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Accounting and Auditing UpdateIssue no. 08/2017

March 2017

www.kpmg.com/in

Sai Venkateshwaran

Partner and HeadAccounting Advisory Services KPMG in India

Ruchi Rastogi

Executive DirectorAssuranceKPMG in India

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© 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.

With this edition of the Accounting and Auditing Updte, we complete the journey of the first year of Ind AS implementation by companies in India. The year was full of activity with the notification of certain Sections of the Companies Act, 2013, proposals on Minimum Alternate Tax computation in relation to Ind AS, Securities and Exchange Board of India (SEBI) provided relaxations for the quarterly Ind AS financial information, Insolvency and Bankruptcy Code, 2016, etc. The month of March 2017 also had its share of important updates e.g. frequently asked questions on Income Computation and Disclosure Standards (ICDS) and SEBI revised the regulatory framework for schemes of arrangements by listed entities.

In this month’s Accounting and Auditing Update we examine an important accounting matter relating to the factors to consider while determining if entities such as e-commerce companies and trading companies are acting as an agent or a principal based on the principles of Ind AS.

There have been various developments in the capital markets in the last one year. These relate to regulatory changes in the debt capital market, establishment of

Gujarat International Finance Tech City (GIFT City), etc. This publication features an interaction with Mr. Ashish Chauhan, MD and CEO, BSE Ltd. Our conversation with him explores the incentives and value propositions of International Financial Service Centre (IFSC), opportunities available to Small and Medium Enterprises (SMEs) to list, various regulatory changes and reporting requirements.

The Companies Act, 2013 (2013 Act) mandates every company to spend on social and environmental welfare (Corporate Social Responsibility (CSR)). Over the last two years, the Ministry of Corporate Affairs (MCA) issued a number of amendments, clarifications including frequently asked questions on this topic. Our article summarises the requirements relating to CSR under the 2013 Act.

Recognition of deferred tax assets when an entity has unused tax losses requires an entity to use its judgement and identify convincing evidence. Our article focusses on the principles laid out under Accounting Standards and Ind AS and identifies the factors that an entity should consider while recognising deferred tax assets when it has history of unused tax losses.

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

Additionally, we successfully concluded our Second Annual KPMG Accounting, Reporting and Compliance Conference (KARCC) at Delhi (7 March 2017), Chennai (9 March 2017) and Mumbai (27 March 2017). The conference was a knowledge sharing platform which provided industry insights on the recent developments in the accounting, reporting and compliance matters. The underlying theme of the conference was executed through sessions by industry experts, regulators and panel discussions. In this month’s Accounting and Auditing Update we bring you highlights of the conference.

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


Table of contents

Agent vs principal – E-commerce and trading companies

Developments in capital markets - Conversation with Mr. Ashish Chauhan

Corporate Social Responsibility

Accounting deferred tax assets - carry forward losses

Regulatory updates

Second annual KARCC

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Agent vs principal – E-commerce and trading companies

This article aims to

• Highlight the considerations to be assessed while accounting for revenue as agent or principal the case of e-commerce and trading companies.


Background

Revenue is a key metrics of performance – both to preparers and users. Additionally, evaluating the amount of revenue to be recognised is a matter of careful consideration – whether revenue should be recognised on a gross or net basis?

In case of trading companies, the conclusion is dependent on whether the company is acting as a principal or an agent. The criteria to evaluate gross or net presentation (agent or principal) of revenue is the same irrespective of the type of a company: a traditional trading company or operating an e-commerce market place platform.

There is no elaborate guidance under AS 9, Revenue Recognition to evaluate agent vs principal relationship. Therefore, industry practice varies with certain companies applying the guidance available in International Financial Reporting Standards (IFRS); while others opt to recognise revenue on a gross basis. This article aims to provide an overview of the basic principles of gross or net presentation under Ind AS along with the practical implications with a specific focus on e-commerce sector and trading business. Ind AS standard on revenue recognition is converged with IFRS.

Guidance under Indian Accounting Standards (Ind AS)

Ind AS 18, Revenue, provides specific guidance for ascertaining whether an entity is acting as a principal or an agent. In an agency relationship, the gross inflows of economic benefits include amounts collected on behalf of the principal which do not result in increases in equity for the entity (agent). Amounts collected on behalf of the principal are not revenue. Instead, revenue is the amount of commission. An entity is acting as a principal when it has exposure to the significant risks and rewards associated with the sale of goods or the rendering of services. While the standard provides indicators,

judgement needs to be exercised and all the relevant facts and circumstances should be considered.

