ACCOUNTING
AND AUDITING
UPDATE
February 2015
In this issue
MCA notifies Ind AS standards and implementation
roadmap p1
Not for Profit Organisations - accounting, tax and regulatory
requirements p7
Income computation and disclosure standards p11
Exposure draft on Frequently Asked Questions (FAQs) on the
provisions of Corporate Social Responsibility (CSR) p15
Ind AS 21 – Accounting for foreign exchange
transactions p17
Business combination vs. purchase of assets p19
Regulatory updates p21
Editorial
After much speculation of will they or wouldn’t
they, the Ministry of Corporate Affairs in the
Government of India has notified the updated
timeline and eligibility criteria for companies to
apply the new IFRS converged Indian Accounting
Standards (Ind AS) and the standards themselves.
The time for action is now and companies all
over India are rushing to work on this area and
consider the impact that this imminent move in
corporate reporting will have on them. In some
areas, companies in India will be able to learn
from the experiences of transition to IFRS in other
countries, but for some areas such as revenue
recognition and financial instruments, India will
actually be applying new IFRS standards prior to
the rest of the world. This additional burden and
sense of responsibility on corporate India to get
the transition and application of these standards
right will be key because we will be in the direct
line of sight and focus of the IFRS world. We
lead this months’ issue with an overview of the
roadmap, key areas of impact and carve outs under
Ind AS.
The areas of corporate social responsibility and
the not for profit sector have also been under
increasing scrutiny over the past few months.
We provide an overview of the accounting and
reporting challenges in the not for profit sector and
also cover the recent clarifications on corporate
social responsibility related reporting and
accounting issued by the Institute of Chartered
Accountants of India.
We also cast our lens in this issue on the
distinction and accounting and reporting
implications between business combinations
and purchases of assets. Finally, in addition to
our regular round up of regulatory updates, we
also highlight the salient aspects of Ind AS 21
on the area of accounting for foreign exchange
transactions.
As always, we 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.
We also have the imminent application of income
computation and disclosure standards to contend
with over the next few months. These standards
will affect all companies irrespective of Ind AS
application and therefore, in some ways, will have
more pervasive and immediate impact than Ind AS.
We provide an overview of these standards that
will help determine taxable income.
© 2015 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.
Jamil Khatri
Deputy Head of Audit,
KPMG in India
Global Head of Accounting
Advisory Services
Sai Venkateshwaran
Partner and Head,
Accounting Advisory Services,
KPMG in India
© 2015 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.
1
MCA notifies Ind AS standards
1
and implementation roadmap
This article aims to:
–– Provide an overview on the roadmap to transition to Ind AS
–– Highlight key differences between the Indian GAAP and Ind AS
–– Give a snapshot of key carve-outs from IFRS along with a brief overview on the
requirements of first-time adoption of Ind AS.
The Ministry of Corporate Affairs
has finally notified the much
awaited Indian Accounting
Standards (Ind AS), which are
converged with International
Financial Reporting Standards
(IFRS). The notification of these
IFRS converged standards fills
up significant gaps that exist in
the current accounting guidance,
and India can now claim to have
financial reporting standards that
are contemporary and virtually
at par with the leading global
standards. This will in turn improve
India’s place in global rankings
on corporate governance and
transparency in financial reporting.
With the new government at the Centre,
there has been a flurry of activities which
started off by the announcement in the
Finance Minister’s budget speech last
year of an urgent need to converge with
IFRS, which has now culminated with
the notification of 39 Ind AS standards
together with the implementation
roadmap. With this notification, coupled
with the progress made on finalising the
Income Computation and Disclosure
Standards (ICDS), the government has
potentially addressed several hurdles
which possibly led to deferment of Ind AS
implementation in 2011.
Overview of the roadmap
Background
The MCA through notification dated 16
February 2015 has issued the Companies
(Indian Accounting Standards) Rules,
2015 (Rules) which lay down a roadmap
for companies other than insurance
companies, banking companies and nonbanking finance companies (NBFC) for
implementation of Ind AS converged with
IFRS. The Rules will come into force from
the date of its publication in the Official
Gazette.
The Ind AS shall be applicable to
companies as explained in the table below.
Phase I
Phase II
Voluntary adoption
Year of adoption
FY 2016 - 17
FY 2017 - 18
FY 2015 -16 or thereafter
Comparative year
FY 2015 - 16
FY 2016 - 17
FY 2014 - 15 or thereafter
a. Listed companies
All companies with net worth >= INR500
crores
All companies listed or in the process of
being listed
b. Unlisted companies
All companies with net worth >= INR500
crores
Companies having a net worth >= INR250
crores
c. Group companies
Applicable to holding, subsidiaries, joint ventures, or associates of companies covered in
(a) and (b) above. This may also impact fellow subsidiary companies while preparing CFS
of the holding company.
Covered companies
Any company could voluntarily adopt Ind
AS
Source: KPMG in India’s analysis
1. Source: Also refer to KPMG in India’s IFRS Notes dated 23 February 2015
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2
• The net worth for implementation of
Exceptions
Companies whose securities are listed or
in the process of listing on the Small and
Medium Enterprises (SME) exchanges
will not be required to apply Ind AS and
can continue to comply with the existing
accounting standards unless they choose
otherwise.
Other significant matters
• The Ind AS would apply to stand-alone
and consolidated financial statements
(CFS).
• The Rules clarify that an Indian
company :
–– having an overseas subsidiary,
associate, joint venture and other
similar entities, or
–– which is a subsidiary, associate, joint
venture and other similar entities of a
foreign entity
is required to prepare its financial
statements, including CFS, where
applicable, in accordance with the Rules.
Ind AS should be calculated based on
the stand-alone financial statements of
the company as on 31 March 2014 or
the first audited financial statements for
accounting period ending subsequently
The net worth of companies which are
not existing on 31 March 2014 or an
existing company falling under any of
thresholds for the first time after 31
March 2014 should be calculated based
on the first audited financial statements
ending after 31 March 2014.
• The above companies would not be
required to prepare another set of
financial statements in accordance with
the accounting standards prescribed in
the Companies (Accounting Standards)
Rules, 2006 prescribed under the
Companies Act, 1956.
• Words and expressions used in the
Rules but not defined in the Rules
would have the same meaning as
assigned in the Companies Act, 2013.
• Net worth is to be calculated as defined
in the Companies Act, 2013 and does
not include reserves created out of
revaluation of assets, write back of
depreciation and amalgamation.
• Once a company applies Ind AS
voluntarily, it will be required to follow
the Ind AS for all the subsequent
financial statements. Thus, no roll back
is permitted.
The roadmap for implementation of Ind AS
Mandatory implementation – Phase I
Mandatory implementation – Phase II
The above implementation timeline for phase II companies will have comparative period ending 31 March 2017 and
annual reporting period ending 31 March 2018.
Source: KPMG in India’s analysis
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3
Key differences between the
current Indian GAAP and Ind AS
The Ind AS bring in several changes when
compared to the current Indian GAAP, and
many of these would have a significant
impact on reported earnings, and net
worth; but these changes are manageable,
with adequate planning. This section
summarises some of the critical GAAP
differences that are likely to be pervasive
with some companies and sectors being
more impacted than others.
Revenue recognition
Ind AS 115, Revenue from Contracts with
Customers, introduces a single revenue
recognition model, which applies to
all types of contracts with customers,
including sale of goods, sale of services,
construction arrangements, royalty
arrangements, licensing arrangements,
etc. In contrast, under existing Indian
GAAP, there is separate guidance
that applies to each of these types of
contracts. Ind AS 115 brings in a five-step
model, which determines when and how
much revenue is to be recognised based
on the principle that revenue is recognised
when the entity satisfies its performance
obligations and transfers control of the
goods or services to its customers, as
compared to the current standards which
focus on transfer of risks and rewards.
There are two approaches to recognition
of revenue under this standard, i.e. at
a point in time or over a period of time,
depending on whether the performance
obligations are satisfied at a point in time
or over a period of time. Following are some of the key GAAP
differences between Indian GAAP and Ind
AS:
• New single five-step revenue
recognition model
• Timing of recognition of revenue (right
of return, dispatch vs. delivery)
• Incentive schemes
• Multiple deliverable arrangements (fair
value of each component)
• Time value of money to be considered
• Linked transactions (to reflect the
substance)
• Gross vs. net presentation (excise duty,
other charges)
• Service concession arrangements –
different accounting.
Property, plant and equipment/
intangible assets
The guidance in Ind AS 16, Property, Plant
and Equipment, and Ind AS 38, Intangible
Assets are largely similar to those
under Indian GAAP. However, there are
differences, including on determination
of what elements of costs are eligible or
required to be capitalised under Ind AS.
Following are some of the key GAAP
differences between Indian GAAP and Ind
AS:
• Eligible borrowing costs (debt vs.
equity, stand-alone vs. consolidated)
• Capitalisation of administrative and
general overheads
• Asset retirement obligation (to consider
time value of money)
• Accounting for leases embedded in
sale or service contracts
• Consideration of time value of money
• Indefinite useful lives for certain
intangibles
• Restriction on revenue based
amortisation.
Consolidation
Under Indian GAAP, control is assessed
based on ownership of more than onehalf of the voting power or control of the
composition of the Board of Directors.
However, Ind AS 110, Consolidated
Financial Statements, introduces a new
definition of control and a single control
model as per which an investor controls
an investee when the investor is exposed,
or has rights, to variable returns from its
involvement with the investee, and has
the ability to affect those returns through
its power over the investee. Due to the
fundamental difference in the definition
of control, the universe of entities that get
consolidated could potentially be different
under the two frameworks.
Following are some of the key GAAP
differences between Indian GAAP and Ind
AS:
• Consolidation based on new definition
of control:
–– Veto rights with minority
shareholders
–– Potential voting rights
–– Structured entities
• Acquisition of control in tranches
• Sale/dilution of stake (retaining vs. loss
of control)
• Deferred tax on undistributed reserves
• Deferred tax on intercompany
eliminations
• Mandatory use of uniform accounting
policies.
Mergers and acquisitions
Under Indian GAAP, there is no
comprehensive guidance that addresses
accounting for business combinations
and the current accounting is driven by
the form of the transaction, i.e. legal
merger, share acquisition, business
division acquisition, etc. which results
in varied results based on the form of
acquisition. Under Ind AS 103, Business
Combinations, all business combinations
are accounted for using the purchase
method that considers the acquisition
date fair values of all assets, liabilities and
contingent liabilities of the acquiree. The
limited exception to this principle relates
to acquisitions between entities under
common control.
