Accounting and Auditing Update Accounting... · Ind AS also provides guidance on the concept of ‘business combinations under common control’ and their accounting treatment. This

Accounting and Auditing Update

www.kpmg.com/in

Issue no. 06/2017

January 2017

Editorial

© 2017 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.

Sai Venkateshwaran

Partner and HeadAccounting Advisory Services KPMG in India

Ruchi Rastogi

Executive DirectorAssuranceKPMG in India

Over the last two years the Ministry of Corporate Affairs has issued a number of amendments and clarifications to various sections and rules in the Companies Act, 2013 (2013 Act). Starting from this month’s edition, the Accounting and Auditing Update (AAU) includes a series of articles on the revised requirements of the 2013 Act. Our first topic is related party transactions and our article provides an overview of the revised requirements for related party transactions under the 2013 Act and the Securities and Exchange Board of India (SEBI) regulations.

An Initial Public Offering (IPO) is an important event for any unlisted company. It requires a lot of preparation on various aspects such as the appointment of lead managers, lawyers, preparation of documents to be filed, etc. The preparation of the financial information is also one of the vital steps in the journey of an IPO. Our article on this topic discusses the challenges that companies are likely to face and the significant decisions to be taken while preparing the financial information.

Accounting for government incentives under Ind AS could be challenging. The Ind AS on government grants is based on the ‘income approach’ and does not support the capital approach to grants. This could pose a change in accounting during the transition to Ind AS. Further, the accounting treatment for certain grants may have an interaction with Ind AS 109, Financial Instruments, and thus, would require detailed evaluation and measurement.

Derecognition of a financial liabilities is another concept dealt with in Ind AS 109. Our article discusses the principles relating to accounting for a modification or refinancing of a financial liability with the help of an illustrative example and flow charts.

Ind AS also provides guidance on the concept of ‘business combinations under common control’ and their accounting treatment. This concept is not dealt with under International Financial Reporting Standards (IFRS). The article looks at the definition of business combination under common control closely

and highlights the factors that are likely to help assess whether a transaction falls under this category. It also explains the accounting treatment with illustrative examples.

As is the case each month, we also cover a regular round-up of some recent regulatory updates in India and internationally.

We would be delighted to receive feedback/suggestions from you on the topics we should cover in forthcoming issues of the AAU.



Table of contents

Derecognition of financial liabilities 01

Business combinations of entities under common control

07

Related party transactions 1 1

Initial Public Offering in India – Big decisions and challenges

17

Accounting for government incentives under Ind AS

Regulatory updates

21

25


Derecognition of a financial liabilityInd AS 109, Financial Instruments requires a financial liability to be derecognised when it is extinguished, i.e. when the obligation is discharged, cancelled or expires. This may occur when:

• The borrower makes a payment to the lender towards the redemption or repurchase of a debt instrument,

• The borrower is legally released from primary responsibility for the financial liability (this condition can be satisfied even

if the borrower has given a guarantee), or

• There is an exchange between an existing lender and borrower of debt instruments with substantially different terms or a substantial modification of the terms of an existing debt instrument.

In this article we illustrate the application of derecognition principles with an example of a restructuring or refinancing of two debt instruments issued by an entity.

Key terms of the financial liabilities

S Limited (the entity or the company) had the following term loans outstanding in its financial statements as on 1 April 2016.

Particulars Loan 1 from Bank A Loan 2 from Bank B

Original loan amount INR200,000,000 INR500,000,000

Transaction costs/fees INR4,000,000 INR10,000,000

Amortised cost as on 1 April 2016

INR198,319,853 INR495,895,153

Interest rate 11 per cent per annum 12 per cent per annum

Remaining term to maturity 3 years 2 years

Effective interest rate (EIR) 11.34 per cent per annum 12.49 per cent per annum

Other terms of the instrument Repayable at maturity. The company has an option to prepay anytime during the three years immediately preceding the maturity date, without any penalty.

Repayable at maturity only. Prepayment penalty of 1 per cent would be levied if prepaid.

Table 1: Key terms of original financial liabilities (term loans)

This article aims to

• Outline the principles relating to accounting for a modification or refinancing of a financial liability.

Source: KPMG in India’s analysis, 2017


1

Derecognition of a financial liability


Table 1: Key terms of original financial liabilities (term loans)

The company experienced an improvement in its credit rating based on its financial performance for the year ended 31 March 2016. Accordingly, on 1 April 2016 the company decided to refinance its loans as follows:

• Loan 1 was repaid in full in accordance with the original terms of the loan that permitted prepayment without penalty in the three years immediately preceding the maturity date. The company then obtained a new loan from Bank A on more favourable terms, in accordance with the market

rate applicable to the company based on its improved credit rating.

• The company had entered into renegotiations with Bank B for modification to the terms of Loan 2. On 1 April 2016, the company finalised an agreement with Bank B modifying the terms of this loan with a reduction in interest rate and an extension in the term of the loan. As part of the restructured arrangement, the company is required to pay a fee of INR2 million to Bank B.

Accounting issue

S Limited is required to determine the appropriate accounting treatment under Ind AS 109 for the prepayment/modification of terms of the loans. This includes determining whether the existing loans should be derecognised from the company’s financial statements.

Accounting guidance

As mentioned above, Ind AS 109 requires a financial liability to be derecognised when it is extinguished, i.e. when the obligation is discharged, cancelled

or expires. An exchange between an existing borrower and lender of debt instruments with substantially different terms or a substantial modification of the terms of an existing financial liability or part thereof is accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability.

Figure 1 illustrates the considerations under Ind AS 109 to determine whether a modification is ‘substantial’ and the consequent accounting treatment required.

Particulars Loan 1 (new) Loan 2 (modified)

Borrowings INR200,000,000 INR500,000,000

Interest rate 9 per cent per annum 9 per cent per annum

Period of the loan 5 years 7 years

Other terms of the instrument Repayable in 2 equal annual instalments commencing from 31 March 2020

Repayable in 5 equal annual instalments commencing from 1 April 2019

Fees for modification Nil INR2,000,000

Loan processing fees INR1,000,000 INR5,000,000

Table 2: Modified terms of the financial liabilities

The following table summarises the new terms for both loans:


2

Source: Insights into IFRS, KPMG IFRG Limited’s publication, 13th edition, September 2016 and KPMG in India’s analysis, 2017

Analysis

The following is an analysis of each ofthe financial instruments mentioned inthe tables above.

Loan 1

The company has prepaid this loan in full, in accordance with the original terms of the loan, which permitted prepayment without penalty in the three years immediately preceding maturity. This loan has been replaced by a new loan from the same lender, i.e. Bank A. The company is required to assess whether the repayment and refinancing of this loan constitutes a substantial

modification of terms or an exchange of debt instruments with substantially different terms.

Since this loan was prepaid in accordance with its original terms, the repayment/settlement of the loan would not constitute a modification of terms and would result in the extinguishment of the original loan liability.

Therefore, the company should consider the original loan as extinguished and derecognise this liability. A gain or loss should be recognised based on the difference between the amortised cost/carrying amount of the original

loan and the consideration paid. In this illustration, this represents the unamortised transaction costs/fees relating to the original loan. The new loan is initially recognised at its fair value (considered as equal to the transaction price since the loan is at market rates), minus directly attributable transaction costs.

Figure 1: Analysis to determine if modification of terms is substantial

Quantitative assessment(Does the NPV of the cash flows under the new terms discounted using the original EIR, differ 10 per cent or more from the NPV of the remaining original cash flows?)

Qualitative assessment(Are there substantial differences in terms that are not captured by the quantitative assessment?)

Recognise:• Gain/loss based on

difference between carrying amount and consideration paid

• Modification costs or fees incurred included in the gain/loss

No

No

Yes

Yes

Derecognise the liability

Recognise new liability - measured at its fair value

Continue to recognise the existing financial liability

(amortise costs/fees incurred over the remaining

term)


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Loan 2

The company has renegotiated the terms of this loan to obtain a reduced interest rate as well as an extension in the term of the loan. Further, there has been a change in the principal repayment schedule of the loan. Ind AS 109 requires the company to assess the modified terms of the liability to determine whether the modification is substantial in nature.

Ind AS 109 states that ‘terms are substantially different if the discounted present value of the cash flows under the new terms, including any fees paid net of any fees received and discounted using the original effective interest rate, is at least 10 per cent different from the discounted present value of the remaining cash flows of the original financial liability.’ This is a quantitative assessment of the modification in terms. We consider that the company should also perform a qualitative assessment to determine if the modification is substantial, if the difference in the present values of the cash flows is less than 10 per cent.

The company has performed a quantitative assessment. In accordance with the guidance above, the present value of the remaining cash flows of the original loan (i.e. its amortised cost) on 1 April 2016 is INR495,895,153 and

the present value of the cash flows (including modification fees) under the modified terms, discounted using the original EIR (12.49 per cent per annum), is INR440,945,889. This amounts to a difference of approximately 11 per cent in the present values of cash flows under the original loan and the modified terms and would result in the extinguishment of the original loan liability.