Features that indicate that an entity is acting as a principal include:

• Primary responsibility for performance: A principal has the primary responsibility of performance under the contract. Any services to be rendered or goods to be supplied are on the principal’s account. Any other entity identified to facilitate the performance under the contract do so in its capacity as an agent. From the customer’s perspective, it is the principal who owes the performance obligation.

• Inventory risk: An entity that bears the inventory risk in terms of any associated gains or losses (including loss on account of obsolescence) is an indicator that it is acting as a principal.

• Discretion in establishing prices: If an entity has the latitude to determine the price to be charged from a customer, directly or indirectly, then it is acting as a principal.

• Credit risk: Principal generally bears the credit risk arising on account of payment default by the customer.

Additional indicators that may be useful in determining that an entity is acting as a principal are:

• It modifies the product or performs part of the services

• Has discretion in selecting the supplier used to fulfil an order or

• Is involved in determining product or service specifications.

None of the indicators noted above are considered individually presumptive or determinative, but a careful overall assessment needs to be done based on the majority of indicators. Practical implications should be considered while making this assessment have been discussed subsequently with relevant illustrations.

Practical implications for companies:

E-commerce companiesWe have discussed below three common business models followed by e-commerce companies along with the potential implications to be considered.

Inventory led model where the e-tailer makes an outright purchase of products from the vendor and sells it directly to the customer. In our experience, e-tailer would have the latitude in setting the prices at which the products are sold to the ultimate customer and would bear the credit risk since the payment to the vendor is independent of the recovery of amounts from the ultimate customer. Also, it has the freedom to select its vendor or supplier. The e-commerce (e-tailer) company would usually act as a principal in such cases as it would be the primary obligor for the goods.

Managed marketplace model where the managed marketplace owner provides a website as a listing platform to a vendor and also manages the logistics, product quality and packaging. It is critical to analyse whether the managed marketplace owners have discretion to establish prices of the products. A careful understanding of agreement between market place owners and vendors is required to evaluate whether market place owner is acting as an agent or a principal. Further, based on industry practice, market place owners generally release payment to vendors once delivery is acknowledged by customers/after return period have elapsed. This factor could have implications on evaluation on who bears the credit risk and hence, would need a careful evaluation. The provision of logistics, quality check and packing services may be considered to be a strong indictors of the value addition done by the market place owners in their capacity as a principal.

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Pure marketplace model where the website is only a listing platform for vendors. The logistics, packaging and quality control is managed by the vendor. Like in the managed market place model, evaluation of who bears the credit risk can become complex since the payment to the vendor is generally linked to receipt of payment by the pure marketplace owner from the customers. If the marketplace owner is only providing the platform for sale of products and does not undertake any other obligation, then it would be acting as an agent.

In addition to the points mentioned above, special consideration needs to be made for discounts. The e-commerce companies periodically offer incentives to the customers to encourage purchases. Such offers range from current discount offers, inducement offers, such as offers for future discounts subject to minimum current purchase, cash back, etc. The discount offers are generally netted off against the revenue from sales or services. Revenue attributable to inducement offers in the nature of customer loyalty programmes and should be deferred based on expected level of redemption of the inducement offers (award credits). The revenue so deferred is accounted at an appropriate basis in the period in which the such offers are availed by the customer.

Trading businesses Trading business companies could be trading in agro products, natural gas, power and coal among others. Such companies generally enter into a variety of arrangements and certain terms and conditions of such arrangements could be complex which would require careful evaluation to determine the principal-agent status of such trading companies. As explained above, the principal-agent evaluation is likely to require significant judgement and depending on the nature of business and the underlying product, some of the indicators discussed earlier may not be relevant for instance inventory risk might not be relevant

for power trading companies. Below are some conditions that could be considered while analysing principal-agent evaluation:

• Back to back sale agreements: Certain back to back sale agreements such as high sea sales transactions might be structured to only bring a buyer and a seller together. Due consideration needs to be given to evaluate which party bears the risks. For example, A sells goods procured from B (seller) to C (customer) on high sea sales basis. In practice, we believe evaluation of whether A is acting as a principal or as an agent is not straight forward. It would need to be evaluated whether A has the right to direct the shipment to another customer while it is in transit. Further, it would need to be evaluated whether the risks and rewards associated with the goods (including the insurable interest) are transferred to A. Assessment of whether the two contracts are separable or linked would also be important. Generally, if procurement of goods from B and onwards sale to C are done in contemplation of one another and the risk and rewards are not transferred to A at any point during the course of shipment, A would be considered to be an agent. Accordingly net accounting would need to be followed by it.

