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Accounting and Auditing UpdateIssue no. 32/2019

March 2019

© 2019 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.

Not for Profit Organisations (NPOs) in India generally assume various legal forms such as public charitable trust, a society and a Section 8 company under the Companies Act, 2013. A foreign NPO can also open a branch office or a liaison office in India. The NPOs need to adhere to accounting, tax and regulatory requirements in India. In this edition of Accounting and Auditing Update (AAU) we have included an article which provides an overview of the accounting and reporting challenges faced by NPOs and highlight the clarifications provided by the Technical Guide on Accounting for NPOs by the Institute of Chartered Accountants of India (ICAI).

Under Accounting Standards there is limited guidance for measuring and accounting financial instruments, including the accounting for transfer and derecognition of financial assets. While Ind AS 109, Financial Instruments, provides detailed guidelines on accounting for financial instruments, and specifies the principles to be followed while evaluating derecognition of financial assets.

The Expert Advisory Committee of ICAI has considered an issue in relation to accounting of transfer of accounts receivable by a licensor to its franchisee. An article on this topic demonstrates the accounting for transfer of financial assets (accounts receivable) under Accounting Standards and demonstrates the corresponding accounting consideration under Ind AS 109.

The ICAI has issued educational material on Ind AS 28, Investments in Associates and Joint Ventures which explains key requirements of the standard and Frequently Asked Questions (FAQs). The FAQs cover issues which are expected to be encountered frequently while implementing the standard. Our article on this topic highlights key issues discussed in the educational material along with the related guidance reiterated by ICAI.

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

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

Sai VenkateshwaranPartner and HeadCFO AdvisoryKPMG in India

Ruchi RastogiPartnerAssuranceKPMG in India

Editorial


Table of contents0 1

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Not for profit organisations - accounting, tax and regulatory requirements

Accounting for transfer of debtors to franchisee

Accounting for investments in an associate and joint venture

Regulatory updates



This article aims to: – Summarise the accounting, tax and regulatory framework applicable to not for profit organisations.

Not for profit organisations - accounting, tax and regulatory requirements

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Accounting and Auditing Update - Issue no. 32/2019 | 02

Over the last decade, India has witnessed a rapid increase in the number of Not for Profit Organisations (NPOs) due to increase in wealth generation, rising social inequality and changing mindset of entrepreneurs from ‘profit generation’ to ‘contribution to society’. However, there seems to be a general lack of awareness around its accounting, tax and regulatory regime.

This article summarises the accounting, tax and regulatory framework applicable to an NPO. Further, this article also touches upon certain important aspects and non-compliance of such matters which may lead to severe consequences including levy of penalties and cancellation of registration under the various laws prevalent in India e.g. the Foreign Contribution (Regulation) Act, 2010, the Foreign Exchange Management Act, 1999 and the Income-tax Act, 1961.

Introduction

The World Bank defines NPOs as ‘private organisations that pursue activities to relieve suffering, promote the interests of the poor, protect the environment, provide basic social services, or undertake community development’.

The term NPO is very broad and encompasses different types of organisations ranging from international charities, community based self-help groups to research associations and professional organisations.

There are certain features that distinguish NPOs from ‘profit oriented’ organisations. These include:

• NPOs do not operate primarily for profit and they operate to serve the specific needs of a community, group, organisation, or its members.

• Performance of NPOs (i.e. ‘service’) is a less measurable component than ‘profit’.

• In NPOs, generally the members or contributors do not possess ownership interests that can be sold, transferred or redeemed.

• A distinct characteristic of the NPO sector is that significant amounts of resources are received from resource providers who often do not expect to receive either repayment or an economic benefit proportionate to the resources provided.

Legal forms of an NPO in India

NPOs in India generally assume the following legal forms viz public charitable trust, a society and section 8 company under the Companies Act, 2013 (2013 Act). A foreign NPO can also open a branch office or a liaison office in India.

Public charitable trust is formed via execution of a trust deed and is governed by state act, if any. A society can

be formed either under the Societies Registration Act, 1860 (central legislation) or state act, as applicable in the respective state. A limited company is formed under section 8 of the 2013 Act (central legislation). Process of incorporating an NPO and compliances to be undertaken are governed by the aforesaid legislations.

In addition to the above, NPOs are also monitored by:

• Ministry of Home Affairs (MHA) in case any NPO receives grants/donations from outside India under Foreign Contribution Regulation Act (FCRA), 2010

• Reserve Bank of India (RBI) in case foreign NPO opens branch office or liaison office in India under Foreign Exchange Management Act (FEMA), 1999

• Income-tax authorities in case the NPO claims specific exemption from payment of taxes under Income-tax Act, 1961 (IT Act).

Accounting framework and basis of accounting for NPOs

The term ‘basis of accounting’ refers to the timing of recognition of revenue, expenses, assets and liabilities in the financial statements. The commonly prevailing basis of accounting are (a) cash basis of accounting; and (b) accrual basis of accounting.

In practice, NPOs are following different accounting practices due to lack of awareness on applicability of the accounting standards. Certain NPOs believe that cash basis of accounting is best suited to them due to ease in implementation. While others take a view that accrual basis of accounting would be the appropriate way to present their financial position. This gives rise to inconsistency in the presentation and accounting of financial information and creates diversity in practice.

Since profit earning is not the objective of the NPOs, it is often debated whether an accounting framework, that is applicable to profit-oriented entities may not be appropriate for accounting for NPOs. However, with regard to elements of the financial statements, it may be noted that principles for recognition of assets and liabilities (e.g. land and furniture) would be same for a profit-oriented entity and an NPO. Similarly, the principles of accounting are same for items of income and expenses.

The Technical Guide on Accounting of Not for Profit Organisations issued by the Institute of Chartered Accountants of India (Technical Guide) recommends that all NPOs, including non-company NPOs, should maintain their books of account on an accrual basis as it follows a matching concept relating to income and expenditure and also it presents the appropriate financial position of an organisation at a given point of time.

NPOs registered under the 2013 Act, are required to maintain their books of account on an accrual basis under the requirements of the 2013 Act. If the books are not kept on an accrual basis, it would be deemed as per the provisions of the section 128 of the 2013 Act (which deals with the books of accounts, etc. to be kept by the company), that proper books of account are not kept. Accordingly, penal provisions contained in the respective Act(s) will apply to the concerned NPOs.

Applicability of accounting standards

As per the preface to the statement of Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI):

‘Accounting Standards apply in respect of any enterprise (whether organised in corporate, cooperative or other forms) engaged in commercial, industrial or business activities, irrespective of whether it is profit oriented or it is established for charitable or religious purposes. Accounting Standards will not, however, apply to enterprises only carrying on the activities which are not of commercial, industrial or business nature (e.g., an activity of collecting donations and giving them to flood affected people).’