The difference between the carrying amount/amortised cost of the original loan and the consideration paid is recognised in profit or loss. In this illustration, the consideration paid by the company is the assumption of the new financial liability (i.e. modified loan). The new financial liability is initially measured at its fair value. The fair value of the new loan is estimated as INR500 million in this illustration, based on the assumption that this loan has been provided by Bank B at market rates (being 9 per cent per annum excluding any adjustment for transaction costs or fees) as applicable to the company on the date of modification. Consequently, the loss on derecognition of the loan amounts to INR4,104,847.

Ind AS 109 also requires any costs or fees incurred related to the modification to be recognised as part of the gain or loss on extinguishment. These are not

adjusted in the initial recognition amount of the new financial liability unless it can be demonstrated that they relate solely to the new liability. In this illustration, the company would be required to include the modification fees of INR2 million and the transaction costs of INR5 million in the gain/loss on derecognition. This would bring the total loss on derecognition to INR11,104,847.

Date Accounting entry Amount in INR

1 April 2016 Term loan 1 (original financial liability) Dr 198,319,853

Profit or loss Dr 1,680,147

Bank Cr 200,000,000

(Prepayment and extinguishment of original loan)

1 April 2016 Bank Dr 199,000,000

Borrowing - Term loan (new financial liability) Cr 199,000,000

(Recognition of new loan at initial fair value minus transaction costs)

The company recognises the following accounting entries:


4

(Source: KPMG in India’s analysis, 2017)

Date Accounting entry Amount in INR

1 April 2016 Term loan 2 (original financial liability) Dr 495,895,153

Profit or loss Dr 11,104,847

Bank Cr 7,000,000

Borrowing – term loan (modified financial liability) Cr 500,000,000

(Substantial modification and extinguishment of original loan and recognition of a new financial liability)

Consider this….

• We consider that a qualitative analysis of a modification in the terms of a financial liability, in order to determine if the modification is substantial, should exclude those differences in terms that have been captured by the quantitative assessment. For example, changes in interest rates, principal amounts, extension of maturities, etc. would generally be captured in a quantitative assessment. Hence, these modifications by themselves would not indicate a qualitative modification in terms that is substantial. Examples of qualitative modifications generally include changes relating to substantial equity conversion features, security pledged by the borrower, or the currency in which the liability is denominated. Entities may be required to exercise judgement to assess if such modifications are substantial in nature.

• A modification in terms that is not substantial in nature would not result in the derecognition of the financial liability. In this scenario, any fees or costs incurred on modification are adjusted in the carrying amount of the financial liability and amortised over its remaining term.


5

The company should recognise the following accounting entry on derecognition.



6

Businesscombinations under common control under Ind AS IntroductionInd AS introduces new accounting concepts that are different from the requirements of Accounting Standards (AS), one such concept is the guidance on business combinations of entities under common control provided in Appendix C to Ind AS 103, Business Combinations. AS 14, Accounting for Amalgamations, does not have any specific guidance on such common control transactions. Internationally as well, IFRS 3, Business Combinations standard does not provide guidance on common control accounting and mentions that such transactions are outside its scope.

In this article, we discuss the concept of business combinations of entities under common control and its accounting treatment with the help of illustrative examples.

Business combinations under common control

It is a business combination involving entities or businesses in which all the combining entities or businesses are ultimately controlled by the same party or parties both before and after the business combination, and that control is not transitory. The following factors should be taken into consideration while assessing whether a business combination would be considered

as a business combination under common control:

Control: Business combinations under common control transactions could include the transfer of subsidiaries or businesses, between entities within the group. It is important to note that it is only control that matters and it need not necessarily be wholly-owned entities. Additionally, it is not necessary for the combining entities to be included as part of the same consolidated financial statements for a business combination to be regarded as one under common control.

Contractual arrangement: When an entity that is controlled by a group of individuals, then such group of individuals should act together under a contractual arrangement. The group of individuals may not be subject to the financial reporting requirements of Ind AS.

Transitory control: The collective power should not be transitory. Ind AS standards do not define the term ‘transitory’. This term seemed to have been included as an anti-abuse measure to deal with certain ‘grooming transactions’ i.e. transactions that could be structured to achieve a particular accounting treatment.


• Explain the concept of business combinations under common control

• Discuss the impact of new accounting guidance on such transactions.


7

Businesscombinations under common control under Ind AS

Accounting treatment of business combinations under common controlUnder Ind AS 103, business combinations involving entities or businesses under common control should be accounted for using the pooling of interests method. Fair value method is prohibited.

The pooling of interests method would involve following steps:

• Carrying amounts: The assets and liabilities of the combining entities would be reflected at their carrying amounts

• Fair value: No adjustments would be made to reflect the fair values of the assets and liabilities

• New assets or liabilities: No recognition of new assets or liabilities

• Uniform accounting policies: Adjustments to assets and liabilities

would be made only for harmonising accounting policies

• Restatement of preceding periods: The financial information in the financial statements in respect of prior periods should be restated as if the business combination had occurred from the beginning of the preceding period in the financial statements, irrespective of the actual date of the combination. However, the restatement from the earliest period cannot extend beyond the date when the entities were actually under common control.

• Identity of reserves: The identity of the reserves would be preserved and should appear in the financial statements of the transferee in the same form in which they appeared in the financial statements of the transferor. Thus, for example, the general reserve of the transferor entity becomes the general reserve of the transferee, the capital reserve

of the transferor becomes the capital reserve of the transferee and the revaluation reserve of the transferor becomes the revaluation reserve of the transferee.

• Consideration transferred: Generally consideration in such scenarios may consist of securities, cash or other assets. Securities would be recorded at nominal value and other assets would be considered at their fair values.

• Capital reserve: The difference, if any, between the amount recorded as share capital issued plus any additional consideration in the form of cash or other assets and the amount of share capital of the transferor should be transferred to capital reserve. Such capital reserve should be presented separately from other capital reserves with a disclosure of its nature and purpose in the notes to the financial statements.

Example 1

Company P

Company S3

Company Y

Company S1 Company S2 Company S3

100%

80% 100% 100%


• In example 1, company P has a number of group entities and Y is an intermediate parent of company S2 and company S3. All group companies are businesses as defined under Ind AS 103. If company Y were to transfer its investment in company S3 to company S2 then at the consolidated financial statements’ level of company P or Y, the transfer of S3 to S2 would be accounted as common control business combination as both companies S2 and S3 are ultimately controlled by company P.

• At the individual financial statements’ level, company S3 would be considered as the transferor and company S2 would be the transferee.


8

Continuing with Example 1

Using the group structure in Example 1, assume that S2 pays cash of INR2,000 to Y to acquire all of the shares in S3 on 1 July 2016. S3 has been part of the group since its formation. The following table illustrates the consolidated position of S2 at the transaction date, based on the book values in the financial statements of S3.

The table below highlights the financial position as at 1 January 2015 (start of comparative period) and 1 July 2016 (date on which the transaction occurs).

As on 1 January 2015 As on 1 July 2016

S2 Pre-transaction S3

Transaction and eliminations S2 Consolidated

Transaction and eliminations S2 Consolidated

Assets 11,000 9,100 - 20,100 (2,000)2 18,100

Liabilities (5,000) (6,000) - (11,000) - (11,000)

Net assets 6,000 3,100 - 9,100 (2,000) 7,100

Share capital 1,500 100 (100)1 1,500 (100)3 1,500

Capital reserve - - 1001 100 (1,900)4 (1,900)

Foreign Currency Translation Reserve (FCTR)

200 100 - 300 - 300

Retained earnings 4,300 2,900 - 7,200 - 7,200

Total equity 6,000 3,100 - 9,100 (2,000) 7,100

Notes:

1. The example illustrates the approach of not reflecting the cash paid of INR2,000 in the comparative information, because the transaction takes place in 2016,

2. Cash paid,

3. Share capital of S3 eliminated,

4. The surplus of the cash paid (INR2,000) over the share capital of S3 (INR100) is recognised in a capital reserve in line with para 12 of appendix C of Ind AS 103.

Source: Insights into IFRS, KPMG IFRG Limited’s publication, 13th edition, September 2016 and KPMG in India’s analysis, 2017


9

Consider this….

• A variation in Example 1 to say, S2 or S3 was held 51 per cent by company Y and the balance 49 per cent was held by an investor company Z which is not related to company P at all. Even in such scenario the transaction would be treated as a common control transaction as company P still controls both S2 and S3.

• A variation wherein instead of company P if there are four individuals (A,B,C,D), each holding 25 per cent each of the subsidiary Y. In such a scenario, Ind AS 103, states that an entity can be controlled by an individual, or by a group of individuals acting together under a contractual arrangement, and that individual or group of individuals may not be subject to the financial reporting requirements of Ind AS. Therefore, it is not necessary for combining entities to be included as part of the same consolidated financial statements for a business combination to be regarded as one having entities under common control.

However in the above example, the individuals A, B, C and D shall be regarded as controlling an entity only when, as a result of contractual arrangements, they collectively have the power to govern its financial and operating policies so as to obtain benefits from its activities, and that the ultimate collective power is not transitory.

• Due consideration will need to be given to Ind AS 101 for first time adoption, the applicable options for business combinations that has occurred prior to the transition date would also apply to a common control transaction.