• Credit risk: Due consideration needs to be given to the contractual arrangements to evaluate which entity is bearing the credit risk in case the buyer defaults in payment. In the above example, if A has extended a bank guarantee to B to guarantee payment of the goods procured and in return has not received any guarantee from C, it could indicate that credit risk is borne by A.

• Resultant gains and losses from performance of the contract: Generally, an entity acting as a principal has the primary obligation under the contract and would bear resultant gains or losses arising from

it, including those arising on account of non-performance by any party to the contract. For instance, A (buyer) and B (seller) enter into a contract for supply of an identified commodity to be procured from C. If B is acting as a principal, it would be obligated to fulfil the contract irrespective of whether C is able to supply the requisite quantities of commodity. Being the principal, it would bear the losses or gains (if any) arising on account of procuring the commodity from an alternate source. If B is acting as an agent, the losses or gains (if any) would be passed on to A.

• Value addition services: Provision of value addition services such as storage of the goods to preserve the quality, segregation of the products into different grades based on quality, transportation and packaging of products also needs to be considered for this evaluation. For instance, if the entity procures products and stores them for sale in future based on its sales plan, it would generally be acting as a principal since it bears the inventory as well as obsolescence risk. Further, the fact that the entity has procured the products for sale in future under its own brand name at prices determined by it could be indicative of the fact that it is not merely facilitating the transaction.

• Financial risk management: To protect an exposure from the price as well as inventory risk, a principal might take derivative positions. This is usually done in gas and commodity trading businesses. It is important to consider the modalities of the arrangement regarding the entity that would bear the cost of derivatives. Generally a principal bears the cost while an agent would be reimbursed.


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Implications of Ind AS 115, Revenue Contracts with Customers

While the basic concept remains the same under both the standards (Ind AS 18 and 115), determining whether the entity is acting as an agent or a principal under the Ind AS 115 differs on account of the shift from the risk-and-reward approach to the transfer-of-control approach. Under Ind AS 18, the entity is a principal in the transaction when it has exposure to the significant risks and rewards associated with the sale of goods or the rendering of services. While IASB noted that the indicators under the new standard serve a different purpose from those in current standard, it is not clear whether IASB expects this conceptual change to result in significant changes in practice. Thus, the arrangements would need to be carefully evaluated under the new standard to assess the impact.

Conclusion

Assessment of whether an entity is acting as a principal or an agent requires significant judgement. A careful assessment of all the relevant indicators is required. The impact of accounting for revenue on gross or net basis is not limited to the disclosure in the financials. Though profit after tax might remain same but changes to the amount of revenue could affect the gross and net margins. Further, the consequential implications on debt covenants would need to be carefully evaluated.


Developments in capital markets

In conversation with Mr. Ashish Chauhan, MD & CEO, BSE LTD.


1. There seem to be a number of regulatory changes impacting India’s capital markets. Can you give us an overview of the significant changes and their impacts?

There has been a transformation in the capital markets led by regulatory changes. These have been in the debt capital market, establishment of the SME Exchange and the international exchange at International Financial Service Centre (IFSC). I will elaborate on each of these one by one.

Debt capital market

Debt capital is one of the core drivers for India Inc. to achieve 7 per cent plus growth for the Indian economy. The landscape for bank-intermediated financing is transforming under regulatory reforms that are pushing Indian corporates to the capital market to raise debt. The Securities Exchange Board of India (SEBI) has made it mandatory for companies raising debt capital of more than INR500 crore to use the electronic bidding platform of stock exchanges1. Pursuant to this requirement of SEBI, the total debt that has been raised through the electronic platform has been over INR2,80,000 crore (USD41 billion approximately) with BSE accounting for over INR1,82,000 crore (USD27 billion approximately) as on date2. Further, Reserve Bank of India (RBI) has issued guidelines3 to banks to progressively reduce exposures to large borrowers which will in turn drive corporates to the debt capital market for fund raising.

