+ All Categories
Home > Education > Accounting and Auditing Update - September 2014

Accounting and Auditing Update - September 2014

Date post: 02-Nov-2014
Category:
Upload: kpmg-india
View: 847 times
Download: 4 times
Share this document with a friend
Description:
The September 2014 edition of the Accounting and Auditing Update provides insights into actions that can be taken by regulators and highlights related accounting and reporting considerations that impact companies primarily in the pharmaceutical sector. We also cover two articles on the Companies Act, 2013 where we share some practical experience and implementation challenges – one is on corporate social responsibility and second on the related party transactions. Under the International Financial Reporting Standards, we cover the status of the lease accounting project and some of the narrow scope but significant amendments issued by the International Accounting Standards Board. As always, we have also covered key regulatory developments during the recent past.
Popular Tags:
24
September 2014 ACCOUNTING AND AUDITING UPDATE In this issue Pharma sector - concept of current good manufacturing practices and import alerts p1 Corporate social responsibility - an analysis p6 Status of the lease accounting project p8 Implementation challenges for related party reporting under the Companies Act, 2013 p10 Summary of narrow scope but significant amendments under IFRS p15 Regulatory updates p18
Transcript
Page 1: Accounting and Auditing Update - September 2014

September 2014

ACCOUNTINGAND AUDITINGUPDATE

In this issue

Pharma sector - concept of current good manufacturing practices and import alerts p1

Corporate social responsibility - an analysis p6

Status of the lease accounting project p8

Implementation challenges for related party reporting under the Companies Act, 2013 p10

Summary of narrow scope but significant amendments under IFRS p15

Regulatory updates p18

Page 2: Accounting and Auditing Update - September 2014

EditorialWe focussed on industry drivers and accounting and reporting issues relating to the pharmaceutical industry in our June 2014 issue. One area that we received some requests and feedback for additional coverage was relating to regulatory actions, warning letters, import alerts, etc. that is becoming increasingly topical in this industry. In this month’s issue, we will try and provide some colour to these topics, and also highlight related accounting and reporting considerations.

Also, another suggestion received from some of our readers was for us to share some of the practical learnings and experience arising from the implementation of different aspects of the Companies Act, 2013. This month we feature the areas of related party transactions and corporate social responsibility, and highlight the nuances and additional insights that have emerged as implementation of the Act has progressed in corporate India.

In our regular coverage of international GAAP developments, we focus in this issue on the proposed standards on leases and some of the narrow scope but significant amendments under IFRS. These amendments and new standards have different application dates but the direction of travel in India, given the government’s recent re-iteration of its commitment to IFRS convergence, is clear.

We also cover a number of updates this month as both reporting and regulatory guidance that affects reporting continue to evolve at a fast pace in India; making the job of anyone involved in the area of corporate reporting much more interesting and challenging!

As I sign off for this month, I would like to remind you that in case you have any suggestions or inputs on topics we cover, we would be delighted to hear from you.

Happy reading!

V. Venkataramanan

Partner, KPMG in India

© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Page 3: Accounting and Auditing Update - September 2014

The United States of America (U.S.) is one of the largest markets for generic drug manufacturers. Many Indian companies have been fairly strong in this market and are credited as being one of the largest generic drug suppliers to the U.S. market. However, over the recent past, the U.S. Food and Drug Administration (‘FDA’ or ‘the agency’) has taken stringent actions against certain Indian pharmaceutical manufacturers by way of issuance of ‘warning letters’ and ‘import alerts’, thereby restricting the import of drugs into the U.S. market. Given the importance of the Indian generic drug manufacturers, the FDA has also increased the number of inspectors based out of India in order to enhance its inspection mechanism in relation to manufacturing facilities based in India. A key area of focus for the FDA is the level of documentation, and their concerns around potential violation of current good manufacturing practices or ‘cGMP’ by the Indian manufacturers.

1

© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Pharma sector Concept of current good manufacturing practices and import alerts

This article aims to

• Explain the concept of cGMP

• Provide insights into the regulatory actions that can be taken by the FDA for violation of cGMP

• Highlight some key accounting and reporting implications of import alerts.

About FDA and the concept of cGMP1

The U.S. is the largest single market for the pharmaceutical industry globally. The FDA is an agency within the U.S. Department of Health and Human Services which is responsible for protecting the public health by assuring the safety, effectiveness, quality, and security of human and veterinary drugs, vaccines, and other biological products. Over-the-counter and prescription drugs, including generic drugs, are regulated by the FDA’s Center for Drug Evaluation and Research (CDER).

The FDA attempts to ensure the quality of drug products by carefully monitoring drug manufacturers’ compliance with the cGMP regulations as stipulated. The cGMP regulations for drugs contain minimum requirements for the methods, facilities, and controls used in

manufacturing, processing, and packing of a drug product which can ensure that a product is safe for use and that it has the ingredients and strength it claims to have.

The approval process for new drug and generic drug marketing applications includes a review of the manufacturer’s compliance with the cGMP. The FDA inspectors determine whether a company has the necessary facilities, equipment, and skills to manufacture the new drug for which it has applied for approval. Decisions regarding compliance with cGMP regulations are based upon inspection of the facilities, sample analyses, and compliance history of the company.

1. The U.S. FDA website

Page 4: Accounting and Auditing Update - September 2014

© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

2

Thus, one of the key objectives of the agency is to conduct an extensive regulatory review of ̀ the key aspects of production and distribution of drugs and drug products, to help assure that such products meet the requirements of the regulations as stipulated. The FDA generally adopts two key elements as part of fulfilling its mandate:

• evaluate through factory inspections, including the collection and analysis of associated samples, the conditions and practices under which drugs and drug products are manufactured, packed, tested and held

• monitor the quality of drugs and drug products through surveillance activities such as sampling and analysing products in distribution.

In order to understand the inspection process, it is important for us to understand the meaning of the cGMP as enforced by the FDA.

As mentioned above, cGMP provide for systems that help assure proper design, monitoring, and control of manufacturing processes and facilities. Adherence to the cGMP regulations can help assure the identity, strength, quality, and purity

of drug products by requiring that manufacturers of medications adequately control manufacturing operations and include establishing strong quality management systems, obtain appropriate quality raw materials, establish robust operating procedures, detect and investigate product quality deviations, and maintain reliable testing laboratories.

This formal system of controls at a pharmaceutical company, if adequately put into practice, can help prevent instances of contamination, mix-ups, deviations, failures, and errors, and can help assure that drug products meet their quality standards. The FDA inspects pharmaceutical manufacturing facilities worldwide using scientific procedures, and also deputes cGMP trained individuals whose job it is to evaluate whether the company is following the cGMP regulations.

If a company is not complying with cGMP regulations, any drug it makes is considered ‘adulterated’ under the law. This kind of adulteration means that the drug was not manufactured under the conditions that comply with the cGMP. It does not imply that there is necessarily something wrong with the drug.

Under the regulations stipulated by the FDA, a drug or device shall be deemed to be adulterated:

– if it has been prepared, packed, or held under insanitary conditions whereby it may have been contaminated with filth, or whereby it may have been rendered injurious to health

– if it is a drug, and the methods used in, or the facilities or controls used for its manufacture, processing, packing, or holding do not conform to or are not operated or administered in conformity with the cGMP to ascertain that such drug meets the requirements for safety, identity and strength, and quality and purity characteristics, which it purports or is represented to possess.

Regulatory actions for violation of the cGMP2

A drug company is considered to be operating in a ‘state of control’ when it employs conditions and practices that attempt to assure compliance with the intent of stipulated regulations and the applicable cGMP regulations. A company in a state of control typically produces finished drug products for which there is an adequate level of assurance of quality, strength, identity, and purity.

Inspection findings that demonstrate that a company is not operating in a state of control may be used as an evidence for taking appropriate advisory, administrative, and/or judicial action.

If the failure to meet cGMP results in the distribution of a defective drug, the company may subsequently recall that product, which also protects the public by removing these drugs from the market. While the FDA can not force a company to recall a drug, companies usually recall voluntarily or at the FDA’s request. If a company refuses to recall a drug, the FDA can warn the public and could seize the drugs that are in the market. Even if the

drugs are not defective, the FDA has the powers to bring a seizure or injunction case in the court to address the cGMP violations. When the FDA brings a seizure case, the agency asks the court for an order that allows federal officials to take possession of ‘adulterated’ drugs and destroy them. This enables the FDA to immediately prevent a company from distributing those drugs to consumers. When the FDA brings an injunction case, the FDA asks the court to order a company to stop violating cGMP.

Both seizure and injunction cases often lead to court orders that require companies to take many steps to correct the cGMP violations, such as:

• hiring outside experts

• writing new procedures

• conducting extensive training of their employees.

2. The U.S. FDA website

Page 5: Accounting and Auditing Update - September 2014

© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

3

The FDA can also file criminal cases because of cGMP violations including seeking fines against a company by involving the Department of Justice (DOJ). A sequential order of regulatory action that can be taken by the FDA upon completion of inspection of a manufacturing facility is as follows:

A brief explanations on each of the above actions is explained in the following paragraphs.

Form 483

The FDA ‘Form 483’ is issued to a company at the conclusion of an inspection when FDA investigator(s) have observed any conditions that in their judgement may constitute violations of the Food Drug and Cosmetic (FD&C) Act and related Acts. The FDA investigators are trained to help ensure that each observation noted on the FDA Form 483 is clear, specific, and significant. Observations are made when in the investigator’s judgement, conditions, or practices observed would indicate that any food, drug, device or cosmetic has been adulterated or is being prepared, packed, or held under conditions whereby it may become adulterated or rendered injurious to health.