• Common control transactions can be of varied nature, some of the examples are:

– Sideways transfers, a subsidiary is transferred to a fellow subsidiary such that the transferor loses control of the subsidiary

– Downstream transfers, a direct subsidiary of the transferor becomes an indirect subsidiary

– Upstream transfers, an indirect subsidiary becomes a direct subsidiary

– Establishment of a new parent that may become a new parent entity of another entity in a group.

While the Ind AS 103 does not address each of these scenarios, careful consideration should be given to the basic principles of what a common control business combination is, i.e. insofar the combination is between entities or businesses that are ultimately controlled by the same party or parties, the guidance in Appendix C to the standard would continue to apply.


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Related party transactionsRelated Party Transactions (RPTs) has been an area of focus for auditors, regulators and shareholders. High volume of RPTs reflected a poor governance framework within an entity. Due to this, the Companies Act, 2013 (2013 Act) and the Securities and Exchange Board of India (SEBI) (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations) now lay a lot of emphasis on the RPTs.

Implementation of the 2013 Act raised a number of execution issues and the Ministry of Corporate Affairs (MCA) has been working with the stakeholders for the last two years to address these challenges by issuing a number of clarifications and amendments to the 2013 Act and the Rules.

The implementation challenges led to the constitution of the Companies Law Committee (CLC) in 2015 to examine and make recommendations on the issues arising out of implementation of the 2013 Act. Accordingly, the MCA has proposed the Companies Amendment Bill, 2016 to provide relief on various aspects of the 2013 Act.

In this article, we aim to compile significant changes made to the Sections relating to RPTs in the 2013 Act along with highlighting the corresponding requirements prescribed by the SEBI.

Background to RPTs

Under the 2013 Act, certain transactions with related parties, which are not in the ordinary course of business and which are not at an arm’s length require the consent of the Board of Directors of a company. Further, shareholders’ approval is required for transactions where certain thresholds are met.

It is expected that the Board of Directors, while approving such transactions, would keep the investors’ interest above any other interest and discharge their fiduciary duties effectively. In case it is proved otherwise, the 2013 Act provides for levying of fine and imprisonment, including class actions suit against the directors.

Additionally, Section 134 of the 2013 Act also requires the details of certain RPTs to be disclosed in the Board’s report.


• Provide a summary of the significant amendments and clarifications to the related party transactions requirements in the Companies Act, 2013

• Highlight the related key requirements of the Securities and Exchange Board of India (SEBI).


11

Related party transactions

Amended definition of related party under the 2013 Act

The definition of related parties is provided in Section 2(76) of the 2013 Act, AS 18, Related Party Disclosures, Ind AS 24, Related Party Disclosures and Listing Regulations. However the definition in all these four documents not aligned.

Several amendments have been made to the related party definition under Section 2(76) of the 2013 Act. The revised definition of the related party with reference to a company under Section 2(76) of the 2013 Act means:

i. a director or his relative

ii. a Key Managerial Personnel (KMP) or his relative

iii. a firm, in which a director, manager or his relative is a partner

iv. a private company in which a director or manager or his relative1 is a member or director

v. a public company in which a director or manager is a director and holds2

along with his relatives, more than two per cent of its paid-up share capital

vi. any corporate whose Board of Directors (Board), managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager

vii. any person on whose advice, directions or instructions a director or manager is accustomed to act

Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions given in a professional capacity.

viii. Any company which is:

a. a holding, subsidiary or an associate company of such company

b. a subsidiary of a holding company to which it is also a subsidiary.

The above mentioned companies are outside the scope of RPTs for private companies3 and units of an unlisted public company in an International Financial Services Centre (IFSC) in Special Economic Zones (SEZs) (specified IFSC public company)4.

ix. such other person as may be prescribed.

The Companies (Specification of Definitions Details) Rules, 2014 prescribe that a director (other than an independent director)5 or KMP of the holding company or his relative with reference to a company, should be deemed to be a related party.

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

As per Listing (Regulation 2(zb)), an entity should be considered as related to the company if:

a. Such entity is a related party under Section 2(76) of the 2013 Act, or

b. Such entity is a related party under Accounting Standards or Indian Accounting Standards (Ind AS).

1. Companies (Removal of Difficulties) Sixth Order, 2014 dated 24 July 2014 issued by the MCA.

2. Companies (Removal of Difficulties) Fifth Order, 2014 dated 9 July 2014 issued by the MCA.

3. Notification no. G.S.R. 464(E) dated 5 June 2015 issued by the MCA.4. Notification no. G.S.R. 08(E) dated 4 January 2017 issued by the MCA.5. Companies (Specification of Definition Details) Amendment Rules, 2014 dated

17 July 2014 issued by the MCA.


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The amended process for approval of RPTs has been summarised in the flow chart below.

Approval process under the 2013 Act and Listing Regulations

The 2013 Act requirements All companies (both listed and unlisted)

All transactions - audit committee approval

All transactions (even if price not charged) – prior to audit committee approval#

Listing Regulations requirements (Listed companies)

Other cases if certain thresholds met

Ordinary resolution at general meeting required – voting only by parties not interested in the

contract/arrangement^

Board’s approval required*

Resolution at general meeting

required-voting by unrelated parties

whether party to a transaction or not.

No further approval required

No further approval required

Transactions under Section 188

Not in ordinary course of business/

not at an arm’s length

Material transactions (10

per cent of annual consolidated

turnover)

Transactions under Section 188

Ordinary course of business and at an

arm’s length

Not material transactions

#No approval is required in case of transactions entered into between two government companies and between a holding company and its wholly owned subsidiary whose accounts are consolidated with the holding company and place before the shareholders at the general meeting for approval.

*No approval required for transactions between the company and any company which is:

a. a holding, subsidiary or an associate company of such company, or

b. a subsidiary of a holding company to which it is also a subsidiary.

^In the case of private companies related parties are allowed to vote



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

All RPTs require audit committee approval

Section 177 of the 2013 Act requires all RPTs to be approved by the audit committee6. Earlier, this Section did not specify whether the audit committee approval needs to be a pre-approval or a post facto approval. The Companies (Amendment) Act, 20157 issued on 26 May 2015, inserted a proviso to Section 177(4)(iv) to permit an omnibus approval for RPTs proposed to be entered into by the company subject to conditions prescribed in the Rules, thereby indicating that prior approval of audit committee would be required.

The MCA notified Companies (Meetings of Board and its Powers) Second Amendment Rules, 20158 on 14 December 2015 and inserted Rule 6A which specifies the following conditions for an omnibus approval from an audit committee:

1. The audit committee after obtaining an approval of the Board specify the criteria for making an omnibus approval which should include:

a. Maximum value of the transactions, in aggregate, which can be allowed under the omnibus route in a year

b. The maximum value per transaction which can be allowed

c. Extent and manner of disclosures to be made to the audit committee at the time of seeking an omnibus approval

d. Review, at such intervals as the audit committee may deem fit, related party transaction entered into by the company pursuant to each omnibus approval made

e. Transactions which cannot be subject to the omnibus approval by the audit committee.

2. The factors which an audit committee should consider while specifying the criteria for making an omnibus approval are as follows:

a. Repetitiveness of the transactions (in the past or the future)

b. Justification for the need of an omnibus approval.

3. The audit committee would satisfy itself on the need for an omnibus approval for transactions that are repetitive in nature and that such approval is in the interest of the company.

4. The omnibus approval should contain or indicate the following:

a. name of the related parties

b. nature and duration of the transaction

c. maximum amount of transaction that can be entered into

d. the indicative base price or current contracted price and the formula for variation in the price, if any

e. any other information relevant or important for the audit committee to take a decision on the proposed transaction.

In situations where need for a RPT cannot be foreseen and aforesaid details are not available, an audit committee may request for an omnibus approval for such transactions subject to their value not exceeding INR1 crore per transaction.

5. Omnibus approval would not be valid for a period exceeding one financial year and would require a fresh approval after the expiry of such financial year.

6. Omnibus approval would not be made for transactions with respect to selling or disposing of an undertaking of a company.

7. Any other conditions as the audit committee may deem fit.

Transactions under Section 188 that are not in the ordinary course of business or not at an arm’s length: Section 188 of the 2013 Act requires that the transactions with related parties that are not in the ordinary course of business or which are not at an arm’s length would require consent of the Board of Directors of the company. Additionally, certain specified transactions would require prior shareholders’ approval by an ordinary (earlier special) resolution. Those transactions are as follows9:

Prescribed transaction categories Amount beyond which shareholders’ approval is required

Sale, purchase or supply of any goods or material (directly or through an agent) Exceeding 10 per cent of turnover or INR1 billion, whichever is lower*

Selling or otherwise disposing of, or buying, property of any kind (directly or through an agent)

Exceeding 10 per cent of net worth or INR1 billion, whichever is lower*

Leasing of property of any kind Exceeding 10 per cent of net worth or 10 per cent of turnover or INR1 billion, whichever is lower*

Availing or rendering of any services (directly or through an agent) Exceeding 10 per cent of turnover or INR500 million, whichever is lower*

Appointment to any office or place of profit in the company, subsidiary company or associate company

Remuneration exceeding INR0.25 million per month

Underwriting the subscription of any securities or derivatives of the company Remuneration exceeding one per cent of net worth


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6. Section 177 does not apply to a specified IFSC public company as per notification no. G.S.R. 08(E) dated 4 January 2017 issued by the MCA.