Apart from policy measures, the easy liquidity conditions and strong emergence of India in the basket of emerging economies as a preferred choice for international investors has attracted a good flow of funds for debt securities. Until December 2016, companies which have listed their debt securities at stock exchanges have raised INR5,02,866 crore which is 35 per cent higher than the amount raised by companies last year in the same period4. BSE’s market share in the private

placement fund raised is over 50 per cent4 and over 90 per cent in the public issuance of debt securities5.

Establishment of SME exchange and its benefitsIn the past, Small and Medium Enterprises (SMEs) have complained about the difficulty in accessing both debt and equity capital. While the government has taken several measures to ease access to credit, giving them easier access to equity was the next step in that process.

SME Exchanges such as AIM (London), Canada (TSXV), Hong Kong (GEM), Japan (Mothers), Korea (KOSDAQ) and US (NASDAQ) were studied by BSE in detail to understand their salient features, best practices and their business model. Learnings from the Over-the-Counter Exchange of India (OTCEI), the capital market realities, and difficulties faced by SMEs have been taken into account while formulating SEBI guidelines for SME exchange in the Indian context. The SME exchanges in India were set up around FY2011-2012 and BSE’s SME exchange received SEBI approval on 27 September 2011.

The SME exchanges provide a regulated platform to SMEs to raise funds from the public and are a great opportunity for entrepreneurs by providing access to public capital. As we know, a listing of its securities is expected to bring greater visibility and enhanced corporate governance into a company. This is likely to further improve the credibility of these companies besides strengthening their equity capital base and improving their ability to leverage. Listing also assists in price discovery and unlocks the value of the company, in the process creating wealth for all stakeholders including investors while providing additional liquidity. Another key benefit is the ability of these companies to attract talent by providing market based compensation through share based payment schemes such as Employee Stock Options Plans (ESOPs), without affecting their cash flow and net worth. It is expected to provide an opportunity for investors to identify and invest at an early stage in companies with high potential.

Opportunities available on establishment of Gift City International Exchange/Clearing CorporationIndia’s first IFSC at Gujarat International Finance Tec City (GIFT City), a multi-services Special Economic Zone (SEZ) is being set up to serve many strategic and economic missions, such as:

• Better macroeconomic (fiscal and monetary) management

– For example, with more than 50 per cent of the Indian currency market being offshore, the influence of onshore markets on pricing the Indian currency is limited. This in turn impacts monetary policy transmission and inflation targeting in the economy. This also holds true for products of national interest like precious metals, energy, etc.

• Wider strategic choices for public/corporate debt financing

– For example, issuance of INR denominated bonds, such as Masala Bonds and Green Bonds, can be done through IFSC. This is expected to accelerate the emergence of the Indian IFSC and the Indian currency on the world stage.

• An integrated and converged financial market across segments is likely to enable economies of scale and scope.

To facilitate IFSC mission, SEBI, RBI, Insurance Regulatory and Development Authority (IRDA), MCA and Ministry of Finance (MoF) have redesigned legal, fiscal and regulatory initiatives with the intent to increase ease of doing business for IFSC participants.

As per SEBI (IFSC) Guidelines 2015 dated 27 March 2015, the international exchange shall offer a product portfolio spanning (i) equity derivatives, including single stock futures and index futures, (ii) fixed income securities issued by eligible issuers, (iii) currency derivatives and interest rate futures and (iv) commodity derivatives except agricultural commodities.

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1. SEBI Circular Ref. CIR/IMD/DF1/48/2016 dated 21 April, 20162. Information compiled by BSE through market participant for the period 1 April 2016 to 10 March 20173. RBI circular Ref 2016-17/167 DBR.No.BP.BC.43/21.01.003/2016-17 dated 1 December 2016

4. Information compiled from the SEBI bulletin Vol. 15 Number 1, January 2017 and SEBI bulletin Vol. 14 Number 1, January 2016

5. Data compiled from the BSE website upto 31 December 2016© 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.

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2. What are the incentives and value proposition of IFSCs in India?

The IFSC units along with their participants, which includes SME exchange, investors, clients and brokers and other service providers, are expected to benefit from tax incentives offered by the government. Under the Finance Act, 2016, IFSC units and their participants will not be subject to service tax, securities transaction tax, commodities transaction tax and dividend distribution tax by the Government of India. Under an order issued by the Revenue Department, Sachivalaya, Gandhinagar dated 16 May 2016, the Government of Gujarat has remitted the stamp duty with respect to instruments executed for share broking transactions by share brokers who establish their registered office in GIFT City. Furthermore, GIFT city project will enjoy an income tax holiday for a period of 10 years, which consists of a 100 per cent deduction of income for the calculation of income tax for the first five years followed by a 50 per cent deduction of income for the calculation of income tax for the subsequent five years. A reduced Minimum Alternate Tax (MAT) will also be available.