The above paragraph seems to suggest that Accounting Standards formulated by ICAI do not apply to an NPO due to nature of their business.

However, the Technical Guide mentions that Accounting Standards contain wholesome principles of accounting. Therefore, the Technical Guide recommends that all NPOs, irrespective of the fact that none of the activities are commercial, industrial or business in nature, should follow Accounting Standards. This will also result in uniformity and consistency in application of accounting principles leading to reduced confusion and misunderstanding amongst various users of the financial information.

Additionally, NPOs that are incorporated under the 2013 Act are required to comply with the accounting standards as prescribed by the central government and as recommended by the National Financial Reporting Authority (NFRA) by virtue of provisions of the 2013 Act.

Applicability of Ind AS to section 8 companies

There was lot of debate and confusion on the applicability of Ind AS to section 8 companies.

However, Rule 4(1)(ii) of Companies (Indian Accounting Standards) Rules, 2015 deals with the applicability of Ind AS to certain categories of companies. These rules do not provide any specific exemption to section 8

companies. Under the 2013 Act, section 8 companies are required to comply with the provisions of sections 133 and 129. This aspect was dealt by Ind AS Technical Facilitation Group (ITFG) in its bulletin No 6 and it concluded that if a section 8 company fulfils the laid down criteria of Ind AS road map then Ind AS would be applicable to it.

Fund accounting applicable to NPOs

One of the peculiar items applicable to NPOs is ‘fund-based accounting’ (as explained in the Technical Guide). NPOs receive grant/donations from various donors who may restrict the use of their funds or impose certain conditions before their funds can be used. Some of the funds may not be subject to any restriction/condition and NPOs are free to use them for their general purposes. In certain situations, NPOs may decide to allocate certain general funds on their own or for specific purposes.

The funds depending upon their nature of use can be categorised under the following categories:

• Unrestricted funds

Unrestricted funds refer to funds contributed to an NPO with no specific restrictions. These funds can be further reclassified into the following three categories:

– Corpus: Corpus refers to funds contributed by founders/promoters generally to start an NPO. Repayment is ordinarily not expected of such funds. The funds received are recognised directly in the corpus fund.

– Designated funds: Designated funds are unrestricted funds which have been created by appropriation of surplus for the year by the trustees/management of an NPO for meeting specific revenue or capital expenditure. When a revenue expenditure is incurred with respect to a designated fund, the same is debited to the income and expenditure account. A corresponding amount is transferred from the concerned designated fund account to the credit of the income and expenditure account after determining the surplus/deficit for the year since the purpose of the designated fund is over to that extent. Where the designated fund has been created to meet a capital expenditure, the relevant asset account is debited by the amount of such capital expenditure and a corresponding amount is transferred from the concerned designated fund account to the credit of the income and expenditure account after determining surplus/deficit for the year.


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– General funds: Unrestricted funds other than ‘designated funds’ and ‘corpus’ are a part of the ‘general fund’. All items of revenue and expenses relating to ‘general fund’ are reflected in the income and expenditure account in accordance with the generally accepted recognition and measurement principles.

• Restricted funds

Restricted funds are contributions received by an NPO, the use of which is restricted by the contributor(s). The sums when received are credited to specific fund account and reflected separately in the balance sheet. Such funds may be received for meeting revenue or capital expenditure. When a revenue expenditure is incurred with respect to a restricted fund, upon incurrence of such expenditure, the same is charged to the income and expenditure account; a corresponding amount is transferred from the concerned restricted fund account to the credit of the income and expenditure account. Where the fund is meant for meeting capital expenditure, upon incurrence of the expenditure, the relevant asset account is debited which is depreciated as per policy of depreciation followed by the organisation. Thereafter, the concerned restricted fund account is treated as deferred income, to the extent of the cost of the asset, and is transferred to the credit of the Income and Expenditure Account in proportion to the depreciation charged every year. The unamortised balance of deferred income would continue to form part of the restricted fund.

• Grants in kind

Grants in the form of non-monetary assets (like fixed assets) should be recorded at the acquisition cost incurred by an NPO. In case, the same is provided free of cost, the NPO should record the same at nominal value e.g. INR1.

Taxation/regulatory regime applicable to NPOs in India

While accounting plays an important role, it is equally important to understand the tax and regulatory regime applicable to an NPO. Sometimes, the non-compliance of these provisions may have serious consequences on an NPO.

Taxation of NPOs is governed by section 11 and 12 of the IT Act. According to these provisions, income received by an NPO is exempt from tax in a financial year provided

it has applied 85 per cent of its receipts for charitable or religious purposes, activities have been conducted within India, and the NPO has obtained registration from Commissioner of Income-tax or Director of Income-tax (Exemptions), as the case may be. In case, the NPO is unable to apply 85 per cent of receipts in a financial year, the IT Act permits the NPO to accumulate (through specified mode of investments) the unapplied amount over next five years provided certain conditions are met. Also, an NPO must obtain registration under section 12AA to enjoy exemption benefits and also re-registration under the said section is required to be obtained in case there are significant changes in the objects of the NPO after registration.

Under section 2(15) of the IT Act, charitable purposes include relief of the poor, education, yoga, medical relief, preservation of environment, preservation of monuments or places or objects of artistic or historic interest and advancement of any object of general public utility. Term ‘religious purposes’ has not been defined under the IT Act. However, any activity undertaken with religious intent may constitute as a religious purpose.

Section 13, specifies the circumstances where charitable exemptions may not be available to an NPO. For example, related party transactions undertaken by an NPO should be at an arm’s length basis, otherwise exemption under Section 11 can be challenged.

Foreign donations/funds received by NPOs

Apart from accounting and tax regulations, NPOs are also governed by Foreign Contribution (Regulation) Act, 2010 (FCRA).

As per the provisions of the FCRA, an NPO which receives any donation/grant in cash or kind from a foreign source is required to obtain a prior approval from the MHA before receiving the donation/grant. Foreign source has been defined to include all foreign bodies (government, citizens, companies, trusts, associations and international agencies).

However, following types of receipts are exempted from FCRA regulations:

• Funds received from specified international agencies such as the World Bank, the United Nations, etc.

• All statutory bodies constituted or established by or under a Central Act or State Act that are required to have their accounts compulsorily audited by the Comptroller and Auditor General of India.