7. Companies (Amendment) Act, 2015 dated 26 May 2015 issued by the Ministry of Law and Justice.

8. Companies (Meetings of Board and its Powers) Second Amendment Rules, 2015 dated 14 December 2015 issued by the MCA.

9. Companies (Meetings of Board and its Powers) Second Amendment Rules, 2014 dated 14 August 2014 issued by the MCA.

The MCA through a notification10 clarified that transactions arising out of compromises, arrangements, and amalgamations that are dealt with under the specific provisions of the Companies Act, 1956/2013 Act will not attract the requirements of Section 188 of the 2013 Act.

Exemption on voting by a private company: The second proviso to Section 188(1) requires a related party (who is a member) to abstain from voting on a resolution of a company to approve a contract/arrangement entered into by the company. However, such a proviso is not applicable to a private company11 and specified IFSC public company12.

Exemption from passing a resolution: RPTs entered into between a holding company and its wholly owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval need not require approval through passing a resolution under Section 18813.

Listing regulations pose an additional responsibility over the management of the company as it requires them to formulate a policy on dealing with RPTs and on materiality of RPTs. A transaction with a related party should be considered material if the transaction(s) to be entered into individually or taken together with previous transactions during a financial year, exceeds 10 per cent of the annual consolidated turnover of the listed entity as per the last audited financial statements of the listed entity. Additionally, these policies should be disclosed on the listed entity’s website.

All RPTs are required to be approved by an audit committee including grant of an omnibus approval on the conditions similar to Section 188 of the 2013 Act. Further, all material RPTs are required to be approved by the shareholders through an ordinary resolution. However, no approval from the audit committee or shareholders is required in the following cases:

a. Where the transactions have been entered into between two government companies (government company to have the same meaning as per Section 2(45) of the 2013 Act ).

b. Where transactions are entered into between a holding company and its wholly owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval.

Additionally, Regulation 23(4) of the Listing Regulations abstain all the related parties to vote on resolutions whether the entity is a related party to the particular transaction or not. This requirement exists irrespective of the fact that the transactions with the related parties may be at an arm’s length and in the ordinary course of business.


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10. General circular no.30/2014 dated 17 July 2014 issued by the MCA.11. Notification no. G.S.R. 464(E) dated 5 June 2015 issued by the MCA.12. Notification no. G.S.R. 08(E) dated 4 January 2017 issued by the MCA.13. Companies (Amendment) Act, 2015 dated 26 May 2015 issued by the Ministry

of Law and Justice.

Recommendations of the Company Law Committee (CLC) and the Companies (Amendment) Bill, 2016

CLC’s recommendations: Following recommendations of the CLC are yet to be addressed:

a. The CLC, recommended that Section 2(76)(viii) be amended to substitute ‘company’ with ‘body corporate’ and should also include investing company or the venturer of a company thereof. In addition, the CLC also felt that the fifth and sixth Removal of Difficulty Orders of 2014, issued to plug unintentional loopholes be brought into the 2013 Act through an amendment.

b. The CLC also recommended that the Institute of Chartered Accountants of India (ICAI) should come up with a suitable guidance note on clarification/definition of terms such as ‘ordinary course of business’ and ‘arm’s length basis’ to guide its members on compliance with respect to Section 188 requirements.

c. With respect to the circular no.30/2014 dated 17 July 2014 issued by the MCA clarifying requirements of second proviso to Section 188 of the 2013 Act, the CLC noted that the requirements of the said proviso had been misinterpreted, and hence, should be withdrawn. Further, as all parties in case of joint ventures and closely held public companies may be related parties, not allowing them to vote may be impractical and such cases may be specifically excluded from the requirements of the second proviso.

The Companies (Amendment) Bill, 2016 (the Bill): Following changes are proposed in the Bill:

a. With respect to the definition of related party (clause 2(76)(viii)), the Bill proposes to include an investing company and venture partners.

b. The Bill proposes to amend Section 177 of the 2013 Act to provide RPTs between a holding company and its wholly owned subsidiary that do not require board approval under Section 188 need not require an approval from the audit committee.

c. The Bill proposes to relax stringent requirements of Section 188. It proposes that the second proviso of Section 188 would not be applicable to cases where 90 per cent or more members, in number, are relatives of promoters or are related parties.

d. The Bill accepts the recommendations of the CLC and proposes the following:

• The existing requirement for the audit committee to pre-approve all RPTs subject to the approval of the board or shareholders as required under Section 188 should continue. For transactions not covered under Section 188, the audit committee may give its recommendations to the board, in case it is not approving a particular transaction.

• Subject to safeguards, the audit committee may ratify within months such transactions that have been entered into without obtaining its prior approval (inadvertently) subject to an upper threshold of INR1 crore.


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Consider this….

• Requirements of RPTs are now largely aligned between 2013 Act and the Listing Regulations.

• Though there have been several amendments to the requirements relating to RPTs, it is important to note that these requirements are still onerous.

• If a company proposes certain RPTs that are expected to require approval from the members of the company, then it should plan for such approvals in advance.

Initial public offering in India – Big decisions and challenges BackgroundOne of the objectives for any company is to create wealth for its shareholders and therefore, the lifecycle of a company involves various milestones in this regard. One of the important milestone is to ’Go Public’ and raise capital from stock markets in the form of issuing equity shares to public shareholders.

The first time a company decides to sell its shares to public by getting itself listed is called Initial Public Offering i.e. IPO.

Typically, IPO journey for each company is different and may take nine months to 15 months depending upon state of readiness, market conditions, issue size, etc.

While there are various activities such as appointment of lead managers/lawyers/registrars/auditors, preparation of various documents to be filed with the authorities, transition from a private limited company to public limited company including necessary changes in governance model and above all marketing of the issue and obtaining necessary approval from the authorities, one of the key elements to be addressed is the preparation of financial information required by the applicable rules.

In addition to other laws applicable to specific elements, the key regulations which cover or prescribe requirement in relation to preparation of financial information are SEBI

(Issue of Capital and Disclosure Requirements) Regulations, 2009 (SEBI ICDR Regulations), SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 and the Companies Act, 2013.

Further, the Institute of Chartered Accountants of India (ICAI) has issued Guidance Note on Reports in Company Prospectus which was revised recently in the wake of the Companies Act, 2013. The revised guidance note is applicable to IPO as well as other types of filings e.g. Qualified Institutional Buyers (QIB), rights issue, Real Estate Investment Trusts (REITS), Infrastructure Investment Trusts (InvITs), etc. for offer documents (DRHP/ Draft Letter of Offer (DLoF)/Prospectus and others) filed on or after 1 January 2017 (voluntary application before that is encouraged).

In IPO journey, two sets of offer document are filed with the authorities i.e. Draft Red Hearing Prospectus (DRHP) on which approval is obtained from authorities and then Red Hearing Prospectus (RHP) before launch of issue after incorporating changes primarily driven by developments subsequent to and any from comments on DRHP from authorities.

In this article, we will discuss some of the important aspects in relation to preparation and requirement of that financial information in the context of IPO.


• Provide an overview of certain important aspects of the preparation and requirement of financial information while preparing for an initial public offer


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Initial public offering in India – Big decisions and challenges

Year’s/periods of financial information: As per the SEBI regulations, generally, companies are required to present five years restated financial information in an offer document along with an additional interim period to ensure that the latest period ended is not less than six months old from the date of the offer document. The restated financial information is required to be audited by its statutory auditors and will contain some additional disclosures as required by the SEBI regulations, for example, principal terms of loan and assets charged as security, statement of tax shelter, age-wise analysis of sundry debtors, etc.

It is important to note that if the entire process of DRHP and RHP is not completed within six months from the date of latest period ended of the audited financial statements, then the company would also need to disclose its interim financial information. This is likely to pose an additional challenge to get the latest interim period audited.

Stand-alone, consolidated, or both: In case a company has subsidiaries/associates/joint ventures, then the Companies Act, 2013 requires preparation of the Consolidated Financial Statements (CFS). However, the preparation of CFS was not mandatory for non-listed entities before introduction of the Companies Act, 2013 and still there are certain exemptions available to certain companies for not preparing CFS under the Companies Act, 2013. Consequently, there may be a situation that the company may not have prepared CFS in the past or for specific period covered by the IPO requirements.

So, one of the important evaluation is whether the company has to present stand-alone financial information, consolidated financial information, or both sets of financial information for all periods stated above in the offer document.

The Guidance Note on Reports in Company Prospectuses (Revised 2016) provides the following alternatives in respect of presentation of the financial information of the company and its subsidiaries:

a. Consolidated financial information in respect of the issuer company along with the issuer company’s interest in the subsidiary companies, and stand-alone financial information of the issuer company

b. Information of the issuer company and issuer company’s interest in the subsidiary companies be combined for all such subsidiaries, or

c. Information of the issuer company and issuer company’s interest in the subsidiary companies to be given individually in respect of each such subsidiary.