Following are some of the key GAAP
differences between Indian GAAP and Ind
AS:
• Acquisition date when control is
transferred – not just a date mandated
by court or agreement
• Mandatory use of purchase method
of accounting – fair valuation of net
assets (including intangible assets and
previously unrecognised assets)
• Fair value of consideration transferred
(earn-out arrangement, deferred and
contingent consideration accounting on
acquisition date)
• Post-acquisition amortisation of assets
based on the acquisition-date fair
values
• Transaction costs charged to the
statement of profit and loss
• Goodwill to be tested at least annually
for impairment – amortisation not
permitted
• Demerger at fair value, in certain
instances
• Common control transactions to be
accounted using pooling-of-interest
method.
–– De facto control
• Joint venture – potential ‘one line
consolidation’
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4
Equity and liability instruments
Other financial instruments
Stock options
Under Indian GAAP, equity and liability
instruments are largely based on the
legal form of these instruments and
also governed by legal and regulatory
treatments permitted, such as utilisation
of securities premium for redeeming
instruments at a premium, etc. Ind AS
32, Financial Instruments: Presentation,
requires that a financial instrument should
be classified in accordance with the
substance of the contractual agreement,
rather than its legal form (substance over
form). These changes can potentially have
a significant impact on both the net worth
as well as net income.
Financial instruments is an area
under Indian GAAP where there is no
mandatorily applicable detailed guidance
available currently. Ind AS 109, Financial
Instruments, will fill this gap. Ind AS 102, Share-based Payment,
provides an extensive guidance on
share-based payments. Currently, under
Indian GAAP, there is a Guidance Note on
Accounting for Employee Share-based
Payments issued by the ICAI.
Following are some of the key GAAP
differences between Indian GAAP and Ind
AS:
• Redeemable preference shares
classified as liability and related
‘dividend’ recognised as interest
expense
• Convertible bonds split into their liability
and derivative components
• All costs related to the debt recognised
through a periodic charge to the
statement of profit and loss – can not
be adjusted against share premium
account
• Foreign exchange fluctuations to be
immediately charged to the statement
of profit and loss
• Treasury shares are presented as a
reduction from equity
• No gain/loss on sale of treasury shares
• Equity share with put options, which
do not allow issuer to avoid obligation
to deliver cash or other financial asset
is liability
• As above, compulsory convertible
debentures may be classified as equity
• Any obligation to issue variable number
of shares may be classified as a liability.
Under Ind AS 109, classification of
financial assets is based on an entity’s
business model for managing financial
assets and the contractual cash flow
characteristics of the financial asset.
Under Ind AS 109, an entity should
recognise all derivative instruments at fair
value on the balance sheet.
Following are some of the critical GAAP
differences between Indian GAAP and Ind
AS:
• Mandatory use of fair value and
resultant increase in employee
compensation costs
• Accelerated costs for options with
graded vesting
Following are some of the critical GAAP
differences between Indian GAAP and Ind
AS:
• Consolidation of trusts dealing with
• Investments to be categorised - fair
Other areas
value through profit or loss (FVTPL),
fair value through other comprehensive
income (FVOCI) and amortised cost
• Initial recognition of all financial assets
and financial liabilities at fair value
(security deposits, employee loans,
sales tax deferral, etc.)
• All investments (including unquoted
equity shares) generally measured at
fair value at each reporting period
• Loans and advances to be measured at
amortised cost using effective interest
rate
• All derivative instruments to be carried
at fair value, unless hedge accounting
requirements met
employee share-based payment plans.
• Timing of recognition of proposed
dividend
• Discounting of provisions
• Additional disclosure on related parties
• Extensive disclosures on segments –
business view relevant
• Extensive disclosures on income
taxes (component of taxes, tax rate
reconciliation)
• Restatement of financial statements for
prior period errors
• Fair valuation of biological assets
• Rate regulated assets/liabilities –
recognition permitted.
• Transfer of financial assets/liability with
recourse – continue to be reported in
the balance sheet
• Impairment of financial assets –
expected loss model
• Extensive qualitative and quantitative
disclosure of various risks impacting
the company
–– Credit risk
–– Liquidity risk
–– Foreign currency risk including
sensitivity analysis
–– Interest rate risk including sensitivity
analysis.
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5
Key carve-outs in Ind-AS
Accounting area
Ind AS carve-outs
IFRS requirements
Mandatory carve-outs
Law overrides
accounting standards
Law would override accounting standards. It appears to imply that court schemes whereby expenses
are charged to reserves may be grandfathered and also possibly for future schemes (subject to
compliance with other regulatory requirements)
Not specifically covered
Previous GAAP
Ind AS 101 specifies previous GAAP as the GAAP applied by companies to meet their reporting
requirements in India immediately before Ind AS i.e. existing notified standards
Previous GAAP is the basis of accounting that
a first-time adopter used immediately before
adopting IFRS
Foreign currency
convertible bonds
- treatment of
conversion option
Recognition of embedded foreign currency conversion option as ‘equity’
Conversion option treated as derivative and
carried at fair value
Employee benefits –
discount rate
Mandatory use of government securities yields for determining actuarial liabilities (except for foreign
components)
Requires use of corporate bond rates as default
Business acquisitions
– gain on bargain
purchase
Recognition of ‘bargain purchase gains’ in a business combination as ‘capital reserve’
‘Bargain purchase gains’ in a business
combination recognised as income in the
statement of profit and loss
Classification of
loan with covenant
breaches
Entities to continue classifying loans as non-current even in case of breach of a material provision if,
before the approval of the financial statements, the lender agreed not to demand payment
Loans reclassified as ‘current liability’
Lease rental
recognition
No straight-lining for escalation of lease rentals in line with expected general inflation
Requires straight-lining of lease rentals
Investment in
associates – gain on
bargain purchase
Excess of the investor’s share of the net fair value of the investee’s identifiable assets and liabilities
over the cost of investment to be transferred to capital reserve instead of in the statement of profit
and loss
Excess recognised as income in the statement of
profit and loss
Foreign exchange
fluctuations
Option to continue the policy adopted for accounting for exchange differences arising from
translation of long-term foreign currency monetary items recognised in the financial statements for
the period ending immediately before the beginning of the first Ind AS financial reporting period as
per the previous GAAP
Requires recognition of exchange rate
fluctuations on long-term foreign currency
monetary items in the statement of profit and
loss
Accounting policies
of joint-ventures and
associates
Option not to align the accounting policy of associates and joint ventures with that of the parent, if
impracticable.
Requires alignment of accounting policies.
Optional carve-outs
Source: KPMG in India’s analysis
Ind AS 101, First-time Adoption
of Indian Accounting Standards
quality information that is transparent
for users and comparable over all
periods presented.
The objective of the Ind AS 101, First-time
Adoption of Indian Accounting Standards
is to:
Ind AS 101 has certain differences
as compared to the corresponding
International Financial Reporting
Standard (IFRS) 1, First-time Adoption
of International Financial Reporting
Standards including certain inclusion/
modification of existing exemptions under
IFRS 1 provide practical expedient to the
Indian companies adopting Ind AS.
• provide a suitable starting point for
accounting in accordance with Ind AS,
• set out the procedures that an entity
would follow when it adopts Ind AS for
the first time as the basis for preparing
its financial statements,
• transition at a cost that does not exceed
the benefits, and
• ensure that the entity’s first Ind AS
financial statements contain high
General requirements
• An opening balance sheet is prepared
• The ‘date of transition’ is the beginning
of the earliest comparative period
presented on the basis of Ind AS.
• At least one year of comparatives
is presented on the basis of Ind AS,
together with the opening balance
sheet.
• Equity and profit reconciliations to be
provided by the first-time adopters.
Selection of accounting policies
• Accounting policies are chosen from
Ind AS effective at the first annual Ind
AS reporting date.
at the date of transition, which is
the starting point of accounting in
accordance with Ind AS.
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6
• Generally, those accounting policies are
applied retrospectively in preparing the
opening balance sheet and in all periods
presented in the first Ind AS balance
sheet.
• Ind AS 101 prescribes mandatory
exceptions and optional exemptions
for first-time adopters of Ind AS
thereby facilitating a smooth transition
to Ind AS. In the absence of these
exceptions/exemptions, all the
standards forming part of Ind AS would
have been required to be applied
with retrospective effect thereby
posing significant challenges (such as
availability of necessary information,
impracticability of application of
some of these requirements with
retrospective effect, etc.) in the
process of transition to Ind AS.
Accordingly, careful consideration of
these exceptions/exemptions and their
impact on the first and subsequent
Ind AS financial statements would be
required.
Recognise adjustments from previous
GAAP to IFRS
The accounting policies that an entity
uses in its opening Ind AS balance sheet
may differ from those that it used for the
same date using its previous GAAP. The
resulting adjustments arise from events
and transactions before the date of
transition to Ind AS. Therefore, an entity
shall recognise those adjustments directly
in retained earnings (or, if appropriate,
another category of equity) at the date of
transition to Ind AS.
Derecognition of financial instruments
• Derecognition requirements are to be
applied prospectively
• Entity may apply the derecognition
requirements in Ind AS 109
retrospectively from a date of the
entity’s choosing, provided that the
information needed to apply Ind AS
109 to financial assets and financial
liabilities derecognised as a result of
past transactions was obtained at the
time of initially accounting for those
transactions.
Hedge accounting
Prevents the use of hindsight from
retrospectively designating derivatives and
qualifying instruments as hedges.
Classification and measurement of
financial assets
Assessment needs to be made based
on the conditions that exist at the date of
transition.
Impairment of financial assets
Impairment requirements as per Ind AS
109 are to be applied retrospectively,
subject to certain exceptions.
Government loans
Requirement of Ind AS 20, Accounting
for Government Grants and Disclosure
of Government Assistance and Ind AS
109 are applied prospectively. May be
applied retrospectively, if information was
obtained at the time of initial recognition.
Optional exemptions
To be consistent with estimates made
under the previous GAAP unless:
A number of exemptions are available
from the general requirement for
retrospective application of Ind AS
accounting policies. Some of the key
optional exemptions from other Ind AS are
as follows:
• there was an error, or
Business combinations
• the estimate and related information
This exemption applies to all business
combinations that occurred before the
date of transition, or before an earlier date
if so elected. Applies also to acquisitions
of associates and interests in joint
ventures.
Key mandatory exceptions
Estimates
under previous GAAP is no longer
relevant because the entity elects
a different accounting policy on the
adoption of Ind AS.
If a first-time adopter does not restate its
previous business combinations, then the
previous acquisition accounting remains
unchanged. However, some adjustments
e.g. to reclassify intangibles and goodwill
may be required.
Deemed cost
The deemed cost exemption permits the
carrying amount of an item of property,
plant and equipment to be measured at
the date of transition based on a deemed
cost. If it is elected, then the deemed cost
exemption may be based on any of the
following:
• Fair value
• A previous GAAP revaluation that was
broadly on a basis comparable to fair
value under Ind AS
• A previous GAAP revaluation that is
based on a cost or depreciated cost
measure broadly comparable to Ind
AS adjusted to reflect, for example,
changes in a general or specific price
index
• An event-driven valuation - e.g. when
an entity was privatised and at that
point valued and recognised some or all
of its assets and liabilities at fair value.