The FDA Form 483 does not constitute a final agency determination of whether any condition is in violation of the FD&C Act or any of its relevant regulations. The FDA Form 483 is considered, along with a written report called an ‘Establishment Inspection Report’, evidence or documentation collected on-site, and any responses made by the company basis, after which the FDA determines what further action, if any, is appropriate to protect public health.

Warning letters

When the FDA finds that a manufacturer has ‘significantly violated’ the FDA regulations, the FDA notifies the manufacturer. This notification is often in the form of a ‘warning letter’. The warning letter identifies the violation, such as poor manufacturing practices, problems with claims for what a product can do, or incorrect directions for use. The letter also makes clear that

• the company must correct the problem and provides directions and

• a time-frame for the company to inform the FDA of its plans for correction.

The FDA then checks to determine if the company’s corrections are adequate.

Import alerts

An import alert allows the FDA to detain, without physically examining, at the U.S. border, products that either have or potentially could violate the FD&C Act. The alert lets the FDA field staff know that the agency has enough evidence or other information to refuse admission of future shipments of an imported article into the U.S.

Consent decree

If a company has repeatedly violated the cGMP requirements, the FDA may make a legal agreement with the company to force them to make specific changes. The agreement i.e. ‘a consent decree’ is enforced by the federal courts. A consent decree of injunction represents an ‘injunction’ to which the defendant has agreed and which is filed in the court. By definition, an injunction means an order issued by the court requiring a defendant to perform an act which he is obligated to perform but refuses to do, or forbidding him from doing a specified act which he is threatening or attempting to do. A, ‘Decree of Permanent Injunction’, may be entered at any time after the complaint is filed, either following a hearing or as a result of a negotiated settlement. As its name implies, a, ‘Decree of Permanent Injunction’, remains in effect until it is dissolved by an order of the court. Such a decree perpetually restrains the defendants from engaging in specified violative practices and remains in force until termination.

FORM 483

Warning letter

Import alert

Consent decree

Source: KPMG in India analysis

Page 6: Accounting and Auditing Update - September 2014

© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

4

Accounting implications of an import alert

Based on our experience, regulatory action by the FDA can have a significant impact as these generally have a negative connotation in the industry and to investors. Post regulatory action, a company may need to critically evaluate the nature of observations/concerns highlighted by the agency and take several steps in order to assuage the FDA and its investors. A summary of certain ‘direct and immediate implications’ and certain ‘other long term implication’ are given below.

Communication with stock exchanges and FDADepending upon the severity of the regulatory action, the company (if listed) may be required to communicate with the stock exchanges explaining the nature of inspection carried out at the facility and the subsequent receipt of the Form 483. The company may also be required to confirm whether it has received an import alert in addition to the Form 483 or whether the company intends to voluntarily suspend supply of products, to the market, pending completion of the internal assessment of the manufacturing facility.

In addition, the company may be required to communicate with the FDA its response to Form 483, warning letter and/or import alerts which can enable the FDA to understand the company’s position on the observations highlighted by the agency.

Evaluation of the nature of violationsA company will need to evaluate the nature of violations highlighted by the FDA and consider whether these have any financial implications, specifically where these pertain to data integrity matter which may have a larger consequence in the form of fine/penalty, if proved to be correct.

Product recallA company may need to actively consider whether to initiate product recall and also perform steps to reassure its customers of the efficacy of drugs being manufactured by it.

Impairment of inventoryInventory physically available with the company may be required to be subject to an impairment test post an import alert. Such inventory is usually not saleable as it is deemed to be ‘adulterated’.

Provision towards committed contractsCertain provisions may be required to be created towards committed contracts for purchase of raw material/ job worker charges towards loss incurred since such contracts would no longer be required as a result of the import alert and the resultant ban on exports to the U.S. market.

Provision towards failure to supplyPharmaceutical companies in the U.S. often enter into long-term supply contracts with their customers to supply products at an agreed price. Extended period of import alerts may warrant a creation of provisions for failure to supply as these customers can be compelled to purchase the required products from alternate suppliers and can, therefore, raise claims on a company towards failure to supply.

Impairment assessment of assetsA company may have to critically evaluate impairment considerations for some of the assets e.g. property, plant and equipment, deferred taxes, MAT, etc.

Direct and immediate implications

Page 7: Accounting and Auditing Update - September 2014

© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

5

Conclusion

The Indian pharmaceutical industry which seems to be making rapid strides in terms of its penetration in the U.S. market, needs to take into account that the level of potential FDA and cGMP related scrutiny. As much as the business opportunity seems attractive, companies should adopt a ‘zero tolerance attitude’ in so far as compliance with cGMP in order to be successful in a sustainable manner in that market. The costs of not doing so can be significant and far reaching.

Companies may also need to evaluate other business considerations which may have a long-term impact on the business continuity and may also have a related financial impact. Some of these implications are highlighted below:

Increased cost of trainingAs explained above, some of the steps required in order to obtain a fresh approval from the FDA for resumption of supplies include significant cash outflows towards hiring of external experts, writing new procedures, and conducting extensive training of employees.

Impact on existing filings for approval of First to File (FTF) The FDA may reconsider the filing of the FTF requests made from a facility which comes under an import alert. Such reconsideration could lead to delay in receipt of approval and may create a significant amount of uncertainty about getting approval in a timely manner for the company.

Action taken by other regulatorsIt has been observed that regulators of other countries often increase vigilance towards products coming from an impacted facility and have in some circumstances restricted the import of products into their jurisdiction on the basis of action taken by the FDA. Such action, may result in further inventory/failure to supply provision as explained in the above paragraphs.

Action by the Department of Justice (DOJ), USAIn rare circumstances, a company may also need to evaluate the regulatory action that can be taken by the DOJ, if any, on the basis of observations contained in the Form 483. In such circumstances, the company may need to consider making appropriate disclosures in relation to the financial impact, and the future course of actions which can enable it to resume supplies to the U.S. market.

Other long term implications

Page 8: Accounting and Auditing Update - September 2014

The Government has introduced mandatory ‘corporate social responsibility’ (CSR) requirements in the Companies Act, 2013 (2013 Act). The 2013 Act mandates companies to spend on social and environmental welfare, making India perhaps one of the very few countries in the world to have such a law and requirement. The CSR provisions have become effective from 1 April 2014, and the Ministry of Corporate Affairs (MCA) has issued further clarifications relating to the CSR requirements through a circular dated 18 June 2014 (Circular).

© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Corporate social responsibility an analysis

This article aims to

• Summarise the requirements of the corporate social responsibility provisions in India

• Highlight the challenges that the companies are expected to face while implementing these requirements.

Applicability

The CSR Rules (Rules) state that every company including its holding or subsidiary, as well as foreign companies having project office/branch in India, meeting certain criteria (i.e. equaling or exceeding net worth of INR5billion, or net profit of INR50 million, or turnover of INR10 billion) during any financial year, is required to comply with the CSR provisions.

The Circular clarifies that the above threshold limits for the CSR applicability during, say, financial year 2014-15 must be checked during any of the preceding three financial years i.e. 2013-14, 2012-13 and 2011-12. The profits calculated under the Companies Act, 1956 (1956 Act) are not required to be recalculated and hence, the net profit threshold of INR5 billion should be considered for profit calculated as per section 349 of 1956 Act (section in the 1956 Act corresponding to section 198 in the

2013 Act) for financial years 2013-14, 2012-13, and 2011-12.

Once a company has been determined to be covered under the CSR provisions, in order for the requirement to cease to be applicable, the company would need to prove that for three consecutive years the CSR provisions do not apply to it. The CSR provisions would then cease to apply from the fourth year and not during the preceding three financial years, which means that the company would be required to continue with the CSR committee and the CSR spend during the three preceding financial years.

6

Page 9: Accounting and Auditing Update - September 2014

7

© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Quantum of spend

The CSR committee of a company has to ensure that the company spends two per cent of its average net profit before tax of the preceding three years on CSR activities within India. Since the profits calculated under the 1956 Act are not required to be recalculated (as mentioned above), profits as per section 349 of the 1956 Act must be considered for this purpose. Section 198 of the 2013 Act/349 of the 1956 Act mentions certain additions and deletions to be made while calculating the net profit of a company (mainly to exclude capital payments/receipts, income tax, set-off of past losses, etc.). Important considerations for companies include the following:

• Can past losses be set-off against profits of subsequent years? To explain this issue with an example, consider three years’ profits are INR100, INR20, INR (200) (i.e. loss of 200). One calculation of the profit could be 100 + 20 + (200) = (80) and therefore, no CSR spend requirement. Other calculation could be to take loss of 200 as nil for that year (since it would be set off against future years’ profits) and hence, profit would be 100 + 20 + 0 = 120. Thus, average profit would be INR 40 (i.e. 120/3) and consequently there would be CSR spend requirement of INR0.8. Currently, there is no authoritative guidance on this aspect that has been issued by the government.

• Dividend from other Indian companies which are covered under and complying with the CSR provisions must be excluded. The words ‘covered under and complying with the CSR provisions’ seem to indicate that dividend of those companies must be excluded which meet the CSR threshold limit and comply with the provisions, although they may not be required to spend on CSR due to negative average net profit.