If the company opts for option (a) above then the company will prepare the CFS for the previous financial years in accordance with the applicable accounting standard and present the same in the offer document.

Generally, in our experience, the companies which have raised money through an IPO in recent past have presented both the stand-alone financial information of the issuer company and consolidated financial statements of the issuer company.

Adjustments required in the audited information: In many cases, financial statements of the companies would have been audited over the years. An important question to evaluate is whether the financial information to be included in the offer document would require any adjustments.

It seems that the financial information presented in any offer document may require certain adjustments to the audited financial statements of a company. The reason for such requirement is that the purpose of financial information in an offer document is to provide sufficient adequate information to prospective investors in a uniform and consistent manner to help them in taking decision for investing in a company. Therefore, all material quantifiable adjustments should be adjusted to the respective periods and only non-quantifiable qualifications remain unadjusted. The latter should be disclosed in the financial information

along with the statement that their impact cannot be ascertained.

These adjustments are mentioned in Schedule VIII of the SEBI ICDR regulations and are as following:

a. Adjustments/rectification for all incorrect accounting practices or failures to make provisions or other adjustments which resulted in audit qualifications. Audit qualifications, which have not been given effect to, if any, shall be highlighted along with the management comments. If the impact of non-provisions is not considered ascertainable, then a statement to that effect by the auditors

b. Material amounts relating to adjustments for previous years should be identified and adjusted in arriving at the profits of the years to which they relate irrespective of the year in which the event triggering the profit or loss occurred.

c. Where there has been a change in an accounting policy, the profits or losses of the earlier years (required to be shown in the offer document) and of the year in which the change in the accounting policy has taken place should be recomputed to reflect what the profits or losses of those years would have been if a uniform accounting policy was followed in each of these years.

d. If an incorrect accounting policy is followed, the re-computation of the financial statements should be in accordance with correct accounting policies.

e. Statement of profit and loss should disclose the profit or the loss arrived at before considering extraordinary items and after considering the profit or loss from extraordinary items.

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Period of filing of offer document

Latest financial year/ interim period, if any

Second/latest financial year

Third financial year

Second earliest financial year

Second earliest financial year

1 April 2016 to 31 March 2017

Indian GAAP(Accounting Standards)

Indian GAAP(Accounting Standards)

Indian GAAP (Accounting Standards)




Ind AS Ind AS Ind AS* Indian GAAP (Accounting Standards)



Ind AS Ind AS Ind AS Indian GAAP

(Accounting Standards) Indian GAAP

(Accounting Standards)


Ind AS Ind AS Ind AS Ind AS Indian GAAP (Accounting Standards)

On or after 1 April 2020

Ind AS Ind AS Ind AS Ind AS Ind AS

The Guidance Note on Reports in Company Prospectuses (Revised 2016) mentions that as per the SEBI ICDR Regulations, material amounts relating to adjustments for previous years should be adjusted in arriving at the profits for the years to which they relate irrespective of the year in which event triggering the profit or loss has occurred. In other words, where there are material facts which would have been taken into consideration while preparing the accounts for the respective years, had those facts been known at that time, the same should be considered in the year to which it relates. The auditor should, therefore, review the relevant information in respect of earlier years, such as, settlement of significant litigations items already reported as prior period adjustments, extraordinary items identified and adjusted in the respective years, etc.

To further illustrate the above requirements, the following examples highlight the situations where the financial information may require adjustment:

• Prior period items, i.e. charges or credits which are disclosed in the current period as a result of errors or omissions in the preparation of financial statements of one or more prior periods.

• Creation of liability due to retrospective amendment in the law

• Excess refunds/provisions for liabilities no longer required and written back.

Identification to some of these adjustments the financial information may require significant amount of judgement and time before an auditor and company concludes whether an adjustment is required to be made to the financial information.

Another situation that should be considered is that if there is any change in the capital structure or denomination of the equity shares (for example, bonus or split) then as per the SEBI ICDR guidelines, compliance with the following requirements should be ensured while making disclosure in the offer document:

a. All the financial data affected by the change in denomination of shares should be clearly and unambiguously presented in the offer document.

b. Comparison of financial ratios representing value per share and comparison of stock market data in respect of price and volume of securities shall be clearly and unambiguously presented in the offer document.

c. The capital structure incorporated in the offer document shall be clearly presented giving all the relevant details pertaining to the change in denomination of the shares.

Depending upon the complexity and ready availability of details, a company should plan appropriate time for this exercise and should not assume that audited financial statements could be reproduced as is in the offer document.

Impact of Ind AS on the financial information

A company falling in the Ind AS road map, would have an added challenge in presenting five years’ financial information due to transition from Accounting Standards to Ind AS. To address this challenge, the SEBI has provided detailed guidance with regard to submission of financial information. The following examples can help throw light on the presentation of the financial information to be given by a company falling in the phase I and phase II of the Ind AS road map.

If the company is covered under Phase I of the Ind AS road map , then the table below highlights the manner of submission of financial information.

For issuer companies falling under phase II of the Ind AS roadmap, the above mentioned principles (timelines) will be followed with time lag of one year.

* Disclose by making suitable restatement adjustments to the accounting heads from their values as on the date of transition following accounting policies consistent with that used at date of transition to Ind AS

Source: KPMG in India analysis 2017 based on the Guidance Note on Reports in Company Prospectuses (Revised 2016)


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Ind AS being a new framework, it can impact a company’s financial performance as compared to previous GAAP audited financial statements. In addition to the impact on its financial statements, there could be certain additional accounting/time-lines related challenges posed by this new framework while preparing for an IPO. Some of these challenges are highlighted below:

• There could be a situation wherein Ind AS financial information may be included in an offer document for periods prior to mandatory transition date to Ind AS framework. If a company has applied certain transition date values and Ind AS exemptions on the Ind AS transition date then the company would need to evaluate how to determine Ind AS values for the period prior to the mandatory transition date for which Ind AS financial information is presented.

• If a company expects a delay between the timing of filing of the DRHP and RHP then it should consider which accounting framework should be followed i.e. Ind AS or Accounting Standards

• If the financial information for the five year period contains certain periods based on Accounting Standards and

certain periods based on Ind AS, then the company should consider the presentation format along with notes of such information.

The Guidance Note on Reports in Company Prospectuses (Revised 2016) provides guidance on some of the above matters which should be considered by a company while preparing the offer document which consists of financial information as per Ind AS.

Impact of mandatory auditor rotation

As required by the Companies Act, 2013, certain companies in India have to change their existing statutory auditors if they have completed two terms of five years each, subject to transitional requirement till 31 March 2017.

This requirement is expected to pose additional challenges to companies going for an IPO after the change of its auditor. Some of the important aspect to consider are:

• Whether the incoming auditor has a valid peer review certificate issued by the ICAI. In case where the financial statements were audited by an auditor who had not been subjected to peer review process of the ICAI, all financial information must be re-

audited for one full financial year and the interim period, by the chartered accountants certifying them.

• Extent of placing reliance on already audited financial statements and how the same will be referred in examination report included in the offer document

• Who will perform the audit of restated/Ind AS financial information for those years which were audited by the erstwhile auditor and

• From issuance of the comfort letter perspective, whether a separate comfort letter will be required from the erstwhile auditor.

While there is guidance available on some of these aspects, each situation is likely to be different considering materiality and other factors. Some of these activities and coordination may impact the overall timeline of an IPO and therefore, the readiness plan should capture related aspects. It is better to have upfront and proactive discussions between the management, lawyers, bankers and auditor’s (principal, component, incoming and outgoing) which will help in achieving the overall objective.

ConclusionGoing public is an important milestone for a company. Therefore, it is important that thorough planning is done for time-bound execution in relation to

the financial information required to be included in the offer document. The complexities have been further compounded by mandatory audit

rotation, applicability of Ind AS to companies and issuance of the new guidance note.


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Accounting for government incentives under Ind ASIntroduction It is common in India for state governments to extend incentives to companies for setting up their business operations in developing areas to promote both capital investment and encourage employment. Such incentives or grants are received by the companies in various forms. For example:

• A special package or otherwise, as financial assistance from the government in the form of Central Sales Tax (CST) deferral usually with a cap on the fixed capital investment

• An interest-free loan for a specified period and repayable over a period of time

• A waiver or exemption such as waiver of electricity duty on generation of power for own consumption, free water during the construction period, exemption from octroi, entry tax, etc.

In many cases, a Memorandum of Understanding (MoU) between a company and the government sets out the terms and conditions for availing such incentives. The MoU also usually includes obligations on the company for commencement of commercial production or project implementation within a prescribed time limit, may specify minimum capacity, identify plant and equipment, etc.

These incentives could be repayable over a stipulated term

from the date of commercial production, subject to other prescribed conditions.

In order to account for government grants under Ind AS, there are certain key considerations that the management of a company should consider and those have been highlighted in this article.