Ind AS 101 also includes a choice to
consider previous GAAP carrying values
as ‘deemed cost’ for property, plant
and equipment, intangible asset, or
investment property acquired prior to the
transition date.
Long term foreign currency monetary
items
Ind AS 101 provides an option to a
first-time adopter to continue the policy
adopted for accounting for exchange
differences arising from translation of
long-term foreign currency monetary
items recognised in the financial
statements for the period ending
immediately before the beginning of the
first Ind AS financial reporting period as
per the previous GAAP.
Next Steps
For Indian companies, there is very limited time for this transition, with the mandatory transition date of 1 April 2015
being just over a month away for companies covered under phase I. This change has an organisation wide impact, and
is not just an accounting change. The devil is in the detail. Companies will, therefore, need to plan in advance and invest
time. Given the pervasive nature of the impact of these new standards, in addition to the financial reporting impacts,
companies will also have to assess impact on other stakeholders such as investors and analysts. Companies should
immediately undertake a holistic assessment, and gear up with a robust implementation plan to deal with a change of
this magnitude within the fairly short timelines.
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7
Not for Profit Organisationsaccounting, tax and
regulatory requirements
This article aims to:
–– Highlight the key aspects relating to accounting under Indian GAAP, tax and regulatory requirements relating to operations of NPOs in
India.
Over the last decade, India has
witnessed a rapid increase in the
number of NPOs due to increase
in wealth generation, rising social
inequality and changing mindset
of entrepreneurs from ‘profit
generation’ to ‘contribution to
society’. However, since the
sector is still nascent, there seems
to be a general lack of awareness
around its accounting, tax and
regulatory regime.
This article summarises the
accounting, tax and regulatory
framework applicable to an NPO.
Further, this article also touches
certain important aspects and noncompliance of such matters which
may lead to severe consequences
including levy of penalties and
cancellation of registration under
the various laws prevalent in India
e.g. the Foreign Contribution
(Regulation) Act, 2010, the Foreign
Exchange Management Act, the
Income-tax Act, 1961.
1. Source: The ‘Technical Guide on Accounting for Not for
Profit Organisations’ (NPO’s) by the Institute of Chartered
Accountants of India (ICAI) (Technical Guide)
Introduction1
The World Bank defines NPOs as ‘private
organisations that pursue activities to
relieve suffering, promote the interests
of the poor, protect the environment,
provide basic social services, or undertake
community development’.
The term NPO is very broad and
encompasses different types of
organisations ranging from international
charities, community based self-help
groups to research associations and
professional organisations.
There are certain features that distinguish
NPOs from ‘for profit’ organisations.
These include:
• NPOs do not operate primarily for
profit but they operate to serve the
specific needs of a community, group,
organisation or its members.
• Performance in NPOs i.e. ‘service’ is
a less measurable component than
‘profit’. It is more difficult to measure
performance in an NPO than in a ‘forprofit’ organisation.
• In NPOs, generally the members or
contributors do not possess ownership
interests that can be sold, transferred
or redeemed.
• A distinct characteristic of the NPO
sector is that significant amounts of
resources are received from resource
providers who often do not expect to
receive either repayment or economic
benefit proportionate to the resources
provided.
Legal forms of an NPO in India
NPOs in India generally assume the
following legal forms viz a Trust, a
Society, a section 8 Company under the
Companies Act, 2013 (corresponding to
section 25 Company under the Companies
Act, 1956) and branch office/liaison office
of a foreign NPO.
The aforesaid entities are generally
regulated by state and central government
authorities. At the state level, an NPO
can be registered as: a society under
the Societies Registration Act, 1860
or any state specific act; a public
trust via execution of a trust deed or
a limited company under section 8 of
the Companies Act, 2013. Process of
incorporating an NPO and compliances
to be undertaken are governed by the
said regulations. At the central level,
the Ministry of Home Affairs (MHA),
the Reserve Bank of India (RBI) and
the Income-tax authorities regulate
registration of such organisations, inflow
and utilisation of foreign funds received
and activities conducted by them. An NPO
should ensure that it complies with both
state and central laws.
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8
Accounting framework and
basis of accounting for NPOs
In practice, NPOs are following different
accounting practices due to lack of
awareness on applicability of the
accounting standards. Certain NPOs
believe that cash basis of accounting
is best suited to them due to ease in
implementation. While others take a view
that accrual basis of accounting would be
the correct way to present their financial
position. This gives rise to inconsistency
in the presentation and accounting of
financial information and creates diversity
in practice.
Since profit earning is not the objective
of the NPOs, it is often debated whether
the accounting framework, that is
applicable to profit-oriented entities may
not be appropriate for NPOs. However,
with regard to elements of the financial
statements, it may be noted that principles
for recognition of assets and liabilities
(e.g. land and furniture) would be same
for a profit-oriented entity and an NPO.
Same is the case for items of income
and expenses. Therefore, the elements
of financial statements remain the same
in NPOs as in the case of profit-oriented
entities.
Similarly, there is generally no difference
in the application of the recognition and
measurement principles adopted by
business entities and NPOs.
Basis of accounting
The term ‘basis of accounting’ refers
to the timing of recognition of revenue,
expenses, assets and liabilities in the
financial statements. The commonly
prevailing basis of accounting are (a) cash
basis of accounting; and (b) accrual basis
of accounting.
The Technical Guide recommends
that all NPOs, including non-company
NPOs, should maintain their books of
account on an accrual basis as it follows
a matching concept relating to income
and expenditure and also it presents the
correct financial position of an organisation
at a given point of time.
NPOs registered under the Companies
Act, 2013/1956, are required to maintain
their books of account according to accrual
basis under the requirements of the
Companies Act. If the books are not kept
on an accrual basis, it shall be deemed as
per the provisions of the section 128 of the
Companies Act, 2013/section 209 of the
Companies Act, 1956, that proper books
of account are not kept. Accordingly, penal
provisions contained in the respective
Act(s) will apply to the concerned NPOs.
Applicability of accounting
standards
As per the preface to the statement of
Accounting Standards issued by the
Institute of Chartered Accountants of
India:
“Accounting Standards apply in respect
of any enterprise (whether organised in
corporate, cooperative or other forms)
engaged in commercial, industrial
or business activities, irrespective
of whether it is profit oriented or it is
established for charitable or religious
purposes. Accounting Standards will
not, however, apply to enterprises only
carrying on the activities which are not of
commercial, industrial or business nature,
(e.g., an activity of collecting donations
and giving them to flood affected people).”
The above paragraph seems to suggest
that Accounting Standards formulated by
the ICAI do not apply to an NPO due to
nature of their business.
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9
However, the Technical Guide on
Accounting for NPOs mentions that
Accounting Standards contain wholesome
principles of accounting. Therefore,
the Technical guide recommends that
all NPOs, irrespective of the fact that
no part of the activities is commercial,
industrial or business in nature, should
follow Accounting Standards. This will
also result in uniformity and consistency
in application of accounting principles
leading to reduced confusion and
misunderstanding amongst various users
of the financial information.
Additionally, NPOs that are incorporated
under the Companies Act are required to
comply with the accounting standards
as prescribed by the central government
and as recommended by the National
Financial Reporting Authority (NFRA) (or
NACAS (National Advisory Committee on
Accounting Standards till such time NFRA
is constituted) by virtue of provisions of
the Companies Act, 2013.
Fund accounting (unrestricted
funds, restricted funds and
grants in kind)
One of the peculiar items applicable to
NPOs is ‘fund-based accounting’. As
indicated in the above paragraphs, NPOs
receive grant/donations from various
donors who may restrict the use of
their funds or impose certain conditions
before their funds can be used. Some
of the funds may not be subject to any
restriction/condition and NPOs are free
to use them for their general purposes.
In certain situations, NPOs may decide to
allocate certain general funds on their own
for specific purposes.
The funds depending upon their nature
can be categorised under the following
categories:
Unrestricted funds
Unrestricted funds refer to funds
contributed to an NPO with no specific
restrictions. These funds can be further
reclassified into the following three
categories:
Corpus - Corpus refers to funds
contributed by founders/promoters
generally to start an NPO. No repayment
is ordinarily expected of such grants. The
funds received are recognised directly in
the corpus fund.
Designated funds - Designated funds
are unrestricted funds which have been
set aside by the trustees/management
of an NPO for specific purposes. When
a revenue expenditure is incurred with
respect to a designated fund, the same
is debited to the income and expenditure
account. A corresponding amount
is transferred from the concerned
designated fund account to the credit of
the income and expenditure account after
determining the surplus/deficit for the
year since the purpose of the designated
fund is over to that extent. Where the
designated fund has been created
for meeting a capital expenditure, the
relevant asset account is debited by the
amount of such capital expenditure and a
corresponding amount is transferred from
the concerned designated fund account to
the credit of the income and expenditure
account after determining surplus/deficit
for the year.
General funds - Unrestricted funds other
than ‘designated funds’ and ‘corpus’ are
a part of the ‘General Fund’. All items of
revenue and expenses relating to ‘general
fund’ are reflected in the income and
expenditure account in accordance with
the generally accepted recognition and
measurement principles.
Restricted funds
Restricted funds are contributions
received by an NPO, the use of which is
restricted by the contributor(s).
When expenditure is incurred with respect
to a restricted fund, upon incurrence of
such expenditure, the same is charged to
the income and expenditure account; a
corresponding amount is transferred from
the concerned restricted fund account to
the credit of the income and expenditure
account.
Grants in kind
Grants in the form of non-monetary assets
(like fixed assets) should be recorded at
the acquisition cost incurred by an NPO.
In case, the same is provided free of
cost, the NPO should record the same at
nominal value e.g. INR1.
Taxation/regulatory regime of NPOs in
India
While accounting plays an important role
in NPOs, it is equally very important to
understand the tax and regulatory regime
applicable to an NPO. Sometimes, the
non-compliances of these provisions may
have serious consequences on the NPOs.
Taxation of NPOs is governed by section
11 and 12 of the Income-tax Act, 1961 (the
IT Act). According to the said provisions,
income received by an NPO is exempt
from tax in a financial year provided it
has applied 85 per cent of its receipts for
charitable or religious purposes, activities
have been conducted within India, and
the NPO has obtained registration from
Commissioner of Income-tax or Director
of Income-tax (Exemptions), as the case
may be. In case, the NPO is unable to
apply 85 per cent of receipts in a financial
year, the Income-tax Act permits the NPO
to accumulate (through specified mode of
investments) the unapplied amount over
next five years provided certain conditions
are met.
Under section 2(15) of the IT Act,
charitable purposes include relief of
the poor, education, medical relief,
preservation of environment, preservation
of monuments or places or objects
of artistic or historic interest and
advancement of any object of general
public utility. Term ‘religious purposes’
has not been defined under the IT Act.