There are two kinds of approvals granted by the MHA i.e. a prior permission and registration. A prior permission can be applied by a NPO which is less than three years old and is desirous of receiving foreign contribution. Such an approval is granted for receipt of specific amount of foreign contribution from a specified source for a specific purpose. Upon completion of three years and subject to fulfillment of prescribed conditions, NPO can apply for registration. Registration allows an NPO to receive foreign contribution on a regular basis and once granted is valid for a period of five years. Upon expiry, the same can be renewed within every five years.

NPOs that have received prior permission/registration are required to maintain separate books of account for foreign contribution received and utilised. Such NPOs are also required to file an annual return duly certified by statutory auditor within nine months from the end of financial year in which foreign contribution is received.

Following important points should be considered by the NPOs who receive/utilise foreign contribution:

• Foreign contribution should be received/deposited in a designated/separate bank account

• Foreign contribution should not be mixed with local receipts

• Foreign contribution should be utilised for the purpose for which it has been received

• Not more than 50 per cent of foreign contribution received in a financial year should be utilised for meeting administrative expenses. Utilisation of more than 50 per cent shall require prior approval of the MHA

• Foreign contribution should not be invested in speculative investments or profitable ventures

• Foreign national (other than of Indian origin) not to be appointed as a governing body member

• NPOs receiving foreign contribution should not appoint those individuals as governing body members who are also office bearers of another association which has come under adverse notice of the MHA

• NPOs receiving foreign contribution should not have only one governing body member in the association.

Non-compliance of the above points could also attract penal provisions/prosecution under the FCRA regulations

Foreign NPOs

Earlier, foreign/international NPOs who wish to undertake charitable activities in India by setting up a branch office or a liaison office were required to seek prior permission from the RBI in consultation with the Ministry of Finance and the MHA as per the requirement of FEMA. However, recently the regulations have undergone a change and going forward foreign NPOs which are engaged in activities covered under FCRA regulations, will be required to apply under FCRA regulations (instead of FEMA), if they intend to set up branch office or liaison office in India.

While the NPOs set up under branch office model can raise funds in India (provided activity of raising funds is specifically approved by the authorities), NPOs operating under liaison office mode can only act as communication channel between the head office of the foreign NPO and parties in India. Such NPOs cannot raise funds, sign contracts or undertake implementation or monitoring activities in India. Accordingly, it is imperative that an NPO obtains approvals keeping in view its long-term objective of operating in India Foreign NPOs, which are registered under FEMA, are granted UIN (Unique Identification Number) post receipt of approval from the RBI. Further, such foreign NPOs are required to file an annual activity certificate certified by the statutory auditor every year within the prescribed time. Failure to furnish an annual activity certificate may attract penal provisions and pose a challenge at the time of closure of branch/liaison office.


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Compliance requirements – a snapshot

To summarise the applicability of the important legislations, the following table summarises the requirements as applicable to NPOs:

Type of organisation Compliance under the IT Act and under internal bye laws (see note 1 below

Compliance under the 2013 Act(see note 2 below)

Form 10B under the IT Act (see note 3 below)

FC-4 certification under FCRA(see note 4 below)

Annual activity certificate under RBI guidelines (NPOs which are registered under FEMA)(see note 5 below)

Section 8 company No Yes Yes Yes No

Liaison office/branch office No Yes No Yes Yes

Trust/society Yes No Yes Yes No

Note 1All trusts and societies are governed by their internal bye laws and the provisions of the IT Act.

Note 2Section 8 company and liaison/branch office of foreign NPOs are governed by the 2013 Act and accordingly, are required to comply with the provisions and schedules of the 2013 Act.

Note 3

All the NPOs, other than a liaison office which do not earn income, are required to file Form 10 B with income tax authorities along with their return of income. Form 10 B indicates how much amount has been spent by the NPO on the objects of the organisation. As indicated in above paragraphs, income received by an NPO is exempt from tax in a financial year provided it has applied 85 per cent of its receipts for charitable or religious purposes and the activities have been conducted within India. This form ensures compliance of this requirement.

Note 4

All NPOs receiving foreign grants and donations are required to file FC 4 return duly certified by a Chartered Accountant by 31 December of the relevant year with the Ministry of Home Affairs. FC 4 return contains the details of foreign donations received and spent by the NPO during the year along with other details relating to bank accounts and foreign donors.

Note 5

Primarily, liaison offices and branch offices registered with RBI are required to file an Annual Activity Certificate within six months from the end of relevant financial year. The Annual Activity Certificate includes compliance with the conditions imposed by RBI at the time or granting the permission to set up a office in India and is required to be duly certified by the statutory auditor of the concerned NPO.


(Source: KPMG in India’s analysis, 2019)

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NPOs and Corporate Social Responsibility (CSR)

The 2013 Act has introduced CSR regulations which require certain corporates to spend 2 per cent of their average net profits towards specified CSR activities. Activities that qualify as CSR are covered under Schedule VII of the 2013 Act and include areas such as education, healthcare, environment, etc. As per the CSR regulations, corporates can undertake CSR activities either on their own or through their own foundation (registered society/trust/section 8 company) or through entities established under any act of Parliament/State Legislature or through any other third party registered NPO which should have a three year track record in undertaking eligible CSR activities subject to certain conditions

With the introduction of the CSR regulations, several corporates in India have now begun to focus on CSR as a required activity and are looking for partnering with NPOs to effectively utilise their CSR spend.

This has brought to the fore the contribution that NPOs are making to the society.


Conclusion

As is evident from above, NPOs like any other organisation, are required to follow a similar accounting framework for measurement and recognition principles as are applicable to profit-oriented organisations. In some elements of the financial statements, the presentation and disclosure requirements may differ. However, these organisations are subject to lot of scrutiny by the regulators to ensure that the exemptions/privileges granted to them are not misused.

With the introduction of the CSR regulations, several corporates in India have now started to focus on CSR as a required activity and are looking for partnering with NPOs to effectively utilise their CSR spend.


This article aims to: – Demonstrate the accounting treatment for transfer of financial assets under Accounting Standards and Ind AS.

Accounting for transfer of debtors to franchisee

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Introduction

Accounting Standards (IGAAP) provides limited guidance for measuring and accounting financial instruments, including the accounting for transfer and derecognition of financial assets. This may result in inconsistencies in accounting for certain transactions, where some entities may derecognise the financial asset, while others may create a provision against the same.

Indian Accounting Standard (Ind AS) 109, Financial Instruments, advocates detailed guidelines on accounting for financial instruments, and principles to be applied to while derecognising of financial assets.

In this article, we aim to illustrate the accounting for transfer of financial assets (accounts receivable) under IGAAP and demonstrate the corresponding accounting under Ind AS 109.

