministry of Corporate Affairs issued a press release announcing a revised roadmap for the implementation of Indian Accounting Standards (Ind AS), converged with International Financial Reporting Standards (IFRS). This roadmap is applicable to companies other than banking companies, insurance companies and non-banking finance companies. In this issue of IFRS Notes, we have provided an overview of the revised roadmap of implementation of Ind AS along with our points of view. Issue 2014/02 IFRS Convergence: ICAI issues exposure drafts on financial instruments and revenue recognition As part of the initiatives towards India s convergence with IFRS from 2016-17, the Accounting Standards Board of the Institute of Chartered Accountants of India has recently issued exposure drafts on Ind AS 109, Financial Instruments (ED on financial instruments) and Ind AS 115, Revenue from Contracts with Customers (ED on revenue). In this issue of IFRS Notes, we have provided an overview of these exposure drafts along with key impact areas. 27
Topics discussed in AAU and First Notes Accounting and Auditing update First Notes January 2015 Government announces roadmap for implementation of Ind AS The Ministry of Finance issues revised drafts on tax computation standards Liquor industry in India AICPA s national Conference 2014 on current SEC and PCAOB developments Guidance note on derivative contracts Income taxes the mystery of uncertainties Revisions in the NBFC framework: an overview of key revisions Regulatory updates The Ministry of Corporate Affairs had earlier announced a roadmap for transition to Indian Accounting Standards (Ind AS) from 1 April 2011. To address lack of clarity of tax implications on the adoption of Ind AS by companies, the Central Board of Direct Taxes (CBDT) constituted a committee to harmonise the accounting standards issued by the Institute of Chartered Accountants of India with the provisions of the Act. In August 2012, the committee, after deliberations issued 14 draft tax accounting standards. These accounting standards are now termed as Income Computation and Disclosure Standards (ICDS). Considering the draft ICDS (2012) by the CBDT had significant differences with generally accepted accounting principles, the Ministry of Finance reworked on the standards and on 8 January 2015 issued revised drafts of 12 ICDS (2015) for public comments. Our First Notes provides an overview of key revisions made in the revised draft ICDS (2015). 28
Others Missed an issue of the Accounting and Auditing Update? Missed an issue of the First Notes? Coming up next February 2015 New issue of: Accounting and Auditing Update First Notes IFRS Notes Download from www.kpmg.com/in 29
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 E-mail: mkankani@kpmg.com Nirav Patel Director, Accounting Advisory Services, KPMG in India E-mail: 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.