However, any activity undertaken with
religious intent may constitute as religious
purpose.
Foreign donations/funds received by
NPOs
Apart from accounting and tax regulations,
NPOs are also governed by Foreign
Contribution (Regulation) Act, 2010
(FCRA).
As per the provisions of the FCRA, an
NPO which receives any donation/grant
in cash or kind from a foreign source is
required to obtain prior approval from
the MHA before receiving the donation/
grant. Foreign source has been defined
to include all foreign bodies (government,
citizens, companies, trusts, associations
and international agencies) and Indian
companies, incorporated under the
Companies Act, 1956, in which more than
50 per cent share capital is held either
singly or in aggregate by foreign bodies.
Therefore, even if an NPO receives grants
from an Indian company in which more
than 50 per cent share capital is held by a
foreign company, it will still be required to
obtain prior approval from the MHA before
accepting funds.
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10
However, following are exempted from
FCRA regulations:
• funds received from specified
international agencies such as the
World Bank, the United Nations, etc.
• all statutory bodies constituted or
established by or under a Central Act
or State Act that are required to have
their accounts compulsorily audited by
the Comptroller and Auditor General of
India.
There are two kinds of approvals
granted by the MHA i.e. a prior approval/
permission and permanent registration.
A prior approval is required to be obtained
by an NPO desirous of receiving one
time foreign contribution for a specified
amount from a specified source. Prior
permission is given on case to case basis
and is sought if an NPO does not have
a permanent registration. Permanent
registration is granted to NPOs seeking
foreign contribution on regular basis and a
one-time approval is granted for a period of
five years.
NPOs that have received prior permission/
registration are required to maintain
separate books of account for foreign
contribution received and utilised. Such
NPOs are also required to file an annual
return duly certified by a Chartered
Accountant within nine months from
the end of financial year in which foreign
contribution is received.
Following important points should be kept
in mind by the NPOs who receive/utilise
foreign contribution:
• Foreign contribution should be
received/deposited in a designated/
separate bank account
• Foreign contribution should not be
mixed with local receipts
• Foreign contribution should be utilised
for the purpose for which it has been
received
• Not more than 50 per cent of foreign
contribution received in a financial
year should be utilised for meeting
administrative expenses. Utilisation
of more than 50 per cent shall require
prior approval of the MHA
• Foreign contribution should not be
• Foreign national (other than of Indian
origin) not to be appointed as a
governing body member
• NPOs receiving foreign contribution
should not appoint those individuals as
governing body members who are also
office bearers of another association
and such association has come under
adverse notice of the MHA
• NPOs receiving foreign contribution
should not have only one governing
body member in the association.
Non-compliance of the above points could
also attract penal provisions/prosecution
under FCRA regulations. It is important
for NPOs to be aware of the provisions of
the FCRA as the MHA, along with support
from income-tax authorities, is keeping a
strict vigilance on NPOs.
Foreign NPOs
Foreign/international NPOs who wish to
undertake charitable activities in India by
setting up a branch office or a liaison office
are required to seek prior permission
from the Reserve Bank of India (RBI) in
consultation with the Ministry of Finance
and the MHA as per the requirement of
Foreign Exchange Management Act, 1999.
While the NPOs set up under branch
office model can raise funds in India,
NPOs operating under liaison office mode
can only act as communication channel
between the head office of the foreign
NPO and parties in India. Such NPOs
can not raise funds, sign contracts or
undertake implementation or monitoring
activities in India. Accordingly, it is
imperative that an NPO obtains approvals
from the RBI keeping in view its long term
objective of operating in India since any
additional activities can be undertaken
only after obtaining a separate approval for
such additional activities.
Foreign NPOs are granted UIN (Unique
Identification Number) post receipt
of approval from the RBI. Further,
foreign NPOs are required to file an
annual activity certificate certified by a
Chartered Accountant every year within
the prescribed time. Failure to furnish an
annual activity certificate may attract penal
provisions and pose a challenge at the
time of closure of branch/liaison office.
NPOs and Corporate Social
Responsibility (CSR)
The newly enacted Companies Act, 2013
has introduced CSR regulations which
require certain corporates to spend 2 per
cent of their average net profits towards
specified CSR activities. Activities
that qualify as CSR are covered under
Schedule VII of the Companies Act, 2013
and include areas such as education,
health care, environment, etc. As per the
CSR regulations, corporates can undertake
CSR activities either on their own or
through their own foundation (registered
society/ trust/section 8 company) or
through any other third party registered
NPO which should have a three year
track record in undertaking eligible CSR
activities subject to certain conditions.
With the introduction of the CSR
regulations, several corporates in India
have now begun to focus on CSR as
a required activity and are looking for
partnering with NPOs to effectively utilise
their CSR spend.
This has brought to the fore the
contribution that NPOs are making to the
society and it may not be incorrect to say
that introduction of such regulations could
result in an increased demand of NPOs in
India.
Conclusion
As is evident from above, NPOs like
any other organisation, are required to
follow a similar accounting framework for
measurement and recognition principles
as are applicable to profit-oriented
organisations. In some elements of the
financial statements, the presentation
and disclosure requirements may
differ. However, these organisations
are subjected to lot of scrutiny by the
regulators to ensure that the exemptions/
privileges granted to them are not
misused.
With the introduction of the CSR
regulations, several corporates in India
have now begun to focus on CSR as
a required activity and are looking for
partnering with NPOs to effectively utilise
their CSR spend.
invested in speculative investments or
profitable ventures
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11
Income Computation and
Disclosure Standards1
This article aims to:
–– Highlight significant impact on companies owing to key differences between the revised drafts of the Income Computation
and Disclosure Standards as released by the Ministry of Finance on 8 January 2015 (ICDS (2015)) and the current framework
of accounting principles (Indian GAAP).
Background of tax accounting
standards
In 2010, when India Inc. was taking steps
towards converging with the International
Financial Reporting Standards (IFRS),
one of the biggest challenges raised
by the industry was taxability by local
regulators of the income computed in
the financial statements complying IFRS
converged Indian Accounting Standards
(Ind AS). With the objective of bringing
in consistency in computation of taxable
income and to address issues resulting
from the innumerable litigations on various
accounting related matters, the Central
Board of Direct Taxes (CBDT) constituted
a Committee in December 2010 to study
and formulate the accounting standards
under the Income-tax Act, 1961 (‘the IT
Act’).
In August 2012, the committee issued,
its recommendations which included
14 draft tax accounting standards (TAS/
draft ICDS (2012)) to be used in the
computation of the taxable income. It
was recommended that in case of conflict
between the provisions of the IT Act and
TAS, the provisions of the IT Act shall
prevail. Further, it was recommended that
the TAS would be made applicable only to
the computation of taxable income and
taxpayers need not maintain separate set
of books of account on the basis of TAS.
Comments and suggestions were invited
by 26 November 2012 from stakeholders
on these 14 TAS.
This article covers the recent updates in
TAS and some of its significant impact
areas.
1. Source: Draft Income computation and disclosure standards as issued by the Ministry of Finance on 8 January 2015 Final Report of the Committee constituted for formulating Accounting Standards
for the purposes of notification under section 145(2) of the Income-tax Act, 1961.
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12
Recent events
In the union budget presented on 10 July
2014, the Finance Minister recognised
the need to converge existing notified
standards under Indian GAAP with the
IFRS. Additionally, the Finance Minister
announced amendment to Section 145
of the IT Act and mentioned that the
standards for computation of tax would
be notified separately. The Tax Accounting
Standards were referred to as ‘Income
Computation and Disclosure Standards’
(ICDS) in the Finance Bill Memorandum
(previously termed as TAS).
Close to the heels of the press release
notifying the roadmap for Ind AS
convergence on 2 January 2015, the
Ministry of Finance on 8 January 2015
issued a revised draft of 12 ICDS (ICDS
(2015)) as a follow up to the union budget
announcement.
These revised draft of ICDS (2015)
are proposed to be applicable for the
computation of income to be offered
for income tax under the IT Act. Taxable
profits would be determined after making
appropriate adjustments to the financial
statements (whether prepared under
IFRS/ AS/ Ind AS).
This addresses a significant roadblock in
the adoption of Ind AS and is expected
to some extent provide stability in tax
treatments of various items. As stated
in the budget speech by the Finance
Minister, it is expected that ICDS will
apply from the assessment year 2016-17
onwards.
The revised draft ICDS (2015) also
addresses some of the concerns raised by
the stakeholders on the draft ICDS (2012)
and propose transitional provisions to
follow the ICDS.
ICDS vs current accounting
framework
While the intention of the ICDS is to
align accounting for income tax, with
the current accounting standards being
followed, there are many differences
between the revised draft ICDS (2015) and
the current Accounting Standards (AS).
Some of the key differences between
the revised draft ICDS (2015) and AS
along with the perceived implications are
mentioned in the following paragraphs.
Leases
The revised draft ICDS (2015) propose
that the depreciation on finance leases to
be accounted for by the lessee. However,
currently the IT Act allows depreciation
only on those assets that are owned
by the assessee. Therefore, suitable
amendments to the IT Act need to be
made in this regard.
While the revised draft ICDS (2015) on
leases, as proposed, has been brought in
line with AS 19, Leases, in most respects,
some major deviations still remain.
AS 19 provides several indicators to
classify a lease as a finance lease and
requires consideration of such indicators
in totality along with the substance of
the transaction. However, it seems that
the revised draft ICDS (2015) proposes
the existence of any one of the indicators
described as sufficient evidence for
finance lease classification. This difference
between the approach adopted under AS
19 and the revised draft ICDS (2015) may
lead to a larger number of leases which
were previously classified as operating
leases, to qualify as finance leases under
the revised draft ICDS (2015).
Minimum Lease Payments definition
under AS 19 is different for lessor and
lessee. Under AS 19, the definition of MLP
for the lessor additionally includes any
residual value guaranteed to the lessor
by an independent third party financially
capable of meeting this guarantee. The
definition of minimum lease payments
for both the lessor and lessee is same
under the revised draft ICDS (2015) and
does not contain reference to residual
value guaranteed by an independent third
party. This may lead to different lease
classification under AS 19 and the revised
draft ICDS (2015).
Another important point to note is that
the revised draft ICDS (2015) proposes
a joint confirmation from both the lessor
and the lessee that they have adopted
the same classification of lease. In case
such a joint confirmation is not executed,
the lessee would not be allowed to claim
depreciation. It is not clear though, if the
lessor would be entitled to depreciation in
such cases.
Further, as per the revised draft ICDS
(2015) the use of another systematic
basis (other than straight line basis) for
recognising operating lease income by
lessors and operating lease expenses
by lessees is not proposed. Therefore,
it seems the revised draft ICDS (2015)
allows only straight line basis.