It seems that net profit and average net profit are two different calculations as they are defined separately. However, it would be possible to have a harmonious reading of the 2013 Act and Rules, and give effect to both the definitions while calculating the net profit as well as average net profit. This view can be substantiated from the fact that the Rules, in case of net profit for foreign companies, state that the same would be calculated as per provisions of the 2013 Act read with section 198.

Challenges and key considerations in implementation

While the expenditure has been made mandatory, there are no specific penal consequences prescribed for failure, provided the reasons of default are disclosed in the Board of Directors’ report as well as its website, if any. The reason for such leniency may be to gauge the initial response of the companies without being cumbersome.

The Rules provide that any surplus arising from the CSR activities would not form part of business profits of the company. Hence, such surplus should be used only for the purpose of future CSR activities.

Another key question arises as to whether any capital expenditure would qualify as CSR spend. For example, a company purchases ambulance vehicles for purpose of its CSR project and capitalises the same in its books. Since the CSR provisions talk about ‘spend’ and not the nature of expenditure, it may appear that the full cost of vehicles should qualify as CSR spend. However, if the asset is capitalised in books of the company and is at its disposal to be utilised in any manner in the future, only depreciation may be considered as the CSR spend for the year in which the asset is utilised towards the CSR activities. Consequently, if any asset is given away as donation or as a contribution to any CSR trust/foundation, full capital expenditure could be considered as the CSR spend.

Schedule VII provides a list of CSR activities that could be undertaken such as, promotion of education, eradicating hunger and poverty, promoting education, rural development projects, ensures environmental sustainability. The Rules clarify that Schedule VII should be interpreted liberally. The Circular reiterates that CSR expenditure is expected to be in a project mode (i.e. planning, budgeting, allocating responsibility for, scheduling of the activities) and accordingly, mere donations (except to funds specified in Schedule VII) or arbitrary activities (even if otherwise qualifying under Schedule VII) would not be considered as eligible CSR activity. Also, activities exclusively benefitting employees or their families would not qualify under these provisions. However, there could be a scenario, though not absolutely intended, where few employees are benefitted by the company’s welfare activities. In such a

case, while there is no clear authoritative guidance, an analogy could be drawn from the CSR guidelines issued by the Department of Public Enterprises for the Central Public Sector Enterprises (CPSEs) which state that the CSR activities, where employees are less than 25 per cent of the beneficiaries of infrastructural facilities such as schools and hospitals, would fall within the guidelines. However, this topic is ambiguous and further clarification from the MCA would be helpful to many companies.

It would be worthwhile to note here that the said existing guidelines requiring CPSEs to spend on CSR are being harmonised with the CSR provisions under the 2013 Act. Thus, it may follow that certain CPSEs currently required to spend only one per cent of their net profit would now be required to spend a minimum of two per cent, and that too, of net profit before tax as against the current requirement of net profit after tax.

Further, while expenditure mandated by any other statute can not qualify as CSR spend, the Circular provides a relief by permitting allocation of salary cost to the CSR spend on timely basis in relation to any employee working on CSR projects. Even contribution made to the corpus of a trust/society/section 8 company would qualify as a CSR spend. This is a welcome step as it eases pooling of funds to undertake CSR on a large scale through a common dedicated expertise.

The Finance Act, 2014 has clarified that expenditure on the CSR would not be considered as ‘for business purpose’ under section 37 of the Income Tax Act, 1961, and accordingly would be disallowed unless specifically allowed under sections 30 to 36.

Conclusion

The CSR concept is expected to evolve and implementation issues encountered to get sorted out in due course. In the interim, a key guidance should perhaps be the underlying spirit behind the sections of the law relating to the CSR. The involvement of companies in social development could bring in required professionalism as well as technology, and CSR could be a powerful instrument for the holistic development of our country.

Page 10: Accounting and Auditing Update - September 2014

© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Status of the lease accounting project

This article aims to

• Summarise the recent developments in the leases project of IASB and FASB

• Highlight the differences in the approach of IASB and FASB and expected effects of adoption.

The FASB1 and the IASB2 issued their revised exposure drafts (EDs) of the new lease accounting proposals on 16 May 2013. The comment period ended on 13 September 2013. Approximately, 630 comment letters were received by the Boards and a vast majority of respondents (54 per cent) were the preparers of the financial statements followed by industry organisations (18 per cent). The EDs are the latest stage in the Boards’ joint project to develop a new approach to lease accounting that would include a requirement for lessees to recognise leases on-the balance sheet. The proposed new standard will replace existing U.S. GAAP and IFRS on accounting for leases. The proposals will also amend IAS 40, Investment Property.

In the future joint deliberations, the Boards will decide upon the effective date of the new Leases Standard. The IASB expects to issue a new Leases Standard in 2015.

However, before issuing a final standard, the Boards are expected to meet once again and further deliberate their current differences (discussed below) including the definition of a lease, re-assessment of variable lease payments, the IASB’s exemption to small leases from recognition and measurement requirements, accounting model for sale and leaseback transactions, and transition related issues.

The FASB is also expected to discuss leveraged leases and private company and not-for-profit issues (e.g. use of a risk-free discount rate as a policy election).

Definition

Under the proposed new standard, a lease contract is defined as a contract that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration. Right to Use (ROU) an asset is defined as the

• ability to make decisions that most significantly affect economic benefits derived from use and

• ability to derive substantially all of the potential economic benefits throughout the contract term.

The definition focusses on control of an identified asset.

Scope and coverage of the new standard

The standard is applicable to all leases e.g. leases of assets, long leases of land, sale-leaseback arrangements, sublease arrangements, in-substance purchases/sales of assets and leases of inventory are examples of transactions that are covered by the proposed new standard.

However, leases of intangible asset for lessors, leases to explore for or use of

minerals, oil, natural gas and similar non-regenerative resources, leases of biological assets and service concession arrangements covered within the scope of IFRIC 12, Service Concession Arrangements, are arrangements that are not within the scope of the proposed new standard.

The standard exempts the lessor and the lessee to apply the requirements of the proposed standard to short-term leases (i.e. leases with a maximum term , including renewal options, of 12 months or less). In respect of such short term leases the current operating lease accounting may be applied. But, such election would still require substantial effort by entities including the need to identify a lease, key lease terms including identifying details of any renewal or purchase options to confirm whether the lease meets the definition of a short term lease. In addition to this exemption provided by both FASB and IASB, IASB has additionally exempted small-ticket lease, that is leases that are individually ‘small’ in nature, even if material in aggregate. No clear definition of ‘small’ has been provided by the IASB, but the exemption is intended to capture items such as office furniture and certain IT equipment.

8

1. Financial Accounting Standards Board2. International Accounting Standards Board

Page 11: Accounting and Auditing Update - September 2014

9

© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The accounting model

This revised ED requires an entity to recognise assets and liabilities arising from a lease. As per the revised ED, while assessing how to account for a lease, a lessee and a lessor will classify a lease as Type A or Type B on the basis of nature of the underlying asset (i.e. whether the underlying asset is a property or an asset other than property) and whether more than an insignificant portion of the economic benefits embedded in the underlying asset are expected to be consumed over the lease term.

This revised ED requires an entity to apply that consumption principle by presuming that leases of property are Type B leases and leases of assets other than property are Type A leases, unless specified classification criteria are met. Those classification criteria are different for leases of property and leases of assets other than property to reflect the different nature of property (which often embeds a land element) and assets other than property.

The Boards acknowledge that, for some leases, the application of the classification criteria might result in different outcomes than if the consumption principle were to be applied without additional requirements. Nonetheless, this revised ED requires an entity to classify leases by applying the classification criteria as laid out in the ED, to simplify the proposal.

Lease Accounting – Lessees

For all leases, recognise a right-of-use asset and a lease liability, initially measured at the present value of lease payments (except if a lessee elects to apply the recognition exemption for short-term leases).

For type A leases, subsequently measure the lease liability on an amortised cost basis and amortise the right-of-use asset on a systematic basis that reflects the pattern in which the lessee expects to consume the right-of-use asset‘s future economic benefits. The lessee will present the unwinding of the discount on the lease liability as interest separately from the amortisation of the right-of-use asset.

For type B leases, subsequently measure the lease liability on an amortised cost basis and amortise the right-of-use asset in each period so that the lessee would recognise the total lease cost on a straight-line basis over the lease term. In each

period, the lessee will present a single lease cost combining the unwinding of the discount on the lease liability with the amortisation of the right of use asset.

Lease accounting – lessors

For type A leases, derecognise the underlying asset and recognise a lease receivable and a residual asset. Lessor will recognise both of the following:

a. The unwinding of the discount on both the lease receivable and the residual asset as interest income over the lease term

b. Any profit relating to the lease (as described in as described in the ED) at the commencement date.

For Type B leases (and any short-term leases if the lessor elects to apply the exemption for short-term leases), continue to recognise the underlying asset and recognise lease income over the lease term, typically on a straight-line basis.

Differences in approach between FASB and IASB

While the IASB preferred to adopt a single lease accounting model that requires all leases to be on the balance sheet as ROU (right of use) asset with a corresponding financial obligation, the FASB has adopted a two step approach which analyses all leasing arrangements using a lease classification test prescribed in the current IAS 17, Leases, resulting in a dual lease accounting classification ( type A and type B ). Type B leases under this approach are recognised directly in the statement of profit or loss account as executory contracts.