The value proposition for setting-up an international exchange are:

• Diversified product portfolio across all major asset classes - cash equity, equity derivatives, debt instruments, currency derivatives, interest rate derivatives, and commodity derivatives

• Competitive pricing and benefits compared to leading international exchanges and clearing corporations

• Deep and liquid market- access to all derivative products on a single platform

• Transparency and round the clock access to comprehensive price and transaction data, available real time to enable market participants to react to global developments rapidly

• State of the art exchange trading platform (Eurex T7)- World’s fastest exchange with response time of 6 microseconds. Algo and Colocation services available from the onset

• Strong and independent financial safeguards- independent surveillance function to ensure compliance. Centralised clearing and settlement through International Clearing Corporation (ICC).

All these will be complemented with a well-diversified portfolio of financial services and products to compete internationally.

3. What is the role of India INX and India ICC?

The BSE in January, 2017 set up and inaugurated the India International Exchange (IFSC) Limited (India INX) and India International Clearing Corporation (IFSC) Limited (India ICC) as wholly owned subsidiaries in GIFT city, that has received recognition from SEBI. Both were inaugurated by Hon’ble Prime Minister on 9 January 2017 and commenced trading on 16 January 2017. The products currently offered on India INX are (i) equity and index derivatives, including single stock futures and index futures, (ii) currency derivatives and (iii) commodity derivatives excluding agricultural commodities. We also propose to introduce interest rate futures and fixed income securities issued by eligible issuers as defined under SEBI guidelines on IFSCs and provide an electronic trading platform that facilitates the following:

• Indian companies to raise capital in foreign currency by issuing foreign currency denominated bonds and providing a trading platform to trade in such bonds

• Indian start-ups to raise equity from foreign investors by getting listed on the international exchange and

• Companies incorporated outside India to raise money by the issuance and listing of their equity shares on the international exchange.

4. Listing on the exchange is generally a very cumbersome and time consuming process. Further, we generally see stocks of smaller companies listed on stock exchanges lacking liquidity. How does SME exchange address these issues?

The SEBI has modified the listing regulations6 such that it is much easier and quicker for SMEs to list on SME Board as compared to other companies listing on the main Board. Some of the key aspects of the listing regulations applicable to SMEs, that are helpful in this context are as follows:

• The SMEs with a minimum post issue paid up capital of INR3 crore and a maximum of INR25 crore can list on SME exchange as compared to a requirement of minimum paid up capital of INR10 crore to list on the main board. Further, the number of allottees in a SME IPO could be as few as 50 as compared to a minimum of 1,000 applicable to others. This opens up the listing route and access to public funds to even those SMEs that are smaller in size and until recently, had to look to private equity for their growth capital.

• The offer document for equity issues of SMEs are scrutinised and commented upon by the exchanges and there is no requirement for SEBI to issue any comments on these. In our experience, we have seen SMEs being able to list within three to four months of signing the mandate as compared to 8 to 10 months for other companies.

• The issue of liquidity of stocks has also been addressed by the regulatory requirement of the merchant banker to the issue to mandatorily undertake market making through a stock broker who is registered as market maker with SME exchange. The merchant banker shall be responsible for market

6. SEBI circular No. CIR/MRD/DSA/11/2010 dated 18 May 2010


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making by being present during a minimum of 75 per cent of the time during a day’s trading session by providing two way quotes. The market making mechanism needs to be provided for each scrip upto a minimum period of three years.

• The SME companies are required to put out abridged financial information on a half yearly basis as compared to more comprehensive quarterly submissions required to be made by other companies.

As they say, the proof of the pudding is in the eating. The country has witnessed over 200 companies list on SME platform as on date with over 160 of them listing on BSE platform itself with a capital raising of INR1,278 crore and total market capitalisation (including companies moved to the main board) in excess of INR14,000 crore (USD2 billion approximately)7. We have witnessed listings from companies in various sectors, including agro-based industry, manufacturing, textiles, Information Technology (IT), construction, etc. A number of merchant bankers are also optimistic about the initiative. Further, our SME exchange has witnessed 21 companies migrating to BSE main board from the SME board which is a clear indicator that the capital raising for these SMEs has achieved its desired objective of growth.