Further, the consequential impact of the
requirements of the ICDS under various
other provisions such as Tax Deduction
at Source and benefits under Double
Taxation Avoidance Agreements would
need to be considered at the time of
implementation of the ICDS.
Lease of land is outside the scope of the
revised draft ICDS (2015). Companies
following Ind AS might have to prepare
additional reconciliation in such cases as
lease of land is in the scope of the Ind AS
17, Leases. Further, Ind AS 17 recognises
the need to determine whether certain
arrangements contain lease elements.
However, similar requirement is not
available under the revised draft ICDS
(2015).
The transition provision proposes that the
revised draft ICDS (2015) on leases shall
apply to all lease transactions undertaken
on or after 1 April 2015. While this is a
major relief, it may entail diverse treatment
of a similar transaction undertaken in
the past. This would require robust
information technology systems in place
for accounting and monitoring.
Construction contracts and revenue
recognition
Similar to the principles of AS 7,
Construction contracts, the revised draft
ICDS (2015) proposes non-recognition
of margins during the early stages of
the contract and thus allowing contracts
revenue to be recognised only to the
extent of costs incurred. However, unlike
AS 7, it proposes to prohibit such deferral
if the stage of completion exceeds 25 per
cent. There are no such bright lines in
AS 7. However, there are different bright
lines under the ‘Guidance note on
accounting for real estate transactions
(revised 2012)’ released by the Institute
of Chartered Accountants of India’,
and would, thus, require all the entities
to reassess their revenue recognition
thresholds.
In addition, while AS 7 specifically states
that any expected loss on a construction
contract should be recognised
immediately as an expense, the revised
draft ICDS (2015) does not propose the
recognition of expected losses on onerous
contracts.
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13
The revised draft ICDS (2015), has not
proposed the completed contract method
which is available under AS 9, Revenue
Recognition, and proposes that only the
percentage of completion method should
be applied for recognition of revenue for
all services. Further, the revised draft ICDS
(2015) does not contain guidance on agent
vs principal relationships.
of exchange differences under Ind AS
21. One of the welcome amendments
proposed by the revised draft ICDS (2015)
from the draft ICDS (2012) is allowing the
usage of a weekly or monthly average
exchange rate for recognising foreign
currency transactions when the exchange
rate does not fluctuate significantly.
Effects of changes in foreign exchange
rates
The revised draft ICDS (2015) on
borrowing costs proposes some
significant departures from the current
accounting practices. Unlike AS 16,
Borrowing Costs, the revised draft ICDS
(2015) does not define any minimum
period for classification of an asset as a
qualifying asset (with the exception of
inventories). For inventories the revised
draft ICDS (2015) proposes that these
should require a minimum period of
12 months to bring them to saleable
condition in order to be classified as
qualifying assets. This could result in a
large number of assets being classified
as qualifying assets for ICDS purposes.
This is expected to reduce the interest
cost recognised as an expense for tax
purposes.
Unlike AS 11, the revised draft ICDS (2015)
has included foreign currency option
contracts and other similar contracts
within the ambit of forward exchange
contracts. When these contracts are
entered as cover to hedge recognised
assets or liabilities, the premium or
discount is amortised over the life of
the contract and the spot exchange
differences are recognised in the
computation of taxable income. While this
treatment may not be in line with current
accounting and tax practices, it brings
consistency in the treatment of foreign
currency options and forward contracts
to the extent that they seek to hedge a
recognised asset or liability.
However, a significant departure from the
current practice would arise in the contract
that is intended for trading or speculation
purposes for which AS 11 provides that
the premium or discount should be
ignored and at each balance sheet date,
the value of the contract is marked-tomarket with the gain or loss recognised in
the statement of profit or loss. In contrast,
the revised draft ICDS (2015) proposes
premium, discount or exchange difference
on contracts that are intended for trading
or speculation purposes, or that are
entered into to hedge the foreign currency
risk of a firm commitment or a highly
probable forecast transaction should be
recognised at the time of settlement.
Contrary to AS 11, the revised draft ICDS
(2015) on the effects of changes in foreign
exchange rates proposes the exchange
differences on translation of non-integral
foreign operations to be recognised as an
income or expense. AS 11 requires such
amounts to be recognised in the foreign
currency translation reserve account.
Further, the revised draft ICDS (2015)
does not propose any option to defer the
exchange differences on certain longterm monetary assets/liabilities similar
to such option under para 46 and 46A
of AS 11. This is similar to the treatment
Borrowing costs
Unlike, AS 16, exchange differences
arising from foreign currency borrowings
to the extent they are regarded as
interest cost are not being considered as
borrowing cost as per the revised draft
ICDS (2015).
The revised draft ICDS (2015) proposes
a formula for capitalisation of borrowing
cost on general borrowings which involves
allocating the total general borrowing cost
incurred in the ratio of average cost of
qualifying assets on the first day and last
day of the previous year and the average
cost of total assets on the first and last
day of the previous year (other than those
assets which are directly funded out of
specific borrowings). This is in contrast
to AS 16 which requires the use of
capitalisation rate which is the weighted
average of the borrowing costs applicable
to the borrowings of an entity that are
outstanding during the period (other than
borrowings made specifically for the
purpose of obtaining a qualifying asset).
The revised draft ICDS (2015) also
proposes a different criteria to determine
the date from which the capitalisation
of borrowing cost could commence. It
states, in case of a specific borrowing,
capitalisation of borrowing cost should
commence from the date of the borrowing
and in case of general borrowing, from the
date of the utilisation of funds. In contrast,
AS 16 specifies that capitalisation of
borrowing cost commences when all
the three conditions are satisfied a)
expenditure on acquisition, construction
or production of a qualifying asset is
being incurred, b) borrowing costs are
being incurred and c) activities that are
necessary to prepare the asset for its
intended use or sale are in progress.
Further, the revised draft ICDS (2015)
proposes capitalisation even if active
development of a qualifying asset is
interrupted. Also, the revised draft
ICDS (2015) proposes that, in case of
qualifying assets other than inventories,
capitalisation of borrowing cost should
cease when the asset is put to use in
contrast to AS 16 which states that
capitalisation should cease when
substantially all the activities to prepare
the qualifying asset for its intended use
are complete.
In addition, as per the revised draft
ICDS (2015), income from temporary
deployment of unutilised borrowed
funds would not be deducted from the
borrowing cost to be capitalised. Rather,
these will be treated as income.
All the above would lead to significant
impact on the practices currently followed
and administrative inconvenience for
companies to follow the ICDS and AS/
IndAS requirements simultaneously.
Accounting policies
The revised draft ICDS (2015) does not
recognise the concept of prudence or
materiality. Hence, it disallows recognition
of expected losses or mark-to-market
losses unless specifically permitted by any
other ICDS. Thus, till such time an ICDS
relating to recognition of mark-to-market
losses is issued, all mark-to-market losses
on assets/liabilities such as derivatives
would now be disallowed till the time of
actual settlement. Similarly, estimated
losses such as on onerous contracts are
expected to be not allowed as deduction
while calculating taxable income.
Further, the concept of materiality
which is an important consideration in
preparing financial statements has not
been considered in the revised draft
ICDS (2015). This might open the doors of
regulatory intervention which is contrary
to the intention of writing ICDS.
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14
Provisions, contingent liabilities
and contingent assets
Unlike AS 29, Provisions, Contingent
Liabilities and Contingent Assets the
revised draft ICDS (2015) proposes
recognition of provisions only if it is
`reasonably certain’. It excludes from its
ambit onerous contracts. In addition, the
revised draft ICDS (2015) also requires
recognition of contingent assets when the
inflow of economic benefits is reasonably
certain. These changes are presumably
made with the intention to bring in
consistency to the tax treatment of losses
and gains.
Tax outflow planning
Considering the current status and
divergent practices that are in existence,
the implementation of new standards
could result in significant variations in
tax outflow. In many cases, the timing of
taxable income under the new standards
would differ from the timing of recognition
under accounting standards. In addition,
some of the judicial pronouncements
which were in favour of the assessee
might no longer be operative.
An important consideration for adoption
of Ind AS is the impact it will have on
computation of the Minimum Alternate
Tax (MAT), which is based on the
accounting profits. The Committee did
not address this issue in its Final Report
released in August 2012. The main
reasons cited were the uncertainty around
the implementation date for Ind AS as well
as the forthcoming changes in IFRS. The
Committee had earlier recommended that
transition to Ind AS should be carefully
monitored and appropriate amendments
relating to MAT should be considered in
the future based on these developments.
A close watch to be kept here to track the
updates.
Transitional provisions
The revised draft ICDS (2015) has
proposed transitional provisions for 11
out of the 12 standards issued except
for revised draft ICDS on Securities.
According to the transitional provisions for
revenue recognition, impacted companies
shall have to do a retrospective catch up
at the date of transition to the extent its
current revenue recognition principles
were different from ICDS. In all other
cases, the provisions apply only on a
prospective basis.
The way forward
In keeping with the consultative approach
adopted for these standards, the
government had invited comments from
stakeholders on the ICDS (2015) by 8
February 2015. The final notification should
follow soon.
The taxable income would now be visibly
delinked from the accounting income as
both will be prepared under different set of
standards. One of the key challenges that
companies could face while implementing
ICDS are the areas of significant
differences from the accounting
standards. Additionally, another area of
difference could be accounting of deferred
taxes in the financial statements.
The advent of ICDS would address
some of the biggest concerns for the
corporate taxpayers and is expected to
provide stability in tax treatments. While
the intention of ICDS is to bring about
uniformity in tax computation, reduce
litigation on issues that have divergent
treatments, minimising the alternatives
and giving certainty to issues, there are
still some areas where there is a need for
some clarity and reassessment.
The implementation of ICDS would entail
the need to educate corporates and
individuals about the impact of the new
standards and also enhance systems and
processes to facilitate the collection of
accurate data. The divergent practices
between the two standards (ICDS and the
relevant AS) may give rise to additional
computations and reconciliations, which
in essence could result in the need for
maintaining a separate set of records.
In summary, the ICDS is a step in the right
direction: while it may throw up challenges
in implementation, the benefit it expects
to bring in the form of harmonisation of
the taxation set up in India is something
that addresses the need of the hour.
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15
Exposure draft on Frequently Asked
Questions (FAQs) on the provisions
of Corporate Social Responsibility
(CSR)1
With the introduction of section 135
of the Companies Act, 2013 (the 2013
Act), CSR activities which traditionally
have been voluntary in nature in India,
became mandatory for companies
meeting the prescribed criteria,
requiring them to contribute two per
cent of their profits for a CSR purpose,
effective from 1 April 2014.
The Ministry of Corporate Affairs
(MCA) has issued several clarifications
post the introduction of the section
and related rules, explaining that the
provisions relating to CSR must be
interpreted liberally so as to ensure
compliance in substance and also the
kind of activities which will fall under
the ambit of CSR activities. However,
considering that the financial year
end 2014-15 for corporate India is
fast approaching, the preparers of
the financial statements seem to be
struggling as to how to account for
the amount spent on CSR activities
and related disclosures in financial
statements.