Accounting treatment under Accounting Standards (IGAAP)

The Expert Advisory Committee (EAC)1 of the Institute of Chartered Accountants of India (ICAI) has considered an issue on accounting for transfer of accounts receivable by a licensor to its franchisee, and has issued an opinion on ‘Provision for Debtors Transferred to Franchisee’.

In the given case, an electricity distribution company (licensor) entered into a 15 year Distribution Franchisee Agreement (DFA) with the successful bidder (franchisee) for distribution of electricity and managing other activities in a particular city (city A). As per the DFA, trade receivables as on the effective date of the DFA amounting to INR388.4 million (excluding amounts collected within three months of the last billing cycle2 and debtors which were in litigation) would be handed over to the franchisee. Similarly, on the expiry date of the contract (i.e. at the end of 15 years)/date of default, all trade receivables as on that date (excluding amounts collected within three months of the last billing cycle) would be handed over to the licensor. The franchisee would make payments to the licensor on the basis of input energy and quoted rates (as per the bid document and DFA), and no separate consideration would be paid by the franchisee for the transfer of the debtors.

The issue related to the accounting for the transfer of sundry debtors by the licensor to the franchisee- i.e. whether the licensor should make a provision for doubtful debts by debiting the statement of profit and loss in respect of debtors transferred, since the right to recover these debtors was transferred to the franchisee, or another accounting treatment was warranted.

The EAC noted that since the significant risks and rewards of ownership of the debtors would be substantially transferred to the franchisee (irrespective of legal title), it would be appropriate to derecognise the same from the financial statements. Further, since no separate consideration would be paid by the franchisee for the debtors, and instead, such payment was included in its quoted rates, the carrying amount of the transferred debtors would be transferred to an appropriate account (alternate asset). Subsequent clearance from this account would be made in an appropriate manner taking into account the nature and quantum of benefits expected to be obtained by the licensor during the franchise period. Since the transferred debtors would be derecognised under the above treatment with concurrent recognition of another asset for equal amount, the question of making any loss or provision for doubtful debts would not arise at all in this case. The EAC also clarified that derecognition of debtors, and provision for doubtful debts which is offset against the gross carrying amount of debtors, would not have the same effect on the presentation in the financial statement of the licensor.

1. ICAI Journal, The Chartered Accountant, May 2018 edition. 2. As per the agreement, the franchisee would collect the amounts due from the consumers on a day to day basis and remit to the licensor on a weekly basis the amounts collected against the consumer bills on the last billing cycle immediately preceding the effective date up-to a period of three months from the effective date.

Accounting treatment under Ind AS 109

Ind AS 109 prescribes specific provisions for derecognition of financial assets, these are assessed in Figure 1 below.

Determining the financial asset subject to derecognition

In applying the derecognition provisions under Ind AS 109, the first step is to determine the financial assets that are subject to possible derecognition. This could be specifically identified cash flows, fully proportionate share of the cash flows of the financial asset or fully proportionate share of specifically identified cash flows of the financial asset.

In this case, the debtors pertaining to city A were transferred to the franchisee. It is pertinent to note that of the total debtors, the amounts that would be collected within three months of the last billing cycle, and other debtors which were in arrears due to litigation would not be transferred. Hence, debtors amounting to INR388.4 million would be subject to the derecognition analysis.


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(Source: KPMG in India’s analysis, 2019, read with Insights into IFRS, KPMG IFRG Ltd.’s publication, 15th edition, September 2018)

Figure 1: Considerations for derecognition of debtors transferred by licensor

Ind AS 109 guidance

No

No

No

No

Yes

Yes

Yes

Yes

Yes

No

No

Yes

Whether derecognition principles are applied to a part or all of an asset?

Derecognise the asset



Continue to recognise the asset

Continue to recognise the asset

Have the rights to the cash flows from the asset expired?

Has the entity transferred its rights to receive the cash flows from the asset?

Has the entity transferred substantially all risks and rewards?

Has the entity retained substantially all risks and rewards?

Has the entity retained control of the asset?

Continue to recognise the asset to the extent of the entity’s continuing involvement

Has the entity assumed an obligation to pay the cash flows from the asset that meet conditions in para 3.2.5 of Ind AS 109?


Transfer of rights to receive cash flows

A financial asset qualifies for derecognition under Ind AS 109 either if the contractual rights to the cash flows from that financial asset expire or if an entity transfers a financial asset in a transfer that meets the criteria for derecognition specified in Ind AS 109. An entity is considered to have transferred a financial asset only if it transfers the contractual rights to receive the cash flows of the financial asset or it enters into a qualifying pass-through arrangement. Generally, transfer of legal title would result in a transfer of all existing rights associated with the financial asset, however, a transaction involving sale of beneficial interest in an asset, without an actual transfer of legal title should be assessed for ‘transfer of rights to receive cash flows’ considering the facts of the case. In either case, for a transfer of contractual rights to take place, the transferee should have an unconditional right to demand payment from the original debtor in the case of default by the original debtor.

In the current case, the contractual rights to recover amounts from the debtors have been transferred to the franchisee, who has the right to retain the amounts collected, and no economic benefits would be passed on to the licensor.

Transfer of substantial risks and rewards

The transfer of risks and rewards analysis is evaluated based on the entity’s exposure, before and after the transfer, to the variability in amount and timing of the net cash flows (present value of the future net cash flows). This analysis should be based on the terms of the contract and other facts and circumstances, considering all of the risks associated with the financial asset on a probability-weighted basis.

In the current scenario, the financial assets under consideration are sundry debtors (trade receivables). The only substantial risk that is generally associated with trade receivables (with relatively short-term maturities) is credit risk. Accordingly, if an entity sells short-term receivables and guarantees to compensate the transferee for credit losses that are likely to occur, then it has retained substantially all of the risks and rewards of ownership.

With respect to the debtors transferred at the beginning of the contract, the company needs to evaluate the debtors collection cycle, and determine whether they have short-term maturities, or will be collected over a longer period. Accordingly, the company needs to evaluate the probability of the debtors being returned to it at the end of the contract, and accordingly, whether the entity’s exposure to the variability in the present value

of the future net cash flows from the asset (variability) would change significantly or not (i.e. whether the credit risk associated with debtors would be transferred):

• Where the entity evaluates that the probability of the debtors initially transferred not being collected by the franchisee is high, and these would be returned to the company at the end of contract, then the variability in cash flows would not change significantly as a result of the transfer. In this case, it can be concluded that the entity has retained substantially all the risks and rewards of ownership of the financial asset, and accordingly, should not derecognise the debtors

• On the other hand, if the company evaluates that the debtors have short-term maturities, and the probability of them being collected within the contract period is high, then the company may conclude that the transfer of debtors tantamount to a transfer of substantially all risks and rewards relating to ownership, and no implicit guarantee is assumed to have been passed on to the franchisee. Accordingly, the company may derecognise the debtors.