The IASB permits recognition of selling profit upfront by the lessor in sales type leases without restriction, FASB prohibits upfront profit recognition on sales type leases that are classified as type A but depend on third party involvement. Upfront selling profits are, instead, spread over the lease term in the FASB model.

The IASB provides an exemption to small leases (small ticket leases) from the proposed new standard irrespective of whether such small leases may be material in the aggregate, FASB has provided no such exemption.

Further, in the IASB model, the lessee is required to reassess the variable lease payments (VLP) that depend on an index or a rate when the lessee remeasures the lease liability for other reasons (for

example, because of a reassessment of the lease term) and when there is a change in the cash flows resulting from a change in the reference index or rate (that is, when an adjustment to the lease payments takes effect).

The FASB decided that a lessee should reassess variable lease payments that depend on an index or a rate only when the lessee remeasures the lease liability for other reasons (for example, because of a reassessment of the lease term).

Expected effects on adoption

Key financial metrics will be affected by the recognition of new assets and liabilities, and by changes in the pattern and presentation of lease income and expense. As a direct result, companies may find themselves no longer compliant with debt covenants provided to lenders. Employee compensation arrangements is another area which could be affected because the adoption of the new standard can result in potential changes in how profitability and other performance parameters are linked to net income are measured. In addition, the ability of a corporate to pay future dividends may also get impacted. It may, therefore, be necessary for companies to clarify in borrowing and compensation arrangements whether the existing or new standard will be used to measure compliance with debt covenants and performance measures during the transition period.

An additional concern in the banking sector will be the effect on regulatory capital.

To summarise

The IASB and FASB continue to discuss fundamental aspects of their lease accounting proposals published in 2013. Although the Boards remain committed to on-balance sheet recognition of leases by lessees, they differed on some points as mentioned above. They are expected to continue their redeliberations until the last quarter of 2014. During the future redeliberations, they are expected to discuss lessee disclosures and transition requirements and are expected to continue the discussion on the project jointly, with the aim of minimising any differences between IFRS and U.S. GAAP.

However, if the Boards do not reach a consensus on the differences between their respective proposed standards, it will reduce the comparability of lessee accounting under IFRS and U.S. GAAP.

Page 12: Accounting and Auditing Update - September 2014

© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Implementation challenges for related party reporting under the Companies Act, 2013

This article aims to

• Highlight key challenges that companies are expected to face while implementing processes that would help ensure compliance with the related party requirements.

The Companies Act, 2013 (the 2013 Act) is a landmark legislation with far-reaching consequences on all companies incorporated in India. In its bid to make sweeping changes in the governance framework of companies, the 2013 Act places a lot of emphasis on approval, reporting, and permissibility of the related party transactions (RPTs).

With the growing involvement of investors and other stakeholders in companies, the concern around transparency in transactions with related parties has often been a topic of much debate and discussion. With the objective to steer corporate India towards an increased degree of transparency in such transactions, section 188 in the 2013 Act and the Revised Clause 49 (RC 49) in the Equity Listing Agreement issued by the Securities and Exchange Board of India (SEBI) have been brought into effect. These changes require the audit committee to review and approve such transactions and refer these to the Board of Directors and/or shareholders (as the case may be) and seek their approval.

Both, the 2013 Act as well as RC 49 require companies to adhere to stringent compliance requirements surrounding RPTs. Compliance with the additional requirements calls for significant efforts on the part of companies.

In this article, we have identified key challenges that companies are expected to face while implementing processes to help ensure compliance with the related party requirements. They are as follows:

Identification of related parties

The definition of related parties is different in section 2(76) of the 2013 Act, RC 49 and AS 18, Related Party Disclosures. The 2013 Act as well as the RC 49 have expanded the scope of related parties quite significantly by including, for example key managerial personnel (KMP) and their relatives with reference to a company or directors and KMP and their relatives of the parent company. Companies need to ensure that the related party identification process is comprehensive to cover all the parties covered by different definitions.

Further, companies should put in place a process to contemporaneously update the list by capturing all changes to the list of the related parties. Such changes could include new directors/relatives, acquisitions, joint ventures, investment in associates. The process to update the list would require regular notification by directors on changes in their or relatives’ business interests.

10

Page 13: Accounting and Auditing Update - September 2014

11

© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Approval for the RPTs

Audit Committee approval-whether ‘prior’ or ‘post facto’

Section 177 of the 2013 Act requires all related party transactions to be approved by the audit committee. However, the section does not specify whether the audit committee approval needs to be a pre-approval or a post facto approval.

Section 188 of the 2013 Act requires that specified transactions with related parties that are not in the ordinary course of business and which are not at an arm’s length would require consent of the Board of Directors of the company. Additionally, certain specified transactions would require prior shareholders’ approval by special resolution and those transactions are as follows:

• Sale or purchase of goods exceeds 10 per cent of turnover or INR1 billion, whichever is lower*

• Sale or purchase of property of any kind, exceeds 10 per cent of net worth or INR1 billion, whichever is lower*

• Leasing of property of any kind exceeds 10 per cent of turnover or 10 per cent of net worth or INR 1billion, whichever is lower*

• Availing or rendering of any service exceeds 10 per cent of turnover or INR500 million, whichever is lower*

• Appointment to any office or place of profit in company, subsidiary, or associate where the monthly remuneration exceeds INR0.25 million

• Remuneration for underwriting subscription of any securities or derivatives which exceeds one per cent of net worth.

*Applies to transaction or transactions to be entered into either individually or taken together with the previous transactions during a financial year.

Section 188 also allows that RPTs may be ratified (and not necessarily pre-approved) by the audit committee/board/shareholders.

SEBI requirements

As per RC 49, RTP is a transfer of resources, services, or obligations between a company and a related party, regardless of whether a price is charged and all such transactions will require a prior approval of the audit committee.

All material RPTs shall require approval of the shareholders through special resolution and the related parties shall abstain from voting on such resolutions.

This requirement exists irrespective of the fact that the transactions with the related parties may be at an arm’s length and in the ordinary course of business.

The 2013 Act requires the approval of the audit committee for all RPTs and RC 49 requires prior approval of the audit committee for all RPTs. Accordingly, for a listed company, prior approval of the audit committee shall be required for all RPTs.

Additionally, the 2013 Act requires prior approval of the Board if the transaction with the related party that is covered under section 188 is not in the ordinary course of business or not at an arm’s length.

For unlisted companies, prior audit committee approval is not expressly required by the 2013 Act. From a governance perspective, it may be advisable that unlisted companies have a procedure in place whereby prior approval of the audit committee is obtained for the RPTs and post facto approval is limited to urgent situations.

Audit committee to approve ‘transactions’ or ‘contract or arrangements’

As mentioned above, section 177 of the 2013 Act requires audit committee to approve all RPTs. Whereas, specific transactions listed under section 188 of the 2013 Act refers to ‘contracts or arrangements’ with related parties which are to be considered for approval by the audit committee and the Board and/or shareholders.

The above creates ambiguity for companies in determining if the audit committee needs to approve each and every transaction with related parties or if obtaining an omnibus approval for a contract or an arrangement would tantamount to an approval for all transactions under such agreements.

In our experience, companies are preparing agreements covering all transactions, contracts or arrangements with each related party to be approved by their the audit committees. While formalising the agreement, a company should identify all transactions including, but not limited to, the scope of services,

terms and conditions, pricing for the services, etc. Additionally, during the year, the company should monitor the RPTs to attempt to ensure that approvals of the audit committee are in place for all the RPTs.

SEBI requirements

Further, the definition provided by RC 49 under the Equity Listing Agreement of the SEBI and AS 18 also includes transactions where no consideration is charged in case of a RPT. For example, in cases where employees of one company provide services such as accounting support, IT support, book keeping support, property services, etc. to another group company and no consideration is charged by the entity providing services, such a transaction should also be considered as a ‘RPT without consideration’.

Another common example is where subsidiaries or other related parties use the office of the parent company as registered office and no consideration is being charged, then such a transaction should be considered as ‘RPT without consideration’.

Page 14: Accounting and Auditing Update - September 2014

© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

12

Transactions between 1 April 2014 and the first audit committee

From 1 April 2014, section 177 and 188 became effective i.e. the requirement for RPTs approval by the audit committee. An audit committee meeting may not have taken place on 1 April 2014. During the period between 1 April 2014 to the first audit committee meeting, say June, companies may have entered into transactions and arrangements with the related parties.

As a transition measure, companies may place all such transactions with related parties between the above mentioned

period to the audit committee for ratification. This may also be accompanied with the list of projected transactions likely to be entered into by the next quarter/year for prior approval.

Section 188 does not provide any specific transitional provision in the section 188. Therefore, the MCA1 has clarified that the contracts entered into by companies, after making necessary compliances under section 297 of the Companies Act, 1956, which came into effect before the commencement of section 188 of the 2013 Act, will not require fresh approval under section 188 till the expiry of original term of such contracts. If any modification

in such contracts on or after 1 April 2014, then the requirements under section 188 would have to be complied with.

SEBI requirements

RC 49 requires that all existing material related party contracts or arrangements as on the date of the SEBI circular dated 17 April 2014 which are likely to continue beyond 31 March 2015 shall be placed for approval of the shareholders in the first general meeting subsequent to 1 October 2014. However, a company may choose to get such contracts approved by the shareholders even before 1 October 2014.