This article aims to:
–– Highlight key provisions of the Exposure
Draft on ‘FAQs on the provisions of CSR
under section 135 of the Companies Act,
2013 and rules thereon’ as released by
the ICAI.
Keeping this in mind, the Institute of
Chartered Accountants of India (ICAI)
has released an exposure draft on
‘FAQs on the provisions of CSR under
Section 135 of the Companies Act,
2013 and rules thereon’ (ED) laying
down accounting and disclosure
requirements for CSR spends2 in
financial statements. Through this
article, we bring to you the key
highlights of the ED.
Accounting treatment and
related disclosure requirements
proposed
Impact related to balance sheet
Recognition - The ED proposes that a
company needs to ascertain whether the
expenditure incurred on any activities
related to CSR as prescribed under
Schedule VII of the 2013 Act is of capital
nature or revenue nature. In case the
company has control over the asset and
is able to derive future economic benefits
from it, the company should recognise
such expense as an asset in the balance
sheet. However, it is clarified that once a
company discloses the cost of an asset
as a CSR spend, depreciation on such
an asset can not be treated as a CSR
spend in subsequent years. For example,
a company purchased a vehicle for INR1
million and recognised this as an asset in
the balance sheet and included this as a
CSR spend in the year of purchase. Now,
the depreciation charged thereon will not
be allowed to be shown as a CSR spend in
subsequent years since INR1 million has
been shown as a CSR spend at the time of
purchase of that vehicle.
Presentation and disclosure Classification of the CSR asset should
be under the natural head for example,
building, vehicles, etc. with specific
subhead of the ‘CSR asset’ (e.g. CSR
Vehicle). Further, apart from disclosing
the cost of an asset as CSR spend, if the
company has undertaken any CSR project,
the note should also disclose the details
regarding expenditure incurred in the
construction of a capital asset under such
project.
1. Source : Exposure Draft on ‘Frequently asked questions on the provisions of Corporate Social Responsibility under section 135 of
the Companies Act 2013 and Rules thereon’ as issued by the ICAI
2. Source : CSR spend implies amount of expenditure incurred on CSR activities in a particular year
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16
Impact related to statement of profit
and loss
Recognition - In case the expenditure
incurred on any of the activities mentioned
in Schedule VII to the 2013 Act is of
revenue nature, then the company
should charge it as an expense in the
statement of profit and loss. For example,
expenditure incurred on training to
promote rural sports as per conditions
defined under Schedule VII of the 2013
Act should be charged to the statement of
profit and loss.
Presentation and disclosure - The
proposed ED gives an accounting
policy choice on how to present the
CSR expense in the statement of profit
and loss. It can either be shown as a
separate line item as ‘CSR expenditure’
or under natural heads of expenses in the
statement of profit and loss. In either case
a break-up and total amount spent on ‘CSR
Activities’ needs to be disclosed by way
of a note to the statement of profit and
loss. Additionally, schedule III of the 2013
Act under the statement of profit and loss
section provides for disclosure of the CSR
expenditure as a separate note.
Appropriation or charge on the
statement of profit and loss - Any CSR
expenditure which is direct in nature
and related to the business processes
of a company shall be charged to the
statement of profit and loss. However,
CSR expenditure; for example in adopting
a village for overall development where
such village development activity is not
related to the business or where such
spend does not have an impact on costs
or operations may be treated as an
appropriation out of profits. Both types of
spends i.e. the expenditure is charged to
the statement of profit and loss and the
expenditure disclosed as an appropriation
of profits, should be aggregated and
disclosed as CSR spends for a particular
year.
Accounting for shortfall and creation
of provision in case of short spent and
accounting for excess spending in CSR
- Section 135 of the 2013 Act states that
every company should spend in every
financial year at least two per cent of the
average net profits of the company made
during the three immediately preceding
years. The ED states that in case there is
a shortfall in spending on CSR activities
below such prescribed threshold, no
provision is required to be made unless
there is a contractual liability incurred for
which a provision needs to be created as
per the applicable accounting standards.
However, any such shortfall should be
explained in the financial statements
with the amount unspent and reasons
for not spending that amount. However,
in case a company spends more than the
prescribed threshold on CSR activities
in a particular year, then such excess
amount spent can not be carried forward
to subsequent years in the books of
account. In subsequent years, however,
the company in its annual report may
disclose excess spending in earlier years
while giving reasons for not spending in
those later years.
How to compute ‘net profit’- The CSR
committee of a company needs to ensure
that the company spends at least two
per cent of its average ‘net profits’ made
during the three immediately preceding
financial years on CSR activities within
India. The ED has clarified that ‘net profit’
should be calculated as per Section 198 of
the 2013 Act. The ED further states that
such profit should not include any profit of
overseas branches whether operated as a
separate company or otherwise. Also, any
dividend received from other companies
in India which are covered under and
complying with the provisions of Section
135 and any dividends received from
a company incorporated outside India
should not be considered while computing
net profits. The ED has also clarified that
any income earned outside India should
also not be considered for determining
such net profits.
Other clarifications
Expenditure incurred ‘in the ordinary
course of business’ not to be
considered for CSR spending - In
order to safeguard the interests of the
society and minimise manipulations by
companies, the ED has clarified that
expenses related to activities undertaken
in the normal course of business or
expenses incurred by companies
otherwise required for fulfilment of any
Act or law can not be considered as part
of eligible CSR spend. For example,
an electricity distribution company
connecting the last house in a village
can not classify such expense as CSR.
Similarly, spending on installation of a
device to prevent pollution which are
mandatorily required to be carried out
by law should not be classified as CSR
spend. Further, activities or programmes
that benefit only the employees of the
company and their families will not be
considered determining CSR spend.
Mode of CSR spending: whether direct
or through charity, NGO or others The ED has clarified that contribution
by companies to charity trusts or NonGovernmental Organisations (NGOs) will
qualify for CSR spend if it meets the track
record and other criteria as per Rule 4(2) of
Companies (CSR Policy) Rules, 2014.
Examples of types of CSR spending
by a company - The ED provides
certain other illustrative examples of
expenditure which can be classified as
CSR expenditure provided that these are
within the areas covered by Schedule
VII to the 2013 Act and as per CSR policy
of the company which is approved by
the Board of Directors. Such illustrative
examples include: a scheme by a
consumer company which has a policy
that for every product sold, a certain
percentage of sales say one per cent will
be earmarked for CSR activity. However,
it is clarified that such amount earmarked
can not be automatically considered as a
CSR spend until these are actually spent.
The ED clarifies that such examples are
only illustrations and companies would
need to apply rationale on the facts and
circumstances of each case to conclude
whether such expenditure qualify as CSR
spend.
Conclusion
Guidance on treatment of CSR spending
in the books of account and disclosures in
the financial statements provided by the
ICAI should be welcomed by corporate
India. The proposed ED once finalised
and notified will help to standardise the
accounting for CSR spending and help
ensure consistency in reporting of such
information across industries in India.
© 2015 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.
17
Ind AS 21 – Accounting for foreign
exchange transactions
This article aims to:
–– Provide an overview of the changes that are expected to be introduced by Ind AS implementation in India with respect to foreign
exchange transactions.
Background
In today’s world with many Indian
entities having either foreign operations
or dealing with multiple currencies and
overseas parties, accounting for foreign
currency transactions has become a
critical topic. Under the current accounting
standards as per Generally Accepted
Accounting Principles in India (Indian
GAAP), AS 11, The Effects of Changes
in Foreign Exchange Rates provides the
requisite guidance on accounting for
foreign currency transactions. Under
Indian Accounting Standard (Ind AS), the
corresponding standard on this topic is Ind
AS 21, The Effects of Changes in Foreign
Exchange Rates.
While both standards are similar in many
aspects, there are certain critical areas of
difference which may result in significant
accounting implications once Ind AS is
implemented.
Potential impact areas on Ind AS
implementation
Determination of functional currency
Currently under Indian GAAP there is no
concept of functional currency and the
financial statements are prepared and
presented in Indian National Rupees
(INR). Under Ind AS 21, every company
is required to determine its functional
currency which is defined as the currency
of the primary economic environment
in which the entity operates and hence,
there could be a scenario where the
functional currency of an Indian entity may
be a currency other than INR.
Ind AS 21 provides guidance on the criteria
to be considered in determining functional
currency. Factors that generally influence
the determination of functional currency
include:
• the currency that influences sales
prices of goods and services
• the currency of the country whose
competitive forces and regulations
mainly determine the sales prices of
goods and services
• the currency that mainly influences
costs of providing such goods and
services including labour and material
costs.
Certain secondary factors which may be
indicative of functional currency include
the currency in which funds from financing
activities are generated and receipts from
operating activities are retained.
In practice, while determination of the
functional currency may be straight
forward in most cases, in certain other
cases where entities operate in a
mixture of currencies, the consideration
of the primary and secondary factors
may not result in an obvious conclusion
of an entity’s functional currency. In
such cases, management will need
to exercise judgement based on facts
and circumstances and the economic
effects of the underlying transactions
to determine the functional currency of
such entities. Further, as per Ind AS 21,
presentation currency for an entity (i.e. the
currency in which the financial statements
are presented) can be different from
its functional currency and the standard
prescribes rules for translation of results
and financial position of an entity from its
functional currency to the presentation
currency. Current Indian GAAP, does not
provide any guidance in this respect.
Foreign operation vs integral/non
integral foreign operations
Under Ind AS 21, a foreign operation is
defined as an entity that is a subsidiary,
associate, joint venture or a branch of the
reporting entity, the activities of which
are conducted in a country or currency
other than those of the reporting entity. In
addition to the factors enumerated above,
Ind AS 21 also provides additional factors
to determine the functional currency of a
foreign operation including whether the
operations of the foreign operation are an
extension of the reporting entity.
AS 11 defines an integral foreign operation
as a foreign operation, the activities of
which are an integral part of those of the
reporting entity. It defines non-integral
foreign operation as one which is not an
integral foreign operation.The translation
principles of a foreign operation whose
functional currency is different from the
parent company under Ind AS 21 and
non-integral foreign operation under
AS 11 are broadly similar. Similarly, the
translation of a foreign operation whose
functional currency is the same as the
parent company under Ind AS 21 and
integral foreign operation under AS 11, are
also broadly similar. Also, the factors to
be considered in determining an entity’s
functional currency under Ind AS 21 are
similar to the indicators prescribed under
AS 11 to determine the foreign operations
as non-integral foreign operations.
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18
Recognition of exchange differences on
long-term monetary items
As a general principle, exchange
differences arising on translation of
monetary items need to be recognised
as an income or expense in the period
in which they arise under Indian GAAP.