While there has been significant progress so far, there is immense potential with a large number of SMEs out there who are potential entities desirous of listing their securities.

There is a need to educate SMEs on the benefits of listing so that more such entities come forward and utilise the platform for collective benefit. The BSE SME exchange continues to conduct several seminars and educational programmes across the country for aspiring SMEs on the benefits of listing and the preparations required for listing on the SME platform. The platform also provides an opportunity to the exchange to engage SMEs and for SMEs to participate in various exchange run programmes relating to capacity building, knowledge sharing, etc. At BSE SME exchange, we have in the pipeline seminars for specific sectors such as auto ancillaries, infrastructure, pharmaceuticals, manufacturing, agro based industries, suppliers to original equipment manufacturers, etc. We are also planning to take the cluster approach for development of SME segment.

5. How does the international exchange set up in GIFT city compare with international exchanges globally?

Most of the International Financial Centres (IFCs) e.g. IFCs in Singapore and Dubai have unified regulators. The IFCs are treated as foreign territory and people who wish to do business in IFCs do not like to approach multiple regulators due to different compliance requirements prescribed by each regulator. There is a need for a unified regulator for IFCs in India as well.

The international exchange in GIFT city India has various advantages as

compared to Dubai and Singapore IFCs. Some of them are:

• Low cost of operations due to lower rentals for office space

• Availability of trained manpower at a lower cost

• Various tax waivers as well as subsidies extended by the central and state governments

• There is no compulsion on minimum amount to be spent annually. In Singapore entities established have to spend at least two hundred thousand Singapore dollars annually.

6. What are the key reporting (ongoing) requirements for companies that seek to raise large debt or equity through exchanges?

For ongoing compliance/reporting requirements SEBI has issued regulations called Listing Obligations and Disclosure Requirements, 2015 (LODR) for equity and debt issuers. BSE has done series of seminars and awareness programmes along with the Institute of Company Secretaries of India (ICSI) for enabling companies to do seamless filings. For fresh raising of capital both equity and debt disclosure requirements are comprehensive and have minor modifications by the regulator in past three years. This has also given stability and ease for companies to raise fresh capital. On the contrary, SEBI has further reduced the time cycle to list on stock exchanges for equity issuance from 12 days to 6 days after issue closure.

7. Information taken from SME platform of BSE (www.bseme.com) and NSE (www.NSEIndia.com) upto 31 March 2017

The views and opinions expressed herein are those of the interviewee and do not necessarily represent the views of KPMG in India.


Corporate Social Responsibility


• An overview of the requirements of the Companies Act, 2013 (2013 Act) in relation to the Corporate Social Responsibility (CSR).


The government introduced mandatory CSR requirements in the 2013 Act. The 2013 Act mandates companies to spend on social and environmental welfare, making India perhaps one of the very few countries in the world to have such a requirement embedded in a corporate law. The CSR provision became effective from 1 April 2014. Significant amendments have been made to CSR provisions through issuance of various notifications, clarifications (including Frequently Asked Questions (FAQs)), Guidance Note on accounting for expenditure on CSR (GN on CSR), etc.

The article summarises key requirements relating to CSR provisions issued so far.

Applicability

The 2013 Act mandates that every company (including its holding or subsidiary, as well as foreign companies having project office/branch in India) to undertake CSR activities if they meet certain thresholds. A company would fall within the ambit of CSR provisions if any of the following thresholds are met:

• Net worth of INR500 crore or more

• Turnover of INR1,000 crore or more

• Net profit of INR5 crore or more

during any financial year1. If a company meets any of the above threshold then it is required to spend two per cent of its average net profits (made during three immediately preceding financial years) as a CSR spend.

While working with the requirements of CSR applicability companies faced various issues. Few of those issues are as follows:

• Applicability to holding or subsidiary companies: One question raised was whether a holding or a subsidiary of a company (which fulfils the criteria for CSR applicability under the 2013 Act) also has to comply with CSR provisions, even if such

holding or subsidiary itself does not fulfil those criteria. The FAQs issued by the MCA clarify that a holding or a subsidiary of a company is not required to comply with CSR provisions unless the holding or subsidiary itself fulfils the CSR criteria.

• Applicability to Section 8 companies under the 2013 Act: The FAQs issued by the MCA clarify that CSR provisions of the 2013 Act apply to ‘every company’ and no specific exemption is given to Section 8 companies. Hence, Section 8 companies are required to follow CSR provisions.