Consider this

• In the above example, the franchisee fees that were to be paid to the licensor, were based on quoted rates in the DFA, which were finalised after considering all conditions (including transfer of debtors). Under Ind AS, these franchisee fees would be accounted for under Ind AS 115, Revenue from Contract with Customers, which requires entities to identify the performance obligations within the contract, and allocate the transaction price to each performance obligation. Since a portion of the franchisee fees includes compensation for transfer of debtors, a portion of the fees would be required to be allocated to the debtors transferred.


This article aims to: – Provide an overview of the guidance given in the educational material on Ind AS 28, Investments in Associates and Joint Ventures.

Accounting for investments in an associate and joint venture

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Introduction

Ind AS 28, Investments in Associates and Joint Ventures prescribes the accounting for investments in associates1

and requirements for the application of equity method when accounting for investment in associates.

The Institute of Chartered Accountants of India (ICAI) issued an educational material on Ind AS 28, which provides a summary of the standard in the form of key requirements and Frequently Asked Questions (FAQs) covering certain issues expected to be encountered frequently while implementing the standard.

Determination of significant influence

When an entity holds, directly or indirectly (e.g. through subsidiaries), 20 per cent or more of the voting power of the investee, it is presumed that the entity has significant influence. However, in case the investor clearly demonstrates that the holding does not give rise to significant influence over an investee then this standard would not apply.

In order to assess whether an entity has significant influence, the existence and effect of potential voting rights that are currently exercisable or convertible, including potential voting rights held by other entities, are to be considered.

Example

Voting rights held by a nominee or in a fiduciary capacity: Voting rights on shares held by a nominee should be considered while evaluating the significant influence of a beneficiary shareholder over the investee. However, such voting rights should not be considered for evaluation of significant influence by the nominee shareholder over the investee as such voting rights are exercised by the nominee as per the directions and in interest of the beneficiary.

On the other hand, shares held by a company in another company in a fiduciary capacity should not be counted for the purpose of determining the relationship of ‘associate company’ under section 2(6) of the Companies Act, 2013 (2013 Act).

Application of equity method

An entity with joint control of, or significant influence over an investee should account for its investment in an associate or a joint venture using the equity method except when that investment qualifies for exemption. Under the equity method, on initial recognition the investment in an associate or a joint venture is recognised at cost, and the carrying amount is increased or decreased to recognise the investor’s share of the profit or loss of the investee after the date of acquisition.

However, when an investment in an associate or a joint venture is held by, or is held indirectly through, an entity that is a venture capital organisation, or a mutual fund, unit trust and similar entities including investment-linked insurance funds, the entity may elect to measure that investment at Fair Value Through Profit or Loss (FVTPL) in accordance with Ind AS 109, Financial Instruments. This election has to be made separately for each associate or joint venture, at initial recognition of the associate or joint venture.

Further, if a portion of the investment is held indirectly through a venture capital organisation, a mutual fund, unit trust and similar entities including investment-linked insurance funds, the entity may elect to measure that portion of the investment at FVTPL in accordance with Ind AS 109 regardless of whether the venture capital organisation has significant influence over that portion of the investment. Equity method would be applied to any remaining portion of its investment in an associate that is not held through a venture capital organisation.

Elimination of group’s share

As per Ind AS 28, a group’s share in an associate or a joint venture is the aggregate of the holdings in that associate or joint venture by the parent and its subsidiaries. The holdings of the group’s other associate or joint ventures are ignored for this purpose.

Example: A parent (X Ltd.) has an investment in a subsidiary (i.e. in A Ltd. 100 per cent), associate (i.e. in B Ltd. 25 per cent) and a JV (i.e. in C Ltd. 50 per cent) which in turn holds interest in parent’s associate Z Ltd. (i.e. 20 per cent held by A Ltd. and 10 per cent each by B Ltd. and C Ltd.).

In such a case, X Ltd. in its CFS:

• Would not consider the investments held by B Ltd. and C Ltd. in Z Ltd.

• Consolidate fully the assets of its subsidiary, A Ltd. which includes 20 per cent investment in Z Ltd. as per equity method.

1. An associate is an entity over which the investor has significant influence.

Entity X

Entity Z

Entity A(Subsidiary)

Entity B(Associate)

Entity C(JV)

100%

20%

25%

50%

10%

10%

Treatment of Non-Controlling Interest (NCI) in associate’s CFS

When an associate or a JV has subsidiaries, associates or JVs, the profit or loss, Other Comprehensive Income (OCI) and net assets taken into account in applying the equity method are those recognised in the associate’s or joint venture’s financial statements (including the associate’s or joint venture’s share of the profit or loss, OCI and net assets of its associates and joint ventures), after any adjustments necessary to give effect to uniform accounting policies.

Example: In the following group structure:

• A Ltd.’s CFS would include 100 per cent of S Ltd.’s profit or loss, OCI and net assets.

• The overall profit and total comprehensive income would be split between amounts attributable to the owners of the parent and NCI.

• The net assets in the consolidated balance sheet would also include 100 per cent of the amounts relating to the subsidiaries with any NCI in the net assets presented within the consolidated balance sheet within equity.

Since the investor’s interest in the associate or JV is as an owner of the parent, the share is based on the profit and loss, comprehensive income and net assets that are reported as being attributable to the owners of the parent in the associate or JV’s CFS i.e. after any amounts attributable to the NCI.

Accordingly, in the given case, H Ltd. should base accounting for its share in profits and net assets of A Ltd. under equity method of accounting, on amounts after attributing amounts to NCI (B Ltd.) in A Ltd.’s CFS.

Treatment of upstream and downstream transactions

As per Ind AS 28, any gains and losses resulting from ‘upstream’2 and ‘downstream’3 transactions between an entity (including its consolidated subsidiaries) and its associate or JV are to be recognised in the entity’s financial statements only to the extent of unrelated investors’ interests in the associate or JV. The investor’s share in the associate’s or JV’s gains or losses resulting from these transactions should be eliminated. Accordingly, following treatment would be followed in the:

• Statement of profit and loss: Adjustment should be made against investor’s profit/share of associate or JV’s profit.

• Balance sheet: Adjustment should be made against the asset that was subject of transaction held by investor or against the carrying amount of the asset, if held by associate or JV.