Understanding of the terms and conditions attached to government grantsThe starting point for recognition of the government grant as per Ind AS 20, Accounting for Government Grants and Disclosure of Government Assistance, in the financial statements of a company is that the management of the company should evaluate whether the company has fulfilled the conditions and obligations attached to a government grant in accordance with the MoU. Such an evaluation is in the form of a reasonable assurance that the company would be in compliance with the conditions attached with the government grant and that such grant would be received.

Careful consideration is needed in identifying the conditions and obligations that give rise to the costs and expenses that a government grant intends to compensate and to determine the period over which the grant would be earned. A company should also consider the consequences of failing to meet those conditions.


• Highlight the key considerations in the accounting for certain government grants under Indian Accounting Standards


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Accounting for government incentives under Ind AS

Recognition and measurement principles

Ind AS 20 is fundamentally based on the ‘income approach’ wherein government grants are accounted for, on a systematic basis, in the statement of profit and loss over the period, on which a company recognises the related costs for which the grant is intended to compensate. Unlike AS 12, Government Grants, Ind AS does not have a concept of a capital approach for accounting of government grants under Ind AS i.e. the grants are neither accounted for as a promoter’s contribution nor adjusted from the cost of property, plant and equipment.

Additionally, Ind AS 20 requires measurement of non-monetary government grants only at their fair value. IAS 20, Accounting for Government Grants and Disclosure of Government Assistance, gives an option to measure non-monetary government grants either at fair value or at nominal value.

Therefore, grants received against specific expenses are recognised in the statement of profit and loss in the same period in which the relevant expenses incurred. Similarly, a government grant related to depreciable assets is usually accounted for in the statement of profit and loss over a period over which depreciation expense on such assets is recognised. In case the government grant is related to a non-depreciable asset requiring the fulfilment of certain obligations, the same is recognised in the statement of profit and loss over the period that bears the cost of meeting the obligations.

Identification and accounting of government grants in the financial statements

The next step is to evaluate the elements of a government grant and its recognition and measurement criteria for recording in the financial statements.

With reference to the context of this article, an interest free loan received from the government constitutes a ‘benefit of the below market rate of interest’ and is treated as a government loan/grant. The deferral of payment of

CST pursuant to a government scheme is akin to an interest free loan from government in terms of economic substance since it has two elements-(a) the availability of amount on account of sales tax collected i.e. the ‘loan amount’ and (b) the ‘interest free’ component of such a loan. The accounting of such interest free government loans including CST deferral payment is divided in two aspects. The first aspect is the ‘loan amount’ which is recognised and measured at fair value in accordance with the principles of Ind AS 109, Financial Instruments, (this aspect of accounting for government grants has been detailed in an earlier edition of the AAU). The second aspect is the ‘benefit of the below market rate of interest’ i.e. the interest free component which is calculated as the difference between the initial carrying value of the loan amount (determined as per Ind AS 109 principles) and the proceeds of amount received from the government. Such a benefit is accounted for as a government grant as per the principles of Ind AS 20.

Illustration

As part of a government assistance scheme, XYZ Ltd is entitled to a CST deferral aggregating INR100 being 25 per cent of its obligation to invest in fixed assets of a new manufacturing facility. The CST retained on sales is payable to the government after five years. Since, the amounts retained i.e. CST deferred on sales, is in the nature of an interest free loan, XYZ Ltd determines the present value of the said loan by comparing the amounts retained or INR100 to the fair value of a similar five year loan at the market rate of 10 per cent p.a with interest payable at maturity as per the principles of Ind AS 109. The government grant, in this case, is the benefit of INR38 which is calculated as the difference between the fair value of the loan on initial recognition (INR62) and the amount of CST retained or (INR100).

The government grant of INR38 is intended for meeting the cost of fixed assets. On fulfillment of the conditions attached to the grant (based on the reasonable assurance by XYZ Ltd), the grant should be recognised as deferred

income in the balance sheet. This deferred income would be amortised to the statement of profit and loss in line with depreciation of the relevant asset because the benefit of the said grant accrues to XTZ Ltd over the useful life of the relevant fixed asset.

Additionally, interest expense would be imputed on the loan amount and recognised using the effective interest rate method as per the principles of Ind AS 109.

In case the CST deferral does not seek to compensate towards the cost of fixed assets but is intended to compensate for the additional cost incurred by the company on account of lower sales tax recovered from the customer, it could be appropriate for XYZ Ltd to account for such grant or benefit i.e. INR38 immediately in the statement of profit and loss as soon as sales take place from the manufacturing facility. The rationale for this view seems to be that the grant is the availability of the relevant funds for the period of deferral. In terms of economic substance, the grant is the nature of an interest free loan. The funds will be available with XYZ Ltd as the sales take place thus creating a linkage between the loan and the accrual of sales. Therefore, the grant should be recognised as the relevant funds accrue i.e. as the sales take place.

Government grants are also recognised in the form of waivers of amounts payable by a company where there is a transfer of resources from the government to the company in the form of waiver of expenditure. Such waivers are also accounted for as per the principles of Ind AS 20. For example a waiver of electricity duty by the government is recognised in the statement of profit and loss in the same period as the related expenditure is incurred by a company.


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Transition to Ind AS

• For a first-time adopter transitioning from Accounting Standards to Ind AS, it becomes necessary to evaluate the accounting of government grants/loans existing at the date of transition to Ind AS. In this regard, Ind AS 101, First-time Adoption of Indian Accounting Standards enunciates a key principle that a first-time adopter would be required to classify all government loans received as a financial liability or an equity instrument in accordance with Ind AS 32, Financial Instruments: Presentation. Additionally, the requirements of Ind AS 109 and Ind AS 20 would apply to all such loans prospectively. However, a first-time adopter cannot recognise

the corresponding benefit of a government loan at a below-market rate of interest as a government grant. Consequently, if a first-time adopter did not, under Accounting Standards, recognise and measure a government loan received at a below-market rate of interest on a basis, consistent with Ind AS requirements, it should use the carrying amount of such loan as per the previous GAAP (i.e. Accounting Standards) as the carrying amount of the loan in its opening Ind AS Balance Sheet. After the transition to Ind AS, the first-time adopter should measure such loan at the amortised cost, using an effective interest rate that is calculated at the date of transition.

• A company may apply the requirements of Ind AS 109 and

Ind AS 20 retrospectively to any government loan originated before the date of transition to Ind AS provided that the information needed to do so had been obtained at the time of initially accounting for such loan. For example, if a company can demonstrate that information needed for determining the present value of the loan had been obtained by it at the time of initial accounting of that loan when the company had prepared IFRS financial statements for reporting to its overseas parent.

Consider this….

• Ind AS 20 stresses that a company should consider the conditions and obligations that have been, or must be met when identifying the costs for which the benefit of the loan is intended to compensate.

• Under the income approach, government grants should be recognised in profit or loss on a systematic basis over the periods in which the entity recognises as expenses the related costs for which the grant is intended to compensate.

• A first-time adopter should apply Ind AS 20 and Ind AS 109 prospectively to government loans existing at the date of transition to Ind AS unless that information was available with it at the time of the initial accounting of that loan.


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Regulatory updatesMCA issues relaxation for an IFSC company located in an SEZ BackgroundOn 8 April 2015, the central government allowed the establishment of Units in an International Financial Services Centre (IFSC) in Special Economic Zones (SEZs). Such Units would be approved under the SEZ Rules, 2006, and Insurance Regulatory and Development Authority of India (IRDA) (Regulation of Insurance Business in SEZ) Rules, 2015. Further such an IFSC would be subject to the following regulations:

a. IRDA IFSC Guidelines, 2015 (dated 6 April 2015)

b. Foreign Exchange Management IFSC Regulations, 2015 (dated 2 March 2015)

c. Scheme for setting up of IFSC Banking Units (IBU) by Indian Banks (dated 1 April 2015)

d. Securities and Exchange Board of India (SEBI) IFSC Guidelines, 2015 (dated 27 March 2015).

The IFSC would cater to customers outside the jurisdiction of India, dealing with flows of finance, financial products and services across borders.

Additionally, during the monsoon Parliament session, the Ministry of Corporate Affairs (MCA) laid draft notifications in the Parliament, and proposed exceptions from, and modifications and adaptations of various provisions of the Companies Act, 2013 (2013 Act) for an IFSC company.

Such an IFSC company would be licensed to operate by the Reserve Bank of India or the SEBI or the IRDA from an IFSC located in an approved multi services SEZ set-up under the SEZ Act, 2005 read with the SEZ Rules, 2006 (specified IFSC company).

New development

The above notifications have been approved by the Parliament and the MCA on 4 January 2017 issued two notifications (G.S.R. 08(E) and G.S.R. 09(E)) mentioning that certain provisions of the 2013 Act should not apply to an IFSC unlisted public or private company. Further, certain provisions of the 2013 Act would apply with specified exceptions or modifications.

The table on the next page provides an overview of the sections that are applicable to an IFSC company (whether unlisted public or private company) with modifications.


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Sections Provision

Section 2(76)(vii), Definitions Section 2(76)(vii) defines that a ‘related person’ includes key managerial personnel. The provision will not be applicable to an IFSC unlisted public company in respect to Section 188 of the 2013 Act.

Section 92(3), Annual Return The requirement for attaching an extract of an annual return with Board’s Report is not applicable to an IFSC company.