Materiality

As stated above, under the 2013 Act, materiality has been specified for each category of transaction in cases when transactions require shareholders’ approval.

The materiality thresholds are to be evaluated party wise for each transaction category and cumulatively for all transactions with a particular party during the financial year. For example, the company may enter into different transactions like sale of goods, purchase of fixed assets, loans taken, etc. with a particular party.

SEBI requirements

Under RC 49, a transaction with a related party shall be considered material if the transaction/transactions to be entered into individually or taken together with previous transactions during a financial year, exceeds five per cent of the annual turnover or 20 percent of the net worth of the company as per the last audited financial statements of the company, whichever is higher.

For calculation of materiality, RC 49 does not specifically define the term ‘turnover’. However, the quarterly results submitted as per the SEBI regulations disclose net turnover (net of excise duty). Accordingly, the company could use net turnover for computation of materiality under RC 49.

1. General Circular No. 30/2014 issued by MCA on 17 July 2014

Companies Act requirements

All companies (both listed and unllisted)

Clause 49 requirements (Listed companies)

All transaction - audit committee approval

All transaction (even if no price charged) - prior audit committee approval

Transacton under section188 - Not in ordinary course of business/

Not at an arm’s length

Material transactions (Higher of 5 per cent of turnover

and 20 per cent of networth)

Board approval required

Special resolution at general meeting required - voting by

unrelated parties

Special resolution at general meeting required -voting by

unrelated parties

Other transactions if certain thresholds meet

Transacton under section 188 - In ordinary course of business and at

an arm’s length

Immaterial transactions

No further approval required

No further approval required

Source: KPMG in India analysis

Page 15: Accounting and Auditing Update - September 2014

13

© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

2. The Organisation for Economic Co-operation and Development

Justification of arm’s length and ordinary course

Arm’s length

The expression ‘arm’s length transaction’ has been defined in section 188 as a transaction between two related parties that is conducted as if they were unrelated, so that there is no conflict of interest. No method/basis to determine whether a transaction is at an ‘arm’s length’ has been prescribed under the 2013 Act.

The company may refer to the Guidance Note issued by Institute of Chartered Accountant of India (ICAI) on transfer pricing, which indicates that, in general, comparable market price is a sound indicator of an arm’s length price. If the price has been accepted by the tax authorities as an arm’s length price, it is likely to meet the definition under the 2013 Act subject to the assessment of other terms and conditions. There could be special conditions attached to transactions, for example, extended credit period, which would need to be evaluated.

A company may also refer to SA 550, Related Parties, issued by the ICAI which suggest the following steps in order to determine whether the transactions are at an arm’s length:

– Comparison of the terms with those of an identical or similar transaction with one or more unrelated parties

– Comparison of the terms to known market terms for identical or similar transactions

– In making the comparison, consideration should be given not only to the price but also to other terms and conditions, for example, credit terms, contingencies, and specific charges.

A company may also refer to International guidelines/principles i.e. OECD2 Transfer Pricing Guidelines for Multinational Enterprises and Tax Administration for determining an arm’s length pricing. Ordinary course of business

The term ‘ordinary course of business’ has not been defined in the 2013 Act. Hence, reference may be made to judicial precedents wherein the courts have commented on the meaning of ‘ordinary course of business’.

The ambit of the terms ‘ordinary course of business’ is fairly wide and based on views taken by the courts; it would include

various attributes, e.g. transactions in the context of the business, normal and incidental to the business, customary and regular to the conduct of the business. Thus, what could be covered within the expression ‘ordinary course of business’ will have to be seen in the context of the business of the relevant company and the transactions which are sought to be classified with such expression.

This area requires careful consideration and should be analysed on a case to case basis.

Loans to directors

Section 185 of the 2013 Act places restrictions on loans and advances, including any loan represented by book debt to directors and any other person in whom the director is interested. The company shall not directly or indirectly, advance any loan, including any loan represented by a book debt:

– to any of its directors

– to any other person in whom the director is interested including any body corporate, board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director to directors, of the lending company

– give any guarantee or provide any security in connection with any loan taken by him or such other person.

The above section shall not apply to:

– loans given by a holding company to its wholly owned subsidiary company provided such a loan is utilised by the subsidiary company for its principle business activities

– any guarantee given or security provided by holding company in respect of any loan made to its subsidiary company, provided such a loan is utilised by the subsidiary company for its principle business activities

– loan given to a managing director or a whole time director as a part of the conditions of service extended by the company to all its employees or pursuant to any scheme approved by the members by a special resolution

– loans or guarantees or securities given by the company which in the ordinary course of its business provides such loans or guarantees or securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the bank rate declared by the Reserve Bank of India (RBI).

Page 16: Accounting and Auditing Update - September 2014

© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Loan and investment by company

As per section 186 of the 2013 Act, a company shall not, directly or indirectly,

– give any loan to any person or other body corporate

– give any guarantee or provide security in connection with a loan to any other body corporate or person

– acquire by way of subscription, purchase or otherwise, the securities of any other body

that exceeds 60 per cent of its paid-up share capital, free reserves and securities premium account or 100 per cent of its free reserves and securities premium account, whichever is more.

Where giving of any loan or guarantee or providing any security or acquisition exceeds the limits specified above, prior approval by means of a special resolution passed at a general meeting shall be necessary.

No investment shall be made or loan/guarantee/security provided by the company unless the resolution sanctioning it is passed at a meeting of the Board with the consent of all the directors present at the meeting and the prior approval of the public financial institution concerned, where any term loan is subsisting is obtained. Provided that prior approval of a public financial institution shall not be required where the aggregate of the loans and investments so far made, the amount for which guarantee or security so far provided to or in all other bodies corporates, along with the investments, loans, guarantee, or security proposed to be made or given does not exceed the limit as specified in section 186(2), and there is no default in repayment of loan installments or payment of interest thereon as per the terms and conditions of such loan to the public financial institution.

The company shall not give any interest free loans to its related parties (including wholly owned subsidiaries) or any employees including directors and key managerial personnel. At a minimum, interest will be charged at a rate not lower than prevailing yield of one year, three year, five year, or 10 year government security closest to the tenor of the loan.

The above requirements of section 186 would not apply to a banking company, an insurance company, a housing financial company or a Non-Banking Financial Company (NBFC) registered with the Reserve Bank of India.

Tracking of RPTs

Post approval of transactions by the audit committee, board of directors, and shareholders, as the case may be, companies also need to put in place a process to ensure that any unapproved transactions are not entered into with the related parties. Further, for transactions approved by the audit committee with certain specified limits, the volume of transactions should not exceed such limits. In practice, companies tend to adopt one of the following processes for ensuring this:

• Circulate a list of related parties and approved transactions to all key stakeholders e.g. business heads who then take ownership to ensure that no transactions are entered into with related parties except those mentioned in the list provided

• Tag related parties in the accounting systems and impose a cap for particular voucher types for approved transactions. The accounting system will prompt the user to obtain additional approval once the limit is reached.

One of the key issue that companies are facing is sensitising business teams regarding the various compliances required for the RPTs. This is of critical importance in large companies where decision making is decentralised and the possibility of entering into transactions with the related parties without due assessment and approval is a possibility due to lack of knowledge/awareness among the business teams.

Voting on related party transactions

Section 188 states that for approval of RPTs, ‘related parties’ can not vote. This again posed a significant interpretation issue since in case of a shareholder approval, all members would be related parties. In practice, companies followed the approach of not allowing members who were interested in the transactions

to vote. This issue has been largely resolved with the clarification of the MCA on 17 July 2014 which elaborated that only related parties interested in the transaction would not be allowed to vote for such resolutions. Other related parties of the company who had no interest in the transactions were permitted to vote.

However, the 2013 Act provides no relief for transactions between fellow subsidiaries and transactions with a joint venture, where all the shareholders would be precluded from voting on the transactions given that they would be interested parties. This is expected to pose significant difficulties in case of transactions wherein a holding company would be required to vote in case of a transaction between its wholly owned subsidiary and partially owned subsidiary.

Summary

The 2013 Act aims to substantively raise the bar on governance and deals with some very relevant themes. On the flip side, some of the requirements are quite onerous and thrusts greater responsibility and obligation on the board of directors and management in Indian companies.

The sections covering related parties under the 2013 Act and the RC 49 under SEBI have laid down extremely stringent compliance requirements on companies with regard to RPTs. The reading of multiple sections and RC 49 in tandem to ensure compliance is proving challenging for many companies.

The implementation difficulties get further accentuated by the fact that all companies irrespective of size have to comply with these requirements and lack of congruence between SEBI and the MCA on prescribing these guidelines and requirements.

The MCA has already issued a draft which proposes relaxation of requirements of section 185, 186, and 188 to private companies. Considering the key challenges as noted above many stakeholders expect further relaxations and clarifications to emerge in the foreseeable future in the context of RPTs.

14

Page 17: Accounting and Auditing Update - September 2014

15

© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

15

This article aims to

• A summary of the narrow scope but significant amendments to the IFRS.

Summary of narrow scope but significant amendments under IFRS

Preparers of IFRS financial statements with December 2013 and March 2014 year ends witnessed major amendments under IFRS including new standard on consolidation, joint arrangements, revised standard on employee benefits, elaborate disclosure requirements on the new standard on fair value measurement, amendments to IAS 1, Presentation of financial statements, relating to presentation of items of other comprehensive income.