However, to protect companies from
the impact of volatile foreign currency
exchange rates, the Ministry of Corporate
Affairs (MCA) in the year 2009 provided an
irrevocable option to recognise exchange
differences arising on translation of longterm foreign currency monetary items
that relate to acquisition of a depreciable
capital asset as an addition or deletion
to the cost of the asset which would be
recognised in the statement of profit
and loss as a depreciation expense over
the balance life of the asset. In other
cases (i.e. where the long-term foreign
currency monetary item does not relate
to an acquisition of a depreciable capital
asset), the exchange differences can
be accumulated in a ‘Foreign Currency
Monetary Item Translation Difference
Account’ and amortised over the balance
period of the long-term monetary asset/
liability, subject to certain conditions. It has
been clarified that for an entity that has
chosen this option, the option provided
under para 4(e) of AS 16, Borrowings
Costs, to capitalise exchange differences
to the extent of the difference between
the foreign currency and local interest
rates would not be available.
This option was also included by the
Accounting Standards Board (ASB) of
the Institute of Chartered Accountant of
India (ICAI) in Ind AS 21 when issued in
2011. Further, Ind AS 21 (read along with
Ind AS 101) as published by the Ministry
of Corporate Affairs on 16 February
2015 also contains an option to continue
the policy adopted for accounting for
exchange differences arising from
translation of long-term foreign currency
monetary items recognised in the
financial statements for the period ending
immediately before the beginning of
the first Ind AS financial reporting period
as per the previous GAAP. Thus, to this
extent Ind AS 21 differs from IAS 21 which
requires recognition of exchange rate
fluctuations on long-term foreign currency
monetary items in the statement of profit
and loss.
Treatment of forward exchange
contracts
Currently, AS 11 includes guidance
treatment of exchange differences and
premium or discount arising in relation
to certain forward exchange contracts.
Ind AS 21 does not deal with forward
exchange contracts. These will be covered
under Ind AS 109, Financial Instruments.
Transitional provisions under Ind AS
101, First-time Adoption of Indian
Accounting Standards
Ind AS 101 provides the guidance to
transition from existing Indian GAAP to
Ind AS. With respect to foreign exchange
transactions, Ind AS 101 provides certain
exemptions as elaborated below:
• Ind AS 21 requires the goodwill and
fair value adjustments arising on an
acquisition of a foreign operation to
be treated as part of the assets and
liabilities of the foreign operation and
to be translated at the reporting date
exchange rate. However, a first time
adopter of Ind AS is given an option to
not apply this requirement for business
combinations that have taken place
before the transition date. This would
result in the first time adopter treating
the assets and liabilities acquired as its
own assets.
• As per Ind AS 21, the translation
differences arising on consolidation
of the foreign operation are to be
recognised as a separate component of
equity. A first time adopter of Ind AS is
given an option to deem the cumulative
translation differences to be zero at
the date of transition to Ind AS and
reclassify any amounts recognised in
accordance with previous GAAP as part
of retained earnings. Any gain or loss
on a subsequent disposal of any foreign
operation shall exclude translation
differences that arose before the date
of transition to Ind AS and shall include
only the translation differences that
arose post the transition date.
Conclusion
With the revised roadmap on Ind AS
implementation issued recently and ICDS
expected to be applicable from 1 April
2015, corporate India needs to speed up
its readiness process for these new set
of challenges so that there is minimal
disruption to business activities, and also
make sure that stakeholders’ interest and
concerns are appropriately addressed.
© 2015 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.
19
Business combination vs.
purchase of assets1
This article aims to:
–– highlight key aspects which differentiate between purchase of business and purchase of assets.
With several companies
expanding their businesses
by new acquisitions, mergers
and restructuring, it becomes
important to understand the
substance of the transactions
and the underlying basis for
carrying out such transactions.
The underlying substance of the
transactions could ultimately
impact the accounting for such
transactions.
Through this article we aim to
highlight key aspects which
differentiate between purchase of
business vs. purchase of assets.
Key concepts
Although the concept of purchase of
business vs. purchase of assets seems
simple, it requires careful analysis which
involves application of judgement. IFRS 3,
Business Combinations and Ind AS 103,
Business Combinations provides guidance
on determining whether a purchase
is a purchase of business or purchase
of assets. If a purchase meets the
definition of business then it will trigger
the application of business combination
accounting, otherwise the purchase will
be accounted for as a purchase of assets.
In the cases where the acquisition of an
asset or a group of assets that does not
constitute a business, the acquirer should
identify and recognise the individual
identifiable assets acquired (including
those assets that meet the definition of,
and recognition criteria for, intangible
assets in IAS 38, Intangible Assets) and
liabilities assumed. The cost of the group
should be allocated to the individual
identifiable assets and liabilities on the
basis of their relative fair values at the date
of purchase. Such a transaction or event
does not give rise to goodwill.
While a business combination is
accounted using the acquisition method
prescribed in IFRS 3 and Ind AS 103. (Ind
AS 103 has a carve-out relating to bargain
purchase option)
IFRS 3 and Ind AS 103 defines business
as an integrated set of activities and
assets that is capable of being conducted
and managed to provide a return to
investors (or other owners, members or
participants) by way of dividends, lower
costs or other economic benefits. A
business generally consists of inputs,
processes applied to those inputs and the
ability to create outputs.
Inputs are economic resources that create
(or have the ability to create) outputs
when one or more processes are applied
to them. For example, non-current assets
(including intangible assets or rights to use
non-current assets), intellectual property,
the ability to obtain access to necessary
materials or rights, and employees.
Processes are systems, standards,
protocols, conventions or rules that create
(or have the ability to create) outputs when
they are applied to inputs. For example,
strategic management processes,
operational processes, etc.
Outputs are the result of inputs and
processes applied to those inputs that
provide, or have the ability to provide, a
return in the form of economic benefits.
Business combinations vs.
purchase of assets
Based on the above definition of business
it seems that it is important to have inputs
and processes which are capable to give
rise to outputs. Some important aspects in
this regard are discussed as under.
1. Sources: KPMG’s Insights into IFRS (11th edition), IFRS 3, Business Combinations and Ind AS 103, Business Combinations
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20
Is it important to acquire all the inputs
of the acquiree?
The standard clarifies that a business need
not include all of the inputs or processes
that the seller used in operating that
business if a market participant would
be capable of producing outputs by
integrating what was acquired with either
its own inputs or processes or with inputs
and processes that it could obtain.
However, judgement is required to assess
the essence of the transaction on a case
to case basis. For example, absence of
acquisition of key inputs may suggest
that the acquired set does not constitute
business. Key inputs are illustrated in the
standard and depend on the nature of
the inputs and kind of business and the
industry to which an entity belongs.
Is it important to acquire all the
processes of the acquiree?
Apart from systems and standard
processes such as operational processes,
the standard states that taking over of
skilled employees is an indication of the
fact that a business has been acquired.
If the employment contracts of the
employees of the acquiree are transferred
to the acquirer, then this may be indicative
of the fact that a business has been
acquired.
Similarly, if some of the acquiree’s
processes and activities were outsourced
before the acquisition and the related
contracts are taken over by the acquirer,
then this could indicate that the processes
and activities necessary to create outputs
are in place, and therefore, the group of
assets acquired is a business. However, if
none of the processes or activities are in
place at the acquisition date but instead
would be designed by a market participant
(or a market participant would already
have similar processes) then this could
indicate that the transaction is a purchase
of assets.
Would acquisition of assets and
activities in development stages
constitute business?
Has the acquirer acquired an integrated
set of assets?
a. planned principal activities have
commenced
It is also important to note that a
significant characteristic of a business
is that the underlying activities and
assets are integrated i.e. both inputs and
processes should be present. A group
of assets without connecting activities
is unlikely to represent a business. If the
acquired set includes only inputs, then it
is accounted for as an asset acquisition
rather than as a business combination.
b. there are employees, intellectual
property and other inputs and there
are processes that could be applied to
those inputs
Is the acquirer required to consider the
set acquired meets the definition of
business from a market’s participant
view?
However, not all of these factors need
to be present for the acquired set to be
considered a business, and as stated
above the assessment would require
significant judgement on a case to case
basis.
Exclusion of some of the inputs or
processes does not preclude the
classification of an acquisition as a
business combination, if the market
participant could operate it as business.
Determining whether a particular set of
assets and activities is a business should
be based on whether the integrated set is
capable of being conducted and managed
as a business by a market participant.
Thus, in evaluating whether a particular
set is a business, it is not relevant whether
a seller operated the set as a business or
whether the acquirer intends to operate
the set as a business.
IFRS 3 and Ind AS 103 provides certain
factors to consider in determining whether
an integrated set of activities and assets
in the development stage is a business,
including, if
c. a plan to produce outputs is being
pursued
d. there will be an ability to obtain access
to customers who will purchase the
outputs.
Conclusion
Each case of an acquisition needs
significant judgement as to whether the
acquired set is a purchase of business
or purchase of assets. This is one of the
most important areas of judgement which
can have a significant impact on the way
the transactions are accounted.
© 2015 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
Regulatory
updates
Constitution of a committee
to monitor implementation
of the Corporate Social
Responsibility (CSR)
policies by companies
For financial year ending 31 March 2015,
prescribed companies are required to
comply with the provisions of section
135 of the Companies Act, 2013 (2013
Act) relating to contribution towards
Corporate Social Responsibility (CSR)
initiatives. In this regard, the Ministry of
Corporate Affairs (MCA) has constituted
a committee:
• to recommend suitable
methodologies for monitoring
compliance to the provisions of
section 135 of the 2013 Act by
prescribed companies
• to suggest measures which can
be adopted by companies for
systematic monitoring and evaluation
of their own CSR initiatives
• to identify strategies for monitoring
and evaluating CSR initiatives
through expert agencies and
institutions to facilitate adequate
feedback to the government
with regard to the efficacy of
CSR expenditure and quality of
compliance by the companies
• to examine if a different monitoring
mechanism is warranted for
government companies undertaking
CSR activities, and if so to make
suitable recommendations in this
respect
• to recommend any other matter
incidental to the above points or
connected thereto.
[Source: General Circular No. 01/2015 of the
Ministry of Corporate Affairs, dated 3 February
2015]
Entry of banks into
insurance business
The Reserve Bank of India (RBI) has
permitted banks to undertake insurance
business. Banks may undertake
insurance business by setting up a
subsidiary/joint venture as well as
undertake insurance broking/agency
either departmentally or through a
subsidiary subject to conditions as
discussed below.