Every company that ceases to be covered under the CSR provisions would not be required to constitute a CSR committee and would not be required to comply with the CSR provisions (Section 135(2)-(5) of the 2013 Act).

Calculation of net profit

As per the GN on CSR net profit means the net profit of a company as per its financial statements prepared in accordance with the applicable provision of the 2013 Act, but would not include the following:

• Any profit arising from any overseas branch or branches of the company, whether operated as a separate company or otherwise

• Any dividend received from other companies in India, which are covered under and complying under the Section 135 of the 2013 Act.

Accordingly, for a CSR contribution to be made in 2016-17, average of the net profits for the immediately preceding three FYs i.e. 2013-14, 2014-15 and 2015-16 would be computed.

Section 198 of the 2013 Act specifies additions/deletions to be made while calculating the net profit of a company (mainly it excludes capital payments/receipts, income tax, set-off of past losses). Additionally, the computation

of net profit for CSR spend calculation would be based on profit before tax.

The GN on CSR explains that net profit in respect of a financial year for which the relevant financial statements were prepared in accordance with the provisions of the Companies Act, 1956 would not be required to be re-calculated in accordance with the 2013 Act. Also in case of a foreign company, net profit would mean net profit of such company as per the statement of profit and loss (prepared in accordance with the prescribed form as per Section 381(1)(a) and Section 198 of the 2013 Act).

CSR committee

Every company required to make a CSR spend should constitute a CSR committee. The CSR committee would comprise three or more directors, out of which at least one director should be an independent director. However, a company which is not required to appoint an independent director, would constitute a CSR committee without an independent director (as per the CSR Rules (Rule 5(1))). A private company with only two directors on its Board of Directors would constitute its CSR committee with those two directors.

In respect of a foreign company, the CSR committee would comprise at least two persons of which one person should be as per the Section 380(1)(d) of the 2013 Act and another person should be nominated by the foreign company.

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1. Any financial year’ means ‘any of the three preceding financial years’ as per MCA circular no. 21/2014 dated 18 June 2014


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The CSR committee would be responsible for the following activities:

a. Formulation and recommendation to the Board of Directors (BOD), a CSR policy indicating the activities to be undertaken by the company as specified in Schedule VII of the 2013 Act

b. Recommendation of the amount of expenditure to be incurred on the activities referred to in clause (a) above, and

c. Monitoring the CSR policy of the company from time to time.

The BOD of the company are required to approve CSR policy after considering the recommendations made by CSR committee and should also ensure that the activities included in the CSR policy are undertaken by the company.

Eligible activities for CSR spend

Schedule VII of the 2013 Act lays down a list of activities which are eligible for the CSR expenditure and can be included by companies in their CSR policies. Following are the key headline activities specified in the Schedule VII of the 2013 Act:

• Eradication of hunger, poverty and malnutrition, promotion of health care including preventive health care and sanitation including contribution to the Swach Bharat Kosh set-up by the central government for the promotion of sanitation and making available safe drinking water

• Promotion of education including special education and employment enhancing vocation skills

• Promotion of gender equality and empowerment of women, setting up homes and hostels for women and orphans, setting up old age homes, day care centres and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups

• Environmental sustainability

• Protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art

• Measures for the benefit of armed forces veterans, war widows and their dependents

• Training to promote rural sports, nationally recognised sports, paralympic sports and olympic sports

• Contribution to the Prime Minister’s National Relief Fund or any other fund set up by the central government or the state governments for socio-economic development and relief and funds for the welfare of the scheduled castes, the scheduled tribes, other backward classes, minorities and women

• Contributions or funds provided to technology incubators located within academic institutions which are approved by the central government

• Rural development projects

• Slum area development.

Companies should give preference to the local area and areas around it where it operates, for spending the amount earmarked for CSR activities.

The MCA has also clarified that CSR activities enumerated in the Schedule VII of the 2013 Act are board-based and are intended to cover a wide range of activities. Thus, these prescribed activities should be interpreted liberally to capture their essence2.

Different forms for undertaking CSR activities

A company can undertake CSR activities in following ways:

• CSR activities itself: A company may undertake the CSR activities itself as per its stated CSR policy either in new projects or ongoing projects.