The process of development of new standards and issue revisions to existing standards is continuous. Major standards such as ‘Regulatory Deferral Accounts’, ‘Revenue from contracts with customers’, and the new complete standard on ‘Financial instruments’ have been recently issued to be effective from annual periods beginning on or after 1 January 2016, 2017, and 2018 respectively. However, apart from these major standards there are several other amendments which will impact the December 2014 year ends, or thereafter.

This article aims to highlight summary of certain narrow scope but significant amendments for which it is essential that companies prepare well in advance.

IFRIC 21 – Levies

IFRIC 21, Levies, lays guidance for accounting for a liability to pay a levy in accordance with the requirements of IAS 37, Provisions, Contingent Liabilities and Contingent Assets. IFRIC 21 defines a levy as ‘an outflow of resources embodying economic benefits that is imposed by governments on entities in accordance with legislation’.

This IFRIC scopes out liabilities to pay income taxes as per IAS 12, Income Taxes, fines or penalties imposed for breaches in legislation, and liabilities arising from emission trading schemes.

IFRIC 21 aims to address the timing of recognition of such a levy. Accordingly it requires entities to identify a triggering event that necessitates the payment of levy in accordance with the legislation, which is when the liability should be recognised. It clarifies that an entity does not recognise a liability at an earlier date, even if it has no realistic opportunity to avoid the triggering event.

To illustrate, an entity is liable to pay a levy if it generates revenues in a specific market on 1 January 2013. Under the interpretation, it does not recognise a liability at 31 December 2012, even if it is economically compelled to operate in 2013

and prepares financial statements on a going concern basis.

This IFRIC explains further that the liability to pay a levy is recognised progressively if the obligating event occurs over a period of time. Similarly, if an obligation to pay a levy is triggered when a minimum threshold is reached, then the liability is not recognised until this ‘minimum threshold’ is reached.

The amendments equally apply to interim financial statements.

The amendments are applicable for annual periods beginning on or after 1 January 2014. Any changes in accounting policies from the initial application of IFRIC 21 should be accounted for retrospectively as per IAS 8.

Page 18: Accounting and Auditing Update - September 2014

© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Investment entities (amendments to IFRS 10, IFRS 12 and IAS 27)

The IASB has published investment entities (amendments to IFRS 10, IFRS 12 and IAS 27), according to which a qualifying investment entity is required to account for investments in controlled entities, as well as investments in associates and joint ventures at fair value through profit or loss with some exceptions. The consolidation exception is mandatory and not optional. The amendments are applicable for annual periods beginning on or after 1 January 2014. For details on this topic, please refer to the Accounting and Auditing Update – June 2013 issue.

Offsetting financial assets and financial liabilities - amendments to IAS 32

Para 42 of IAS 32, Financial Instruments: Disclosure and Presentation, provides ‘A financial asset and a financial liability shall be offset and the net amount presented in the statement of financial position when, and only when, an entity:

a. currently has a legally enforceable right to set off the recognised amounts

b. intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.’

According to the amendment, an entity currently has a legally enforceable right to set-off if that right is:

a. not contingent on a future event

b. enforceable both in the normal course of business and in the event of default, insolvency or bankruptcy of the entity and all counterparties.

Further, to meet the criterion in paragraph 42(b), an entity must intend either to settle on a net basis or to realise the asset and settle the liability simultaneously.

The amendment clarifies that if an entity can settle amounts in a manner such that the outcome is, in effect, equivalent to net settlement, the entity will meet the net settlement criterion in paragraph 42(b). This will occur if, and only if, the gross settlement mechanism has features that eliminate or result in insignificant credit and liquidity risk, and that will process receivables and payables in a single settlement process or cycle.

These amendments are applicable for annual periods beginning on or after 1 January 2014 and should be applied retrospectively.

Significant developments - annual improvements 2010-12 cycle

Amendment to IFRS 2, Share based Payment

These amendments clarified the definition of vesting conditions by adding definitions for service condition and performance condition. The amendments also clarified the definition of market condition.

Performance condition:

According to the new definition, for a condition to be a performance condition, it needs to meet both of the following criteria:

a. Requirement for the counterparty to complete service condition, which may be explicit or implicit

b. Meeting specified performance target while the counterparty is rendering the service as mentioned in a) above.

The amendments clearly state that the period for achieving the performance target(s) can not extend beyond the end of the service period, but it may start before the service period provided that the commencement date of the performance target is not substantially before the commencement of the service period.

As such, performance targets achieved after the requisite service period would not be accounted for as a performance condition, but would instead be accounted for as a non-vesting condition. [It is to be noted that this treatment differs from the recent U.S. GAAP guidance on the task force consensus on issue 13-D, ‘Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period’]

The amendment also clarifies both:

• how to distinguish between a market and a non-market performance condition

• the basis on which a performance condition can be differentiated from a non-vesting condition.

For example, a share market index target would be a non-vesting condition even if an entity’s shares form part of that index, because such an index reflects not only the performance of the entity, but also the

performance of other entities outside the group.

Service condition: The definition of service condition has been provided to clarify that any failure to complete a specified service period – even due to the entity terminating an employee’s employment – would represent a failure to satisfy a service condition.

Market condition: The definition of market condition is amended to clarify that it requires the counterparty to complete service condition which may be explicit or implicit. Further it is clarified that a market condition can be used on the market price of the entity’s equity instruments or the equity instruments of another group entity

The IASB considered that that changes in the definitions as above may result in changes to the grant date fair value of share based payments for which grant date was in previous periods. Thus to avoid the use of hindsight, these amendments in IFRS are applicable prospectively for share based payments transactions for which the grant date is on or after 1 July 2014.

Amendment to IFRS 3, Business Combinations

IFRS 3, Business Combinations, has been amended to clarify that the classification as a liability or equity of any contingent consideration in a business combination, that is a financial instrument, should be determined as per IAS 32 Financial Instruments: Disclosure and Presentation, rather than as per any other IFRSs.

Further, contingent consideration that is classified as an asset or a liability is always subsequently measured at fair value (rather than being measured at amortised cost), with changes in fair value recognised in profit or loss.

Consequential amendments are also made to IAS 39 Financial Instruments: Recognition and Measurement and IFRS 9 Financial Instruments. In addition, IAS 37 Provisions, Contingent Liabilities and Contingent Assets is amended to exclude provisions related to contingent consideration of an acquirer.

The amendment is applicable prospectively to business combinations for which the acquisition date is on or after 1 July 2014.

16

Page 19: Accounting and Auditing Update - September 2014

17

© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Amendment to IFRS 8, Operating Segments

IFRS 8, Operating segments, has been amended to explicitly require the disclosure of judgements made by management in applying the aggregation criteria. The disclosures include:

• a brief description of the operating segments that have been aggregated;

• the economic indicators that have been assessed in determining that the operating segments share similar economic characteristics.

In addition, this amendment clarifies that a reconciliation of the total of the reportable segments’ assets to the entity’s assets is required only if this information is regularly provided to the entity’s chief operating decision maker.

The amendments are applicable for annual periods beginning on or after 1 July 2014. Earlier application is permitted.

IAS 24, Related Party Disclosures

IAS 24, Related party Disclosures has been amended to include ‘a management entity that provides key management (KMP) services to the reporting entity or to the parent of the reporting entity’ in the definition of related party.

In this regard amounts incurred by the reporting entity for the provision of KMP services by such management entity should be separately disclosed. However, it is clarified that the reporting entity is not required to disclose compensation paid by the management entity to the individuals providing the KMP services. Nevertheless, the reporting entity will also need to disclose other transactions with the management entity under the existing disclosure requirements of IAS 24 e.g. loans.

The amendments are applicable for annual periods beginning on or after 1 July 2014. Earlier application is permitted.

Defined benefit plans: Employee contributions (amendments to IAS 19)

IAS 19, Employee Benefits, as released in 2011 required companies to forecast future service related contributions from employees and attribute those contributions to periods of service as negative benefits under the plan’s benefit formula or on a straight-line basis. As a result such contributions would be included when calculating net current

service cost and the defined benefit obligation. This could require complex actuarial calculations.

IAS 19 as amended now permit companies to reduce such contributions from the service cost in the period in which the related service is rendered provided such contributions:

• are set out in the formal terms of the plan

• linked to service

• independent of number of years of service for example, contributions that are a fixed percentage of the employee’s salary.

The amendment is relevant for defined benefit plans that involve contributions from employees or third parties meeting the criteria as mentioned above. For example, certain provident fund plans which are classified as defined benefit plans.

The amendments are required to be retrospectively applied for annual periods beginning on or after 1 July 2014. Earlier application is permitted.

Accounting for acquisitions of interests in joint operations (amendment to IFRS 11)

The IFRS Interpretations Committee observed diversity in practice in accounting for acquisition of interests in jointly controlled operations or jointly controlled assets under the erstwhile IAS 31, Interests in Joint Ventures, when their activities constituted business. Some companies were following business combinations accounting while some others were following cost method whereby they would allocate total cost/consideration to the individual identifiable assets on the basis of their relative fair values.

Considering that this diversity may continue in the accounting for acquisitions of interests in joint operations, as defined in IFRS 11, Joint Arrangements, when the activities of those joint operations constitute business, the IASB amended IFRS 11 to provide guidance on the subject.