Changes in ownership interest

As per Ind AS 110, Consolidated Financial Statements if a parent loses control of a subsidiary, the parent should:

a. Derecognise the assets and liabilities of the former subsidiary from the consolidated balance sheet.

b. Recognise any investment retained in the former subsidiary at its fair value when control is lost and subsequently accounts for it and for any amounts owed by or to the former subsidiary in accordance with relevant Ind ASs. That fair value should be regarded as the fair value on initial recognition of a financial asset in accordance with Ind AS 109 or, when appropriate, the cost on initial recognition of an investment in an associate or joint venture.

c. Recognises the gain or loss associated with the loss of control attributable to the former controlling interest.


15

H Ltd.(Holding entity)

S Ltd.(Subsidiary of A Ltd.)

A Ltd.(Associate entity) B Ltd.

25%

20%80%

2. Upstream transactions could include sale of assets from an associate or a JV to the investor.

3. Downstream transactions could include sales or contributions of assets from the investor to its associate or its JV.


Example:

• Loss of control: An entity A Ltd. owns 100 per cent shares in an investee entity X Ltd. which were purchased for INR700 crore and INR50 has been incurred as directly attributable cost. A Ltd., sells 60 per cent shares in X Ltd. to B Ltd. and retains 40 per cent shares. A Ltd. has a significant influence over X Ltd.

At the date of disposal, the fair value of the identifiable assets and liabilities of X Ltd. including intangible assets is INR1,800 crore and the fair value of A Ltd.’s retained interest of 40 per cent of the shares of X Ltd. is INR800 crore, which includes goodwill.

On the basis of the guidance given in Ind AS 110, upon loss of control, A Ltd. should derecognise X Ltd. and should account for its remaining interest i.e. 40 per cent as an associate or joint venture as per equity method. Accordingly, in the given case:

– The initial carrying amount of A Ltd.’s associate would be based on the fair value of the retained interest i.e. INR800 crore.

– Fair value of the retained interest would be bifurcated between goodwill and identifiable net assets as follows:

• Step-up increase in an existing associate/JV: As per Ind AS 28, an investment is accounted using the equity method from the date on which it becomes an associate or a JV. The cost of investment in an associate or JV is allocated into two components:

a. Purchase of a share of the fair value of net assets and

b. Goodwill.

Appropriate adjustments are made to the entity’s share of the associate’s or joint venture’s profit or loss after acquisition for example, depreciation of the depreciable assets based on their fair values at the acquisition date or for impairment losses for goodwill, property, plant and equipment, etc.

Therefore, the carrying value of the associate or joint venture is only adjusted for the investor’s share of the associate or JV’s profits or losses and other recognised equity transactions. Accordingly, the purchase price paid for additional interest should be added to the existing carrying amount of the associate or the JV and the existing interest in the associate or JV should not be remeasured. Such an additional interest should be split between goodwill and fair value of the net assets of the associate/JV based on the fair value of the net assets at the date of the increase in the associate or JV. Therefore, goodwill/capital reserve would be computed based on fair value of identified assets and liabilities on the date of further acquisition.

Example: An entity X obtains significant influence over entity Y by acquiring an investment of 20 per cent at a cost of INR2,00,000. The fair value of the associate’s net identifiable assets at the date of acquisition is INR9,50,000. In the CFS of X, the investment is accounted for using equity method.

Entity X acquires an additional investment of 15 per cent in Y at a cost of INR1,80,000. The current fair value of the associate’s net identifiable assets has increased to INR10,00,000.

In the given case, the carrying amount of investment immediately prior to additional investment is INR2,00,000. Upon acquisition of additional 15 per cent, the equity accounted amount for the associate increases by INR1,80,000. Therefore, the notional goodwill applicable to the second tranche of the acquisition is INR30,000 (i.e. INR1,80,000 - (15 per cent*INR10,00,000)).


X Ltd. X Ltd.

A Ltd. A Ltd.

Before sale of shares After sale of shares

100% 40%

Goodwill Identifiable net assets

Total investment in X Ltd.

INR80 crore(balancing figure)

INR720 crore (i.e.

INR1,800*40 per cent)

INR800 crore

Following is the summary of impact of additional investment on entity X equity accounted amount for entity Y:

• Accounting for piecemeal acquisition: Ind AS 28 does not include any specific guidance on how an investor should account for an existing investment, which is accounted for under Ind AS 109, Financial Instruments that subsequently becomes an associate or a JV that should be accounted for under the equity method.

However, Ind AS 103, Business Combination, deals with the situation where control over an acquiree is achieved in stages. As per Ind AS 103, in case of piece-meal acquisition, an acquirer should remeasure its previously held equity interest in the acquiree at its acquisition date fair value and recognise the resulting gain or loss, if any, in the statement of profit and loss or OCI.

Example: An entity X initially holds 10 per cent interest in entity ABC and acquires additional 25 per cent in ABC later (resulting in achieving significant influence). Such an entity could account for the step acquisition of an associate or a JV by applying analogy to Ind AS 103, i.e. considering fair value as deemed cost. Accordingly, the cost of an associate acquired in stages would be measured as the sum of the fair value of the interest previously held plus the fair value of any additional consideration transferred as of the date when the investment became an associate.

• Discontinuance of equity method on disposal: As per Ind AS 28, an entity should discontinue the use of the equity method from the date when its investment ceases to be an associate or JV. Accordingly, if the retained interest in the associate or JV is a financial asset, then the entity should measure such retained interest at fair value. The entity should recognise in the statement of profit and loss, any difference between the:

a. Fair value of any retained interest and any proceeds from disposing of a part interest in the associate or JV and

b. Carrying amount of the investment at the date the equity method was discontinued.

Further, when an entity discontinues the use of equity method, then it should reclassify the gain or loss previously recognised in OCI by the entity to profit and loss, on disposal of related assets or liabilities. For instance, if an associate or a JV has cumulative exchange differences relating to a foreign operation and the entity discontinues the use of the equity method, then in such a case, an entity should reclassify to profit or loss, the gain or loss that had previously been recognised in OCI in relation to the foreign operation. Such a reclassification adjustment would be for the full amount and not just a proportionate amount based on the interest disposed.

Example: An entity sells 15 per cent interest in an associate to a third party and have retained interest of 10 per cent. The entity should discontinue the use of equity method from the date of transfer of 15 per cent. The retained interest would be accounted as a financial asset as per the principles of Ind AS 109. Accordingly, the retained interest, at the date of inception, would be measured at its fair value. Any difference in fair value of retained interest plus proceeds from disposal of 15 per cent interest and the carrying amount of the investment (of 25 per cent) at the date the equity method was discontinued would be recognised in the statement of profit and loss. Additionally, the entire share of an associate’s OCI representing exchange difference relating to a foreign operation would be reclassified to the statement of profit and loss.