Section 139(2), Appointment of Auditors

The provision relating to reappointment of auditor is not applicable to an IFSC company.

Section 152, Appointment of directors

The provision relating to retirement and filing of vacancy on retirement of directors is not applicable to an IFSC company.

Section 177, Audit committee Formation of Audit Committee is not applicable to an IFSC public company.

Section 178 Formation of Nomination and Remuneration Committee and Stakeholders Relationship Committee is not applicable to an IFSC public company.

Section 188(1), Related party transactions

Conditions for entering contract or arrangement with a related party is not applicable to an IFSC company.

Section 196(4), Appointment of managing director, whole-time director or manager

Conditions for the appointment of managing director, whole-time director or manager under provisions of section 197 and Schedule V is not applicable to an IFSC company.

Section 197, Overall maximum managerial remuneration and managerial remuneration in case of absence or inadequacy of profits

Conditions for overall maximum managerial remuneration and managerial remuneration in the case of absence or inadequacy of profits is not applicable to an IFSC company.

Sections Provision

Section 43 – Kinds of share capitalSection 47 – Voting Rights

The sections are not applicable to an IFSC public company where memorandum of association or articles of association of such a company provides such requirements.

Section 67 - Restrictions on purchase by company or giving of loans by it for purchase of its shares

The aforementioned section is not applicable to IFSC public companies in cases where:

• No other body corporate has invested any money in the company’s share capital

• The borrowings of such company from banks or financial institutions or any body corporate is less than twice of its paid up share capital or INR50 crores, whichever is lower, and

• Such a company is not in default in repayment of such borrowings subsisting at the time of making transactions under this section.

Sections 101 to 107 and Section 109

The mentioned sections relating to notices for meetings, quorum, voting is not applicable to an IFSC company unless otherwise specified in the articles of the company.

Section 135, Corporate social responsibility

This section is not applicable for a period of five years from the commencement of the business of an IFSC company.

Section 138, Internal audit The section is applicable to an IFSC company if articles of the company provide for such requirements.

I. Key sections that are not applicable to an IFSC unlisted public and private company

II. Key sections applicable with certain new conditions

Regulatory updates


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Sections Provision

Section 2(41), Definition of financial year

An IFSC company which is the subsidiary of a foreign company can follow a financial year same as its holding company without the approval of the National Company Law Tribunal.

Section 3(2), Formation of Company

An IFSC company should be formed only as a company limited by shares.

Section 186, Loan and Investment by company

• The provision relating to the restriction on more than two layers of investment companies is not applicable to an IFSC company.

• The provision relating to the restriction on a loan or guarantee or providing security in connection with a loan to any other body corporate or person should not be applicable if the company passes a resolution to this effect.

• The board of an IFSC company can approve the investment or loan made or security given under this section by means of resolutions passed at the meetings of the Board of Directors or through resolutions passed by circulation.

III. Key sections modified

(Source: MCA notification dated 4 January 2017 and KPMG in India’s First Notes dated 17 January 2017)

SEBI (Listing Obligations and Disclosure Requirements) (Third Amendment) Regulations, 2016

SEBI on 3 January 2017, issued SEBI (Listing Obligations and Disclosure Requirements) (Third Amendment) Regulations, 2016 to introduce certain approval requirements for employees, including senior management, key managerial persons, directors and promoters. The amended regulations impose restrictions for employees of a listed entity to enter into an agreement with any shareholder/private equity fund/any other third party with regard to compensation or profit sharing related to dealings in the securities of such listed entity.

The amended regulations enforce disclosures and shareholders’ approval for all such agreements including existing agreements that extend beyond the date of the amendment.

(Source: SEBI notification SEBI/LAD-NRO/GN/2016-17/025 dated 3 January 2017)

SEBI publishes norms for public issue of units and disclosures to be made by REITs

SEBI (Real Estate Investment Trusts) Regulations, 2014 (REIT Regulations) notified on 26 September 2014, provided a regulatory framework for registration and regulation of Real Estate Investment Trusts (REITs) in India. The

REIT Regulations, inter alia, prescribe conditions for making a public offer, initial and continuous disclosures, investment conditions, unit-holder approval requirements, related party disclosures, etc.

Recently, SEBI issued the following circulars providing detailed requirements for REIT with respect to:

I. Public issue of units of REITs (CIR/IMD/DF/136/2016 dated 19 December 2016)

II. Disclosure of financial information in an offer document of a REIT (CIR/IMD/DF/141/2016 dated 26 December 2016), and

III. Disclosure of financial and non-financial information to be submitted to the stock exchanges and required compliances on a continuous basis by a REIT (CIR/IMD/DF/146/2016 dated 29 December 2016).

Please refer KPMG in India’s IFRS Notes dated 16 January 2017 for detailed insight into the requirements of the above mentioned REIT circulars.

SEBI board meeting

SEBI through its press release (PR No. 5/2017) dated 14 January 2017 released the minutes of its board meeting. SEBI in its board meeting approved the proposals to revise and streamline the regulatory framework governing schemes of arrangement.

Some of the key features of the revision are as follows:

I. In case of merger of an unlisted company with a listed company,

a. The unlisted company, inter-alia, should comply with the requirement of disclosure of material information as specified in the format for abridged prospectus.

b. The holding of pre-scheme public shareholders of the listed entity and the Qualified Institutional Buyers (QIBs) of the unlisted company, in the post scheme shareholding pattern of the ‘merged’ company shall not be less than 25 per cent.

c. Unlisted company can be merged with a listed company if it is listed on a stock exchange having nationwide trading terminals.

II. To ensure larger participation of public shareholders, the requirement to obtain approval through e-voting has been extended in the following cases:

a. The schemes involving merger of an unlisted company resulting in reduction in the voting share per cent of pre-scheme public shareholders by more than 5 per cent of total capital of merged entity.

b. Schemes involving transfer of whole or substantially the whole of the undertaking of a listed

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company and consideration for such transfer is not in the form of listed equity shares.

c. Schemes involving merger of unlisted subsidiary with listed holding company where the shares of the unlisted subsidiary have been acquired by the holding company directly or indirectly from the promoters/promoter group.

III. Companies would be required to submit compliance report confirming compliance with this SEBI circular and Accounting Standards duly certified by Company Secretary, Chief Financial Officer and Managing Director.

IV. Schemes which provide for merger of a Wholly owned Subsidiary (WoS) with the parent company would not be required to be filed with SEBI. Such schemes should be filed with stock exchanges for the limited purpose of disclosures only.

(Source: SEBI press release PR No. 5/2017 dated 14 January 2017)

Guidance note on board evaluation

On 5 January 2017, SEBI issued guidance note on board evaluation. The purpose of the guidance note is to guide the listed entities and their board of directors about various aspects involved in the board evaluation process and improve their overall performance as well as corporate governance standards to benefit all stakeholders.

The guidance note covers all major aspects of board evaluation including the following:

• Subject of evaluation i.e. who is to be evaluated

• Process of evaluation including laying down of objectives and criteria to be adopted for evaluation of different persons

• Feedback to the persons being evaluated

• Action plan based on the results of the evaluation process

• Disclosure to stakeholders on various aspects

• Frequency of board evaluation

• Responsibility of board evaluation, and

• Review of the entire evaluation process periodically.

(Source: SEBI circular SEBI/HO/CFD/CMD/CIR/P/2017/004 dated 5 January 2017)

ICAI issued exposure draft for amendments to Ind AS 12, Income Taxes

The Institute of Chartered Accountants of India (ICAI), on 18 January 2017 issued exposure draft to Ind AS 12 to propose amendments related to recognition of deferred tax assets for unrealised losses. The amendments proposed are in line with the amendments proposed by the International Accounting Standards Board (IASB) to IAS 12, Income Taxes as part of its annual improvements process to IFRS Standards for 2014-16 cycle.

Ind AS 12 provides requirements on the recognition and measurement of current or deferred tax liabilities or assets. The exposure draft proposes to clarify how to account for deferred tax assets related to debt instruments measured at fair value and the requirements on recognition of deferred tax assets for unrealised losses, to address diversity in practice.

The exposure draft sought comments and the last date to provide comments is 20 February 2017.

(Source: ICAI notification dated 18 January 2017)

RBI issued Foreign Exchange Management (Transfer or issue of any foreign security) (Second Amendment) Regulations, 2016

The Reserve Bank of India (RBI), on 2 January 2017, issued Foreign Exchange Management (Transfer or issue of any

foreign security) (Second Amendment) Regulations, 2016. The amended regulations have restricted an Indian party from making any direct investment in an overseas entity located in the countries identified as ‘non co-operative countries and territories’ by the Financial Action Task Force or as notified by the RBI from time to time.

(Source: RBI notification FEMA.382/2016-RB dated 2 January 2017)

IFRS 17, Insurance Contracts expected in May 2017

The IASB on 19 January 2017 released its work plan based on a discussion in its board meeting. The IASB is expecting to finalise the final standard for IFRS 17, Insurance Contracts over the next few months and expected to publish the final standard in May 2017. The IASB will consider the objective and scope of a transition resource group to provide adequate support for IFRS 17 implementation.