As per the amendment, when an entity acquires an interest in a joint operation in which the activity of the joint operation constitutes a business, as defined in IFRS 3, Business combinations, the entity should apply, to the extent of its share,

business combinations accounting as defined under IFRS 3. Application of business combination accounting would include, inter-alia (a) measuring identifiable assets and liabilities at fair value, (b) recognising acquisition related costs as expenses in the periods in which the costs are incurred, and (c) recognising goodwill, as appropriate.

The amendment also specifies that business combination accounting would also apply to the acquisition of additional interests in a joint operation while the joint operator retains joint control i.e. the additional interest acquired will be measured at fair value and any previously held interests in the joint operation will not be remeasured.

The amendments are not applicable to joint operations under common control.

The amendments apply prospectively for annual periods beginning on or after 1 January 2016. Early adoption is permitted.

Clarification of acceptable methods of depreciation and amortisation (amendments to IAS 16 and IAS 38)

The IASB has amended IAS 38, Intangible Assets, to restrict the use of revenue based amortisation for intangible assets. The amendment under IAS 38 now includes a rebuttable presumption that revenue based amortisation method for an intangible asset is inappropriate. This is so because such methods reflect factors that are not directly linked to the consumption of the economic benefits embodied in the intangible asset such as selling activities, changes in sales volume and prices due to inflation, etc.

However, this presumption can be overcome only when revenue and the consumption of the economic benefits of the intangible asset are ‘highly correlated’, or when the intangible asset is expressed as a measure of revenue – e.g. a right to extract gold from a mine until total cumulative revenue from the sale of gold reaches INR200 million.

The IASB has also amended IAS 16, Property, Plant and Equipment, to prohibit revenue based methods of depreciation for property, plant, and equipment.

The amendments are applicable prospectively for annual periods beginning on or after 1 January 2016. Earlier application is permitted.

Page 20: Accounting and Auditing Update - September 2014

© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

18

Regulatory updates

The Companies (Management and Administration) Second Amendment Rules, 2014

The Ministry of Corporate Affairs (MCA) vide notification dated 24 July 2014 has amended the Companies (Management and Administration) Rules, 2014. Following are the amendments:

• Section 89 and rule 9 deals with ‘declaration in respect of beneficial interest in any shares’. Currently, when a company receives a declaration under section 89, it is required to make note of such declaration in the register of members and should file, within a period of 30 days from the date of receipt of declaration by it, a return in Form No. MGT.6 with the Registrar in respect of such declaration with fee.

The amendment has been made in sub-rule 3 of the rule 9 which states that the above requirement of filing the form with the Registrar will not apply in relation to a trust which is created to set up a mutual fund or venture capital fund or such other fund as may be approved by the Securities and Exchange Board of India.

• Rule 13 deals with ‘return of changes in shareholding position of promoters and top 10 shareholders’. Currently, the rule requires every listed company to file with the Registrar, a return in Form No. MGT.10 along with the fee with respect to changes relating to either increase or decrease of two per cent, or more in the shareholding position of promoters and top 10 shareholders of the company in each case, either value or volume of the shares, within 15 days of such change.

The rule also has an ‘explanation’ which states that for the purpose of this sub-rule, the ‘change’ means increase or decrease by two per cent or more in the shareholding of each of the promoters and each of the top 10 shareholders of the company.

An amendment has been made to the rule 13 which removes the words ‘either value or volume of the shares’ and has deleted the explanation.

• Rule 23 deals with ‘special notice’. Currently, the rule requires that a special notice that is required to be given to the company should be signed, either individually or collectively by such number of members holding not less than one per cent of total voting power or holding shares on which an aggregate sum of not less than INR0.5 million has been paid up on the date of the notice.

The amendment to the sub-rule changes the words ‘not less than INR0.5 million and ’substitutes by the words ‘not more than INR0.5 million.

• Rule 27 deals with ‘maintenance and inspection of document in electronic form’. Currently, the sub-rule (1) requires every listed company having not less than 1,000 shareholders, debenture holders and other security holders shall maintain its records, as required to be maintained under the Act or rules made thereunder, in electronic form.

The amendment to the sub-rule change the word ‘shall’ to ‘may’.

(Source: MCA; F. No. 01/34/2013-CL. V Part- I; dated 24 July 2014)

Amendment to the Schedule VII of the Companies Act, 2013

The MCA vide its notification on 6 August 2014 has added ‘slum area development’ to the list of activities that would classify as the ‘corporate social responsibility’ (CSR) under the Companies Act, 2013. This notification shall come into force on the date of its publication in the Official Gazette.

(Source: MCA; F. No. 1/18/2013-CL-V; dated 6 August 2014)

Refinancing of project loans

The Reserve Bank of India (RBI) vide notification dated 26 February 2014 had issued detailed guidelines on refinancing of the existing infrastructure and other project loans. As per the guidelines, banks were allowed to refinance by way of take-out financing, even without pre-determined agreement with other banks/financial institutions; and fix a longer repayment period without treating the same as restructuring if the following conditions were satisfied:

• such loans should be ‘standard’ in the books of the existing banks, and should have not be restructured in the past

• such loans should be substantially taken over (more than 50 per cent of the outstanding loan by value from the existing banks/financial institutions

• the repayment period should be fixed by taking into account the life cycle of the project and cash flows from the project.

Page 21: Accounting and Auditing Update - September 2014

© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Regulatory updates

19

Based on the feedback received regarding the difficulty to comply with the above condition, the RBI has now, with respect of existing project loans, vide its notification dated 7 August 2014 exempted banks from complying with the aforesaid requirement and the same would not be considered as restructuring in the books of the existing as well as taking over lenders if the specified conditions are met. The refinancing facility will be available only once during the life of the existing project loans. The refinancing of existing project loans not meeting the specified conditions (as explained above) will continue to be governed by the extant instructions (issued on 26 February 2014).

(Source: RBI/2014-15/167, dated 7 August 2014)

Company Law Settlement Scheme, 2014

The MCA has granted a period from 15 August 2014 to 15 October 2014 as a one time relief period (transitional period) to the companies that have defaulted in filing their annual returns and financial statements within the prescribed time limit. The scheme permits:

• Condoning the delay in filing annual returns and financial statements with the Registrar

• Granting immunity from prosecution

• Charging a reduced fee (i.e. 25 per cent of actual fees for the default payable on the date of filing the belated documents)

• Filing of belated documents which were due for filing till 30 June 2014.

Additionally, the scheme gives an opportunity to inactive companies to get their companies declared as ‘dormant company’ under section 455 of the Companies Act, 2013 by filing a simple application at reduced fees.

(Source: General Circular No. 34/ 2014, Ministry of Corporate Affairs, dated 12t August 2014)

Expanding the framework of ‘offer for sale’ (OFS) of shares through stock exchange mechanism

The OFS mechanism has been successfully used to divest promoter stake. The Securities and Exchange Board of India (SEBI) took market feedback which indicated that there was a need to take measures to encourage retail participation in OFS. This will enable other large shareholders to use the OFS mechanism and would also expand the universe of companies that would use this

framework. Accordingly, SEBI vide circular dated 8 August 2014 has, inter-alia, made the following amendments to the OFS framework:

• OFS would be available for the top 200 companies based on market capitalisation in any of the last four completed quarters

• Any non-promoter shareholder of the eligible company holding at least 10 per cent of share capital may also offer shares through the OFS mechanism

• In case a non-promoter shareholder offers shares through the OFS mechanism, promoters/promoter group entities of such companies may participate in the OFS to purchase shares subject to compliance with applicable provisions of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 and SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011

• Minimum 10 per cent of the offer size to be reserved for retail investors

• The cut-off price (determined based on all valid bids) shall be determined separately for bids received in the retail category and non-retail category

• Seller can also offer discount to retail investors subject to specified conditions.

(Source: SEBI/CIR/MRD/DP/24/2014, dated 8 August 2014)

The Companies (Meetings of Board and its Powers) Second Amendment Rules, 2014

With a view to facilitate the implementation of the Companies Act, 2013 and to address the concerns of various stakeholders, the Ministry of Corporate Affairs (MCA) vide notification dated 14 August 2014 has amended the Companies (Meetings of Board and its Powers) Rules, 2014. Section 188 read with the Rules requires shareholders’ approval where:

• the paid up share capital of the company is INR100 million or more, or

• prescribed transaction level thresholds have been exceeded.

The amendment, inter alia, removes the paid up share capital criteria and modifies transaction level thresholds.

The amended Rules will be effective from the date of its publication in the Official Gazette.

For an overview of these amendments, please refer to KPMG’s First Notes dated 19 August 2014.

(Source: MCA; F. No. 1/32/2013-CL-V-Part; dated 14 August 2014)

Extension of due date for obtaining and furnishing the report of audit under section 44AB of the Income Tax Act, 1961

The Central Board of Direct Taxes vide its order dated 20 August 2014 has extended the due date for obtaining and furnishing of the report of audit under section 44AB of the Income Tax Act, 1961 for assessment year 2014-15 in case of assessees who are not required to furnish report under section 92E of the Income Tax Act, 1961 from 30 September 2014 to 30 November 2014.

It has also been clarified that the tax audit report under section 44AB of the Income Tax Act, 1961 filed during the period from 1 April 2014 to 24 July 2014 in the pre-revised forms would be treated as valid tax audit report furnished under section 44AB of the Income Tax Act, 1961.