Banks setting up a subsidiary/
joint venture (JV) for undertaking
insurance business with risk
participation
Banks are not allowed to undertake
insurance business with risk
participation departmentally, and may
do so only through a subsidiary/JV set
up for the purpose. Banks which satisfy
the eligibility criteria as below (as on
31 March of the previous year) may
approach Reserve Bank of India (RBI)
to set up a subsidiary/JV company for
undertaking insurance business with
risk participation:
a. The net worth of the bank should not
be less than INR10 billion
b. The Capital to Risk-weighted Assets
Ratio (CRAR) of the bank should not
be less than 10 per cent
c. The level of net non-performing
assets should be not more than 3 per
cent
d. The bank should have made a net
profit for the last three continuous
years
e. The track record of the performance
of the subsidiaries, if any, of
the concerned bank should be
satisfactory. The RBI would take into
consideration various aspects of the
bank’s functioning like corporate
governance, risk management,
etc. before granting approval.
There are restrictions relating to
contribution towards equity of the
insurance company by the subsidiary
of the bank. Also, it needs to be
ensured that the risks involved in
the insurance business do not get
transferred to the bank.
It may be noted that a subsidiary of a
bank and another bank will not normally
be allowed to contribute to the equity
of the insurance company on risk
participation basis.
Guidelines for banks undertaking
insurance broking and agency
business
Banks require prior approval of the
RBI for setting up a subsidiary/
JV to undertake insurance broking/
corporate agency through subsidiary/
JV. Accordingly, banks desirous of
setting up a subsidiary for undertaking
insurance broking/corporate agency and
which satisfy the eligibility criteria as
below (as on 31 March of the previous
© 2015 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.
22
year) may approach the RBI for approval
to set up such subsidiary/JV:
a. The net worth of the bank should
not be less than INR 5 billion after
investing in the equity of such
company
b. The CRAR of the bank should not be
less than 10 per cent
c. The level of net non-performing
assets should be not more than three
per cent
d. The bank should have made a net
profit for the last three continuous
years
e. The track record of the performance
of the subsidiaries, if any, of
the concerned bank should be
satisfactory.
RBI would take into consideration
various aspects of the bank’s
functioning like corporate governance,
risk management, etc. before granting
approval.
Banks need not obtain prior approval
of the RBI to act as corporate agents
on fee basis, without risk participation/
undertake insurance broking activities
departmentally.
Apart from the requirement to obtain
RBI’s approval as mentioned above,
banks undertaking insurance agency or
broking business departmentally and/
or through a subsidiary need to comply
with the following conditions:
1. Board approved policy: The board
should approve a comprehensive
policy regarding undertaking
of insurance broking or agency
business. The services which
would be offered to the customers
should be in accordance with such
approved policy. The policy should
also encompass provisions relating
to suitability and appropriateness
of the products to be sold to the
customer, as well as a mechanism
for redressing grievances.
2. Compliance with Insurance
Regulatory and Development
Authority (IRDA) policies: It
has been specified that banks
undertaking insurance broking/
agency business should comply with
the relevant IRDA guidelines and
code of conduct including mandatory
maintenance of deposits as per the
IRDA regulations.
3. Ensuring customer
appropriateness and suitability:
While undertaking insurance
distribution business, either under
the corporate agency or broking
model under the relevant IRDA
Regulations, banks must ensure that:
a. All employees should possess
requisite qualifications as
prescribed by the IRDA to deal
with insurance agency/broking
business
b. Standardised system to assess
suitability and appropriateness
of the products as per customer
needs should be in place to
ensure that the customers are
treated fairly and in a transparent
manner.
4. Payment of commission,
brokerage or incentive: Banks
should adhere to the guidelines
issued by IRDA and Banking
Regulation Act, 1949, in relation to
payment of commissions, brokerage
or incentives to its staff. Banks
should also ensure that no part of
incentive whether cash or non cash
should be paid to the staff engaged
in insurance broking services by the
insurance company .
5. Know Your Customers (KYC) : The
KYC guidelines should be adhered to.
6. Transparency and disclosures:
Banks should not follow any
restrictive policies such as forcing a
customer to either opt for products
of a specific insurance company
or link sale of such products to any
other banking product. Banks should
state prominently in all publicity
material distributed by them that
the purchase of any insurance
products by a bank’s customer is
purely voluntary, and is not linked to
availment of any other facility from
the bank. Further, the details of
fees/ brokerage received in respect
of insurance broking business
undertaken by them should be
disclosed in the ‘notes to accounts’
to their balance sheet.
7. Customer grievance redressal
mechanism: A robust internal
grievance redressal mechanism
should be put in place along
with a Board approved customer
compensation policy for resolving
issues related to services offered.
Banks must also ensure that the
insurance companies whose
products are being sold have robust
customer grievance redressal
arrangements in place. Further, the
bank must facilitate the redressal of
grievances.
8. Penal action for violation of
guidelines: Violation of the above
instructions will invite strict penal
action against the banks.
In addition to the above mentioned
conditions it has been clarified that
the IRDA guidelines do not permit
group entities (even separate entities
within the same group) to take up both
corporate agency and broking business.
Thus, banks or their group entities may
undertake either insurance broking or
corporate agency business.
[Source: RBI/2014-2015/409 DBR.No.FSD.
BC.62/24.01.018/2014-15 dated 15 January 2015]
Companies (Removal of
Difficulties) Order, 2015
Amendment in the definition of
‘small company’
The Companies Act, 2013 required
that a company, other than a public
company, could be classified as a small
company if its paid up share capital
does not exceed INR5million (or such
other amount as may be prescribed) or
its turnover as per the last statement of
profit and loss does not exceed INR20
million. Difficulties were faced as a
company could be treated as a small
company if either the paid up capital
or turnover threshold is met despite
exceeding the monetary limit criteria of
the other. In view of this, the definition
of ‘small company’ has been amended
to provide that a company would
be considered as a ‘small company’
provided it meets the monetary limits,
both, for turnover and paid up capital.
Amendment to section 186
Further, section 186 of the Companies
Act, 2013 has been amended to provide
that any acquisition of securities in the
ordinary course of business, made by
a banking company or an insurance
company or a housing finance company
will not attract the provisions of section
186 (except sub section 1 relating to
investments through not more than two
layers).
[Source: Order by Ministry of Corporate Affairs
dated 13 February 2015]
© 2015 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.
© 2015 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.
KPMG in India offices
Ahmedabad
Commerce 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
Bengaluru
Maruthi Info-Tech Centre
11-12/1, Inner Ring Road
Koramangala, Bengaluru 560 071
Tel: +91 80 3980 6000
Fax: +91 80 3980 6999
Hyderabad
8-2-618/2
Reliance Humsafar, 4th Floor
Road No.11, Banjara Hills
Hyderabad 500 034
Tel: +91 40 3046 5000
Fax: +91 40 3046 5299
Kochi
Syama Business Center,
3rd Floor, NH By Pass Road,
Vytilla, Kochi – 682019
Tel: +91 484 302 7000
Fax: +91 484 302 7001
Chandigarh
SCO 22-23 (Ist Floor)
Sector 8C, Madhya Marg
Chandigarh 160 009
Tel: +91 172 393 5777/781
Fax: +91 172 393 5780
Kolkata
Unit No. 603 – 604,6th Floor,
Tower – 1,Godrej Waterside,
Sector – V,Salt Lake,
Kolkata – 700091
Tel: +91 33 44034000
Fax: +91 33 44034199
Chennai
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Nungambakkam
Chennai 600 034
Tel: +91 44 3914 5000
Fax: +91 44 3914 5999
Mumbai
Lodha Excelus, Apollo Mills
N. M. Joshi Marg
Mahalaxmi, Mumbai 400 011
Tel: +91 22 3989 6000
Fax: +91 22 3983 6000
Delhi
Building No.10, 8th Floor
DLF Cyber City, Phase II
Gurgaon, Haryana 122 002
Tel: +91 124 307 4000
Fax: +91 124 254 9101
Pune
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Pune 411 001
Tel: +91 20 3058 5764/65
Fax: +91 20 3058 5775
www.kpmg.com/in
© 2015 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.
IFRS Convergence – a reality now!
MCA notifies Ind AS standards and implementation roadmap
This issue of our IFRS Notes provides a high level analysis of
the much awaited Indian Accounting Standards (Ind AS) that
are converged with International Financial Reporting Standards
(IFRS), which was finally notified by the Ministry of Corporate
Affairs last week.
The notification of these IFRS converged standards fills up
significant gaps that exist in the current accounting guidance,
and India can now claim to have financial reporting standards
that are contemporary and virtually on par with the best global
standards. This will in turn improve India’s place in global
rankings on corporate governance and transparency in financial
reporting.
With the new Government at the Centre, there has been a
flurry of activities which started off by the announcement in
the Finance Minister’s budget speech last year of an urgent
need to converge with IFRS, which has now culminated with
the notification of 39 Ind AS standards together with the
implementation roadmap. With this notification, coupled with
the progress made on finalising the Income Computation and
Disclosure Standards (ICDS), the government has potentially
addressed several hurdles which possibly led to deferment of
Ind AS implementation in 2011.
Companies should make an impact assessment and engage
with all stakeholders, both internal and external, to deal
with their respective areas of impact and ensure a smooth
transition.
Missed an issue of Accounting and Auditing Update or First Notes?
The Ministry of Finance
issues revised drafts
on tax computation
standards
Introducing KPMG in India
IFRS Institute
KPMG in India is pleased to re-launch IFRS
Institute - a web-based platform, which seeks
to act as a one-stop site for information and
updates on IFRS implementation in India
The website provides information and
resources to help board and audit committee
members, executives, management,
stakeholders and government representatives
gain insight and access thought leadership
publications on the evolving global financial
reporting framework.
The Ministry of
Corporate Affairs had
earlier announced a
roadmap for transition
to Indian Accounting
Standards (Ind AS) from
1 April 2011. To address
lack of clarity of tax implications on the adoption
of Ind AS by companies, the Central Board of
Direct Taxes (CBDT) constituted a committee
to harmonise the accounting standards issued
by the Institute of Chartered Accountants of
India with the provisions of the Act. In August
2012, the committee, after deliberations issued
14 draft tax accounting standards. These
accounting standards are now termed as
Income Computation and Disclosure Standards
(ICDS). Considering the draft ICDS (2012) by the
CBDT had significant differences with generally
accepted accounting principles, the Ministry of
Finance reworked on the standards and on 8
January 2015 issued revised drafts of 12 ICDS
(2015) for public comments. Our First Notes
provides an overview of key revisions made in
the revised draft ICDS (2015).
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
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.
In this month’s call, we provided an overview
and approach for formulation of Income
Computation and Disclosure Standards (ICDS)
as issued by the Ministry of Finance (MOF) on 8
January 2015. We also covered the revised draft
ICDS in-depth and discussed implications on
companies. In our previous month’s call, we had
provided a brief overview on revised draft ICDS.
site provides the facility to register as a member
by providing certain minimal information.
Play Store
Feedback/Queries can be sent to
[email protected]
Back issues are available to download from:
www.kpmg.com/in
App Store
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.
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.
© 2015 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. (NEW0215_028)