The new standard IFRS 17 is expected to be a detailed standard for insurance contract accounting and is set to replace the current IFRS 4, Insurance Contracts.

(Source: IASB work plan updated dated 19 January 2017)

IASB issued improvements to IFRS

The International Accounting Standards Board (IASB) on 8 December 2016 issued:

• Annual improvements to IFRS

• An interpretation IFRIC 22, Foreign Currency Transactions and Advance Consideration

• Narrow amendment to IAS 40, Investment Property.

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Standard Amendment

IFRS 1, First-time Adoption of International Financial Reporting Standards

Deletion of short-term exemptions for first-time adopters.

In Annual Improvements to IFRS Standards 2014–2016 Cycle, the IASB deleted the short-term exemptions in paragraphs E3–E7 and the related effective date paragraphs. The IASB noted that the reliefs provided in those paragraphs were no longer applicable. The reliefs provided had been available to entities only for reporting periods that had passed.

The amendment would be effective from 1 January 2017.

IFRS 12, Disclosure of Interests in Other Entities

Clarification of the scope of the standard

In Annual Improvements to IFRS Standards 2014–2016 Cycle, the IASB added paragraph 5A to clarify that, except as described in paragraph B17, the requirements in IFRS 12 apply to interests in entities within the scope of IFRS 5, Non-current Assets Held for Sale and Discontinued Operations i.e. interests that are classified (or included in a disposal group that is classified) as held for sale, held for distribution to owners in their capacity as owners, or discontinued operations. Paragraph 5A refers only to interests that are classified as held for sale or discontinued operations because the clarification was needed only for interests referred to in paragraph 5B of IFRS 5.


IAS 28, Investments in Associates and Joint Ventures

Measuring an associate or joint venture at fair value

When an investment in an associate or joint venture is held by, or is held indirectly through, a venture capital organisation, or a mutual fund, unit trust and similar entities including investment-linked insurance funds, the entity may elect, in accordance with paragraph 18 of IAS 28, to measure that investment at fair value through profit or loss. The IASB received a request to clarify whether the entity is able to choose between applying the equity method or measuring the investment at fair value for each investment, or whether instead the entity applies the same accounting to all of its investments in associates and joint ventures.

The Board noted that, before it was revised in 2011, IAS 28 Investments in Associates permitted a venture capital organisation, or a mutual fund, unit trust and similar entities to elect to measure investments in an associate at fair value through profit or loss separately for each associate. However, after the revision, it had become less clear whether such an election was still available to those entities. The IASB noted that it did not consider changing these requirements when revising IAS 28 in 2011, and any lack of clarity that arose as a consequence of the amendments in 2011 was unintentional.

Accordingly, in Annual Improvements to IFRS Standards 2014–2016 Cycle, the IASB amended paragraph 18 of IAS 28 to clarify that a venture capital organisation, or a mutual fund, unit trust and similar entities may elect, at initial recognition, to measure investments in an associate or joint venture at fair value through profit or loss separately for each associate or joint venture.


Annual improvements 2014-2015 cycle

Annual Improvements to IFRS Standards 2014–2016 Cycle has amendments to the following three standards:

IFRIC 22 – a new interpretation

The IFRIC Interpretation 22, Foreign Currency Transactions and Advance Consideration addresses the exchange rate to use in transactions that involve the advance consideration paid or received in a foreign currency. The Interpretation is effective from 1 January 2018.

Please refer to KPMG in India’s IFRS Notes IFRIC 22 clarifies the transaction date to determine the exchange rate dated 21 December 2016 for a detailed overview of IFRIC 22.

IAS 40 – a narrow scope amendment

A narrow-scope amendment to an IAS 40, Investment Property to clarify the requirements on transfers to, or from, investment property and are effective

from 1 January 2018. The IASB received a question regarding the requirements on transfers to, or from, investment property. The question asked whether an entity transfers property under construction or development previously classified as inventory to investment property when there is evidence of a change in use, even if that evidence is not specifically listed in paragraph 57(a)–(d).

Paragraph 57 of IAS 40 requires transfers to, or from, investment property when, and only when, there is a change in use of property supported by evidence. The IASB noted that the words ‘when, and only when’ in this paragraph are important to ensure that a transfer is limited to situations in which a change in use has occurred. The IASB observed that the list of circumstances that provide evidence of a change in use

specified in paragraph 57(a)–(d) of IAS 40 was drafted such that it was exhaustive (as shown by the references to ‘when and only when’ and ‘evidenced by’ in that paragraph).

The IASB decided, however, to amend paragraph 57 so that it reflects the principle that a change in use would involve (a) an assessment of whether a property meets, or has ceased to meet, the definition of investment property; and (b) supporting evidence that a change in use has occurred. Applying this principle, an entity transfers property under construction or development to, or from, investment property when, and only when, there is a change in the use of such property, supported by evidence.

(Source: IASB press release dated 8 December 2016)

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Annual Improvements to IFRS – 2015 - 2017 cycle – an exposure draft

The International Accounting Standards Board (the Board) has published an exposure draft on proposed amendments to IFRS as part of its annual improvements process.

The exposure draft proposes amendments to IAS 12, Income Taxes, IAS 23, Borrowing Costs and IAS 28, Investments in Associates and Joint Ventures. The proposed amendments are as follows:

Standard Proposed amendment

IAS 12 To clarify that all income tax consequences of distribution of profits are recognised in profit or loss, including payments on financial instruments classified as equity.

IAS 23 Specific borrowings – i.e. funds borrowed specifically to finance the construction of a qualifying asset – should be transferred to the general borrowings pool once the construction of the qualifying asset has been completed

IAS 28 Long-term interests that, in substance, form part of the investor’s net investment in an associate or a joint venture are in the scope of IAS 28’s requirements on loss recognition and impairment.

The IASB proposes to clarify that those long-term interests are also in the scope of IFRS 9, Financial Instruments, including its impairment requirements.

The exposure draft sought comments and the last date to provide comments is 20 February 2017.

(Source: IASB’s Annual Improvements to IFRS Standards 2015–2017 Cycle)

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KPMG in India’s IFRS instituteVisit KPMG in India’s IFRS institute - a web-based platform, which seeks to act as a wide-ranging site for information and updates on IFRS implementation in India.

The website provides information and resources to help board and audit committee members, executives, management, stakeholders and government representatives gain insight and access to thought leadership publications that are based on the evolving global financial reporting framework

MCA issued relaxation for an IFSC company located in an SEZ

17 January 2017

The Ministry of Corporate Affairs (MCA) on 4 January 2017 issued two notifications (G.S.R. 08(E) and G.S.R. 09(E)), to propose exceptions from, and modifications and adaptations of various provisions of the Companies

Act, 2013 (2013 Act) for an International Financial Services Centre (IFSC) company. Such an IFSC company would be licensed to operate by the Reserve Bank of India or the SEBI or the IRDA from an IFSC located in an approved multi services SEZ set-up under the SEZ Act, 2005 read with the SEZ Rules, 2006

The notification provides that certain provisions of the 2013 Act should not apply to an IFSC unlisted public or private company. Further, certain provisions of the 2013 Act would apply with specified exceptions or modifications.

This issue of First Notes provides an overview of the key sections of the 2013 Act that are applicable to an IFSC company with these modifications.

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 our recent call, on 5 January 2017, we covered key financial reporting and regulatory matters that are expected to be relevant for stakeholders for the quarter ending 31 December 2016.

Our call included updates from the Ministry of Corporate Affairs, the Securities and Exchange Board of India, the Institute of Chartered Accountants of India, the Reserve Bank of India, etc.

Post the call, we have shared a brief publication which summarises important topics relating to the quarter ending 31 December 2016 from the Ministry of Corporate Affairs, the Securities and Exchange Board of India, the Reserve Bank of India, the Institute of Chartered Accountants of India and the Central Board of Direct Taxes.

Missed an issue of Accounting and Auditing Update or First Notes?

IFRS NotesSEBI publishes norms for public issue of units and disclosures to be made by REITs

16 January 2017

The Securities and Exchange Board of India (SEBI) (Real Estate Investment Trusts) Regulations, 2014 (REIT Regulations) notified on 26 September 2014, provided a regulatory framework for registration and regulation of Real Estate Investment Trusts

(REITs) in India. The REIT Regulations, inter alia, prescribe conditions for making a public offer, initial and continuous disclosures, investment conditions, unit-holder approval requirements, related party disclosures, etc.

Recently, SEBI issued the following circulars providing detailed requirements for REIT with respect to:

I. Public issue of units of REITs (CIR/IMD/DF/136/2016 dated 19 December 2016)

II. Disclosure of financial information in an offer document of a REIT (CIR/IMD/DF/141/2016 dated 26 December 2016), and

III. Disclosure of financial and non-financial information to be submitted to the stock exchanges and required compliances on a continuous basis by a REIT (CIR/IMD/DF/146/2016 dated 29 December 2016).

This issue of IFRS Notes provides an insight into the requirements of the above mentioned SEBI circulars.

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.


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Accounting and Auditing Update Accounting... · Ind AS also provides guidance on the concept of ‘business combinations under common control’ and their accounting treatment. This