• Continuance of equity method on disposal: Ind AS 28 does not expressly deal with derecognition of proportionate investment in an associate or JV. Once ownership is reduced in cases of partial disposal, an entity should derecognise the carrying value of the associate proportionate to the percentage reduced and recognise the resulting gain or loss in the statement of profit and loss. Further, it should reclassify the gain or losses previously recognised in OCI to the statement of profit and loss on proportionate basis.


17

Particulars Percentage held Carrying amount (INR)

Share of net assets (INR)

Goodwill included in investment (INR)

Existing investment 20% 2,00,000 1,90,000 10,000

Additional investment 15% 1,80,000 1,50,000 30,000


Example: An entity XYZ Ltd. sells its stake of 10 per cent (out of total stake of 40 per cent) in an associate ABC Ltd. for a consideration of INR80,000. The entity continues to recognise remaining interest of 30 per cent as in the associate following equity method.

Assuming, the net asset carrying value of ABC Ltd. at the date of partial disposal is INR300,000 with goodwill being INR30,000. Also, cumulative share of associate’s OCI INR20,000 represents actuarial gain or loss. Accordingly, applying the above mentioned guidance in the instance case, ABC Ltd.’s carrying value in the CFS of XYZ Ltd. would be INR150,000 (i.e. 40 per cent*(INR300,000+30,000)). The carrying value of the associate would be reduced in proportion to the percentage reduced i.e. investment in associate in the CFS of XYZ Ltd. would be INR 37,500 (i.e. INR150,000*10/40).

Also, the proportion of gain or loss previously recognised in OCI would be reclassified to the statement of profit and loss as part of gain on partial disposal i.e. INR5000 (20,000/40 per cent *10 per cent) would be credited from OCI to statement of profit and loss.

Others

• Treatment of reciprocal holdings: Ind AS 28 provides that when an associate/JV has subsidiaries/associates/JVs, the profit or loss, OCI and net assets taken into account in applying the equity method are those recognised in the associate’s/JV’s financial statements (including the associate’s/JV’s share of the profit or loss, OCI and net assets of its associates and joint ventures), after any adjustments necessary to give effect to uniform accounting policies. However, in case of reciprocal holdings (for instance, an associate X holds 20 per cent shares of another associate Y and Y also holds 20 per cent shares of X), such an approach would result in a portion of entity’s profits being double counted.

Therefore, in case of reciprocal holdings, it would be appropriate to simply account for interest in associate ignoring the reciprocal interest. Accordingly, in the stated case, X and Y with profits of INR100,000 (excluding their share in each other) should recognise profit of INR120,000 each. This approach is in line with the consolidation principles prescribed under Ind AS 110 which provides that the income arising on investment held by a subsidiary in a parent should be eliminated in CFS.

Since the profits related to reciprocal interest have been ignored, therefore, while calculating the Earnings Per Share (EPS), the number of shares related to reciprocal interest should also be ignored. Accordingly, in the given case, X’s and Y’s capital after excluding each other’s interest would be 96,000 shares (as entity X and Y indirectly owns 4 per cent (i.e. 20 percent*20 percent) of their own shares). Such shares should be treated as treasury shares.

• Financial statements subsequent to reporting date of the investor: Financial statements of an associate prepared as at a date subsequent to the reporting entity date (investor) could be used for the purpose of applying the equity method provided the following has been complied with:

a. Length of the reporting periods and any difference between the ends of the reporting periods should be the same from period to period i.e. consistently applied from period to period.

b. Adjustments to the effects of any significant events or transactions between the investor (or its consolidated entities) and the associate that occur between the date of the associate’s financial statements and the date of the investor’s CFS have been provided.

• Appropriation of profits: The educational material clarified that the creation of a mandatory reserve is merely appropriation of profits and does not result in reduction of the profit as well as net assets of the associate. Therefore, an entity should not exclude the appropriation made to mandatory reserves from the result of operations of the associate that would be used for the purpose of computing the investor’s share.


Associate Y

Associate X

20% 20%


Regulatory updates

19

Supreme Court ruling on the applicability of Provident Fund contributions on allowances

The Employees’ Provident Funds and Miscellaneous Provision Act, 1952 (EPF Act) requires that the contribution towards Provident Fund (PF) will be calculated on monthly pay comprising the following

components:

• Basic wages

• Dearness allowance (all cash payments by whatever name called paid to an employee on account of a rise in the cost of living)

• Retaining allowance

• Cash value of any food concession.



However, basic wages do not include cash value of any food concession, dearness allowance, house rent allowance, overtime allowance, bonus, commission or any other similar allowance payable to an employee in respect of his/her employment, or any presents given by the employer.

The provision of EPF is applicable to employers having more than 20 employees and are required to deduct PF of 12 per cent on monthly pay (as specified above).

Petition filed

The appeal before the Supreme Court had been filed which raised a question whether the other allowance such as travel allowance, canteen allowance, special allowance, management allowance and conveyance allowance paid by an establishment to its employees would fall within the expression basic wages for computation of contribution towards PF.

Supreme Court decision

The Supreme Court explained its ruling as follows:

• If any amount is to be excluded from the basis wages, it has to be shown that the employee had become eligible to get this extra amount beyond the normal work which he/she was otherwise required to put in

• It could not be demonstrated that the allowance (e.g. house rent allowance, overtime allowance, bonus, commission) being paid to employees were either variable or were linked to any incentive for production resulting in greater output by an employee and that such allowances were not paid across the board to all employees in a particular category or were being paid especially to those who avail the opportunity.

• The wage structure and the components of salary had been examined on facts, both by the authority and the appellate authority under the EPF Act, who had arrived at a conclusion that the allowances (e.g. house rent allowance, overtime allowance, bonus, commission) were essentially a part of the basic wage camouflaged as part of an allowance so as to avoid deduction and contribution.

The above mentioned ruling of the Supreme Court would require employers to revisit their policies and determine the salary for the purpose of PF computation.

Also refer KPMG in India’s Tax Flash News dated 1 March 2019 which provides detailed overview of Supreme Court ruling.

(Source: Supreme Court decision in the case of Regional Provident Fund Vs Vivekananda Vidyamandir And Others (Supreme Court of India), dated 28 February 2019)

SEBI board meeting

The Securities and Exchange Board of India (SEBI) recently on 1 March 2019 held its board meeting to take certain decisions. Following are the key decisions taken during the meeting:

• Corporate debt restructuring

In relation to corporate debt restructuring, SEBI approved exemptions from applicability of conditions for preferential issue under the SEBI (Issue of Capital and Disclosure Requirements), 2018 (ICDR, 2018) and from the obligation of making an open offer as required by the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 to all scheduled commercial banks (excluding regional rural banks) and all India financial institutions for acquisitions in their ordinary course of business.