(Source: CBDT/ F.No.133/24/2014-TPL, dated 20 August 2014)

Discussion paper on review of clause 36 and related clauses of the Equity Listing Agreement

The Securities and Exchange Board of India (SEBI) has observed disparities in disclosures made under clause 36 and other related clauses of the Equity Listing Agreement. The disparity primarily stems from a perceived lack of clarity on the term ‘materiality’ and ‘price sensitive information’. The SEBI has issued a discussion paper on 19 August 2014 to improve continuous disclosure requirements and reduce disparity in disclosures. Comments are invited on the discussion paper by 12 September 2014. For a summary of the important aspects of the discussion paper and comparison with the present clause 36, please refer to KPMG’s First Notes dated 22 August 2014.

(Source: http://www.sebi.gov.in/cms/sebi_data/attachdocs/1408444809721.pdf; dated 19 August 2014)

Page 22: Accounting and Auditing Update - September 2014

© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

20

The MCA clarifies auditor related norms of the government owned companies

The Ministry of Corporate Affairs (MCA) vide notification dated 31 July 2014 and 4 September 2014 has clarified the provisions relating to the ‘appointment of auditors’ by the Comptroller and Auditor General of India (C&AG) and under section 145(3) of the Companies Act, 2013 (the 2013 Act).

Appointment of auditors by the C&AG

Applicability of provisions under the 2013 Act, to deemed government companies as described under the Companies Act, 1956 (the 1956 Act)

Section 139 sub-sections 5 and 7 of the 2013 Act deal with the appointment of auditors by the C&AG in the following cases:

• government company

• any other company owned or controlled, directly or indirectly, by the central government, or by any state government or governments

• any company partly by the central government and partly by one or more state government.

This section did not specify the manner of appointment of auditors in the case of ‘deemed government companies’ as defined under section of 619B of the 1956 Act. Section 619B of the 1956 Act defined ‘deemed government company’ as a company in which at least 51 per cent of the paid-up share capital is held by one or more of the following or combination thereof:

a. the central government and one or more government companies

b. any state government or governments and one or more government companies

c. the central government, one or more state governments and one or more government companies

d. the central government and one or more corporations owned or controlled by the central government

e. the central government, one or more state governments and one or more corporations owned or controlled by the central government

f. one or more corporations owned or controlled by the central government or the state government

g. more than one government company.

The MCA has clarified that the 2013 Act does not alter the position with regard to audit of such deemed government companies through the C&AG. Thus, deemed government companies will be covered under section 139 sub-section 5 and 7 of the 2013 Act.

Assessing existence of control

The MCA has clarified that while assessing control over an individual companies (other than ‘deemed government company’) by the Central Government and/or one or more State Governments to determine applicability of sections 139(5) and 139(7) to such companies, the definition of control as per section 2(27) of the 2013 Act needs to be taken into account. Section 2(27) of the 2013 Act states that control, ‘shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner’.

Additionally, a company (other than ‘deemed government company’) should assess documents like articles of association and shareholders’ agreements, etc. while evaluating presence of control under section 2(27) of the 2013 Act, and thus to determine the applicability of sections 139(5) and 139(7) of the 2013 Act to a particular company.

Assessing existence of control

The MCA has clarified that while assessing control over an individual companies (other than ‘deemed government company’) by the Central Government and/or one or more State Governments to determine applicability of sections 139(5) and 139(7) to such companies, the definition of control as per section 2(27) of the 2013 Act needs to be taken into account. Section 2(27) of the 2013 Act states that control, ‘shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner’.

Additionally, a company (other than ‘deemed government company’)

should assess documents like articles of association and shareholders’ agreements, etc. while evaluating presence of control under section 2(27) of the 2013 Act, and thus to determine the applicability of sections 139(5) and 139(7) of the 2013 Act to a particular company.

Manner of communication of incorporation related information to C&AG for appointment of the first auditor

Section 139(7) prescribes the period during which the first auditor should be appointed by the C&AG. In this regard, clarification had been sought from the MCA about the manner in which information regarding the incorporation of the company (covered under section 139(7)) should take place between the C&AG and the relevant company.

The MCA has clarified that the responsibility of such communication rests with both the concerned government and the relevant company. However, the newly incorporated company should primarily be obligated to intimate the C&AG about its incorporation along with its name, location of its registered office, and its capital structure immediately on its incorporation. Such newly incorporated company is also responsible to share such intimation with the relevant government so that such government may also send a suitable request to the C&AG.

Manner of audit to be conducted by the auditor appointed by the C&AG

Section 143(5) of the 2013 Act requires the C&AG to direct the auditors of a government company, appointed under section 139 sub-sections 5 and 7 of the 2013 Act, to conduct the audit as per instructions and manner specified by the C&AG.

In this regard, the MCA on 4 September 2014 has issued the Companies (Removal of Difficulties) Seventh Order, 2014. Through this order the MCA has extended the applicability of section 143(5) of the 2013 Act to ‘any other company owned or controlled, directly or indirectly, by the central government, or by any state government or governments, or partly by the central government and partly by one or more state governments’ as well.

(Sources: MCA notification dated 31 July 2014 and the Companies (Removal of Difficulties) Seventh Order, 2014 on 4 September 2014)

Page 23: Accounting and Auditing Update - September 2014

© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

21

AhmedabadCommerce House V 9th Floor, 902 & 903 Near Vodafone House, Corporate Road, Prahlad Nagar Ahmedabad - 380 051. Tel: +91 79 4040 2200 Fax: +91 79 4040 2244

BengaluruMaruthi Info-Tech Centre11-12/1, Inner Ring RoadKoramangala, Bengaluru 560 071Tel: +91 80 3980 6000Fax: +91 80 3980 6999

ChandigarhSCO 22-23 (Ist Floor) Sector 8C, Madhya Marg Chandigarh 160 009Tel: +91 172 393 5777/781 Fax: +91 172 393 5780

ChennaiNo.10, Mahatma Gandhi RoadNungambakkamChennai 600 034Tel: +91 44 3914 5000Fax: +91 44 3914 5999

DelhiBuilding No.10, 8th FloorDLF Cyber City, Phase IIGurgaon, Haryana 122 002Tel: +91 124 307 4000Fax: +91 124 254 9101

Hyderabad8-2-618/2Reliance Humsafar, 4th FloorRoad No.11, Banjara HillsHyderabad 500 034Tel: +91 40 3046 5000Fax: +91 40 3046 5299

KochiSyama Business Center,3rd Floor, NH By Pass Road, Vytilla, Kochi – 682019Tel: +91 484 302 7000Fax: +91 484 302 7001

KolkataUnit No. 603 – 604,6th Floor, Tower – 1,Godrej Waterside,Sector – V,Salt Lake,Kolkata – 700091Tel: +91 33 44034000Fax: +91 33 44034199

MumbaiLodha Excelus, Apollo MillsN. M. Joshi MargMahalaxmi, Mumbai 400 011Tel: +91 22 3989 6000Fax: +91 22 3983 6000

Pune703, Godrej CastlemaineBund GardenPune 411 001Tel: +91 20 3058 5764/65Fax: +91 20 3058 5775

KPMG in India offices

www.kpmg.com/in

Page 24: Accounting and Auditing Update - September 2014

kpmg.com/in

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Printed in India. (NEW0914_001)

Latest insights and updates are now available on the KPMG India app. Scan the QR code below to download the app on your smart device.

Google Play | App Store

Introducing Voices on Reporting

KPMG in India is pleased to present Voices on Reporting – a monthly series of knowledge sharing calls to discuss current and emerging issues relating to financial reporting.

On 24 July 2014, the International Accounting Standards Board issued the completed version of IFRS 9, Financial Instruments (IFRS 9 (2014)), which substantially concluded the challenging project launched in 2008 to replace IAS 39, Financial Instruments: Recognition and Measurement.

The Companies Act, 2013 (the Act) was largely operationalised with effect from 1 April 2014. However, there are a number of implementation issues relating to related party transactions.

In our call, we provided an overview on IFRS9 (2014) and discussed the approval process for related party transactions under the Act and the Securities and Exchange Board of India’s Equity Listing Agreement guidelines and highlighted implementation challenges that corporate India is expected to face.

Missed an issue of Accountingand Auditing Update or First Notes?

The August 2014 edition of the Accounting and Auditing Update focussed on IFRS convergence through the Ind AS (the Indian version of converged IFRS standards) and highlighted key aspects relating to how these standards may be applied in India and key differences between current Indian GAAP. We also showcased the status of IFRS convergence process of other countries and what companies and preparers of financial statements should focus on as they prepare for this transition.

This month we also covered the topic of mandatory audit firm rotation, the concept and requirements for ‘one person companies’ under the Companies Act, 2013, IFRS 9 (2014) as issued by the IASB, the diversity in practice that exists in the area of accounting policy choices available under Indian GAAP and the accounting implications and impact of demergers in India along with key regulatory developments during the recent past.

The MCA amends norms relating to useful life and residual value; clarifies certain aspects of capitalisation of costs

The Ministry of Corporate Affairs (MCA) has issued certain amendments and clarifications relating to the application of certain provisions of the Companies Act, 2013 (the Act) relating to computation of depreciation expenditure (useful lives and residual values) and capitalization of costs for power projects.

This issue of First Notes summarises the important aspects arising from amendments to schedule II of the Act, and the MCA clarification on capitalisation of costs by companies engaged in power projects.

Feedback/Queries can be sent to [email protected]

Back issues are available to download from: www.kpmg.com/in


Recommended