Such exemptions would not be available for acquisition of shares by persons other than aforesaid lenders by way of allotment by the target company or purchase from lenders.

• Amendments to SEBI (Infrastructure Investment Trusts) (InvITs) Regulations, 2014 and the SEBI (Real Estate Investment Trusts) (REITs) Regulations, 2014

The SEBI approved following amendments to SEBI InvITs Regulations, 2014 and the SEBI REITs Regulations, 2014:

– Modification of the minimum allotment and trading lot for publicly issued InvITs and REITs in prescribed manner

– Increased leverage limit from existing 49 per cent to 70 per cent of InvIT assets. The enhanced limit shall be subject to certain specified additional disclosure and compliance requirements

– A separate framework for privately placed unlisted InvIT, providing sufficient flexibility to both issuers and investors would be created.

(Source: SEBI press release 9/2019 dated 1 March 2019)

ICAI issued exposure draft to amend Ind AS

Recently on 27 February 2019, the Institute of Chartered Accountants of India (ICAI) issued exposure drafts to certain Ind AS to maintain convergence with IFRS by incorporating amendments issued by International Accounting Standards Board (IASB) into Ind AS. The exposure draft relates to following Ind AS:

• Amendments to Ind AS 103

ICAI proposed amendments to Ind AS 103, Business Combinations to amend the definition of business. The revised definition aims to provide assistance to companies in determining whether an acquisition is a business or purchase of a group of assets.

The proposed amendment to Ind AS 103 is based on amendments issued by IASB to IFRS 3, Business Combinations on 22 October 2018. The proposed amendments to definition of business highlight that the ‘output of a business’ is to provide goods and services to customers, whereas the previous definition focussed on returns in the form of dividends, lower costs or other economic benefits to investors and others. The new definition is narrow and is expected to facilitate robust decision-making when assessing whether a set of acquired assets and activities constitute a business.

Effective date: The revised definition is proposed to be made effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 April 2020 and to asset acquisitions that occur on or after the beginning of that period.

• Amendments to Ind AS 1 and Ind AS 8

ICAI proposed amendments to Ind AS 1, Presentation of Financial Statements and Ind AS 8, Accounting Policies, Changes in Accounting Estimates and Errors and provided revised definition of the term ‘material’ to make it easier to understand. The proposed definition is based on definition revised by IASB on 31 October 2018 to make it aligned across IFRS and the Conceptual Framework.

Accordingly, the revised definition of ‘material’ included in Ind AS 1 and Ind AS 8 is as follows:

‘Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.’

The IASB felt that the concept of materiality needs to be clearly understood so that preparers of financial statements can apply it appropriately. Therefore, the amendments provide a definition and explanatory paragraphs. The amendments promoted the concept of ‘obscuring’ to the definition, alongside the existing references to ‘omitting’ and ‘misstating’.

Additionally, the exposure draft increased the threshold of ‘could influence’ to ‘could reasonably be expected to influence’. However, the exposure draft has also removed the definition of material omissions or misstatements from Ind AS 8.

Effective date: The revised definition would be made effective for annual periods beginning on or after 1 April 2020. However, early adoption is permitted.

The exposure drafts are open for comments upto 6 April 2019.

(Source: Exposure drafts to Ind AS 103, Ind AS 1 and Ind AS 8 issued by ICAI dated 27 February 2019)

Disclosure of significant beneficial ownership in the shareholding pattern

Section 89 of the Companies Act, 2013 (2013 Act) requires every person who holds or acquires a beneficial interest in the shares of a company and the person registered as a holder of shares but does not hold the beneficial interest in such shares, to make a declaration to the company specifying the nature of his/her interest, in a prescribed manner.

The 2013 Act defines significant beneficial owner as a person who is not a registered shareholder of the company but the person either individually or jointly owns at least 10 per cent stake in the company or directly or indirectly exercises significant control over the company.

The Companies (Significant Beneficial Owners) Rules, 2018 specify various requirements pertaining to disclosures regarding significant beneficial owners. With an aim to increase transparency to investors, SEBI through its circular dated 7 December 2018 has prescribed a format for disclosure of significant beneficial owners.

Further, the Ministry of Corporate Affairs (MCA) through its notification dated 8 February 2019, issued amendments to the Companies (Significant Beneficial Owners) Rule, 2018 relating to declaration of significant beneficial ownership and applicability of the said rules.

In view of the amendments to the said rules, SEBI issued amendments to circular dated 7 December 2018 through its circular dated 12 March 2019. As per the revised circular the SEBI requirements are applicable to those listed entities that are reporting companies as per the Companies (Significant Beneficial Owners) Rules, 2018, as amended from time to time.

The listed entities would need to disclose details pertaining to significant beneficial owners in the revised format prescribed at Annexure to revised circular.

The circular will come into force from the quarter ended 30 June 2019.

(Source: SEBI circular SEBI/HO/CFD/CMD1/CIR/P/2019/36 dated 12 March 2019)

21


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.

First Notes: MCA further amends deposit norms - mandatory return for all amounts not considered as deposits

6 February 2019

On 22 January 2019, the Ministry of Corporate Affairs (MCA) through its notification issued the Companies (Acceptance of Deposits) Amendment Rules, 2019 which makes certain amendments to the Companies (Acceptance of Deposit) Rules, 2014 (Deposit Rules).

The amendments have come into force from the date of their publication in the official gazette i.e. 22 January 2019.

This issue of First Notes provides a summary of the amendments made to the Deposit Rules.

First NotesIFRS NotesRBI defers implementation of Ind AS for banks till further notice

26 March 2019

Scheduled Commercial Banks (SCBs) excluding Regional Rural Banks (RRBs) were initially required to implement Indian Accounting Standards (Ind AS) from 1 April 2018. However, RBI vide a press release dated 5 April 2018, deferred the implementation of Ind AS by one year i.e. 2019-20.

The RBI through a notification dated 22 March 2019, has further deferred the Ind AS implementation till further notice.

The implementation of Ind AS by banks required certain legislative changes in the format of financial statements to comply with disclosures required by Ind AS. The amendments recommended by RBI are still under consideration of the Government of India, therefore, RBI has taken a decision to defer the applicability of Ind AS till further notice.

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

Continuing with the series of special sessions, the recent session on 22 February 2019 focussed on the technology sector. In this session we discussed the significant areas relating to lease accounting, where current guidance is expected to change due to implementation of new lease standards. Also discussed the potential areas where significant judgement and estimates are generally required and such areas could be considered as potential KAMs specific to technology sector.

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