• CSR activities through a company/trusts/society established under Section 8 of the 2013 Act3: Companies can undertake its CSR activities through:

– Established by the company or with any other company: A company established under Section 8 of the 2013 Act, a registered trust, or a registered society established by the company along with any other company

– Established by the central or state government: Section 8 company, a registered trust, or a registered society established by the central or state government or any entity established under an Act of Parliament or a state legislature

– Established by others: Any other Section 8 company, registered trust, or a registered society.

If a company decides to undertake CSR activities through a company established Section 8 of the 2013 Act, a registered trust or a registered society (which are neither established by it or central/state government) then such Section 8 company, trust or registered society should have an established track record of three years in undertaking similar programmes or projects. Additionally, the company (under the obligation of CSR provisions) would have to specify the projects and programmes to undertaken by such Section 8 company, trust or registered society, including modalities of utilisation of funds of such projects and programmes and the monitoring and reporting mechanism.

• CSR in collaboration with other companies: A company may collaborate with other companies for undertaking projects/programmes or CSR activities in such a manner that CSR committees of respective companies are in a position to report separately on such projects/programmes.

2. Frequently Asked Questions with regard to CSR dated 12 January 2016 issued by the MCA3. MCA notification no. GSR 540(E) dated 23 May 2016


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• Building CSR capacities of personnel and implementing agencies: Companies may build CSR capacities of their own personnel as well as those of their implementing agencies through institutions with established track records of at least three FYs. However, such expenditure including expenditure on administrative overheads should not exceed five per cent of the total CSR expenditure of the company in one FY.

• Contribution to funds specified in the Schedule VII: Companies may also contribute in the funds specified in Schedule VII of the 2013 Act, for example:

– Swach Bharat Kosh set-up by the central government for the promotion of sanitation and making available safe drinking water

– Prime Minister’s National Relief Fund or any other fund set up by the central government or the state governments for socio-economic development and relief and funds for the welfare of the scheduled castes, the scheduled tribes, other backward classes, minorities and women

– Contribution or fund provided to technology incubators located within academic institutions which are approved by the central government.

Ineligible activities for CSR spend

Following activities are not eligible for the CSR spend:

• Normal course of business activities

• Direct/indirect contribution to any political party

• Only for the benefit of the employees and their families

• One-off events

• Regulatory expenses

• Activities undertaken outside India.

Treatment of CSR expenditure in the financial statements

The amount of contribution made towards CSR would generally, be treated as an expense and charged to the statement of profit and loss, unless it give rise to an asset. According to the GN on CSR, an asset would be recognised on the basis of an evaluation of control over the asset and accrual of future economic benefits to the company. Based on the guidance given in GN on CSR, and in our experience, a company may not be able to demonstrate fulfillment of either the control or future economic benefits criteria for the CSR assets.

In case a company spends more than the amount specified in Section 135(1) of the 2013 Act (i.e. more than 2 per cent of its average net profits of three preceding years) on CSR, the excess amount spent cannot be carried forward to the subsequent years and adjusted against the next year’s CSR expenditure.

However, the company’s BOD may carry forward any unspent amount out of the minimum required CSR expenditure to the next financial year. The carried forward amount would be over and above the next year’s CSR allocation equivalent to at least 2 per cent of the average net profit of the company of the immediately preceding three years.

Key tax benefits of CSR expenditure

As per the Finance Act, 2014, expenditure on CSR does not form part of the business expenditure. However, spending on certain activities such as Prime Minister’s National Relief Fund, scientific research, rural development projects, skill development projects, agricultural extension projects, etc. (part of the Schedule VII of the 2013 Act) would be eligible for exemptions under the Income Tax Act, 1961.

Disclosures

A company within the ambit of CSR provisions has to provide following disclosures:

• Financial statements: Disclose the amount of expenditure incurred on CSR by way of a note to the statement of profit and loss.

The GN on CSR requires expenditures on CSR activities to be presented as a separate line item under the term ‘CSR expenditure’ in the statement of profit and loss. Additionally, a note containing the break-up of various heads of expenses relating to the item CSR expenditure should be provided.

If a company has made a provision for unspent CSR amount then it should be presented as per the requirements of the Schedule III to the 2013 Act. The movements in the provision during the year should also be shown separately.

Additionally, a company should also disclose related party transactions e.g. contribution to a trust controlled by the company in relation to CSR expenditure.

• Cash flow statement: Disclose in the notes to cash flow statement the expenditure incurred on CSR provisions.

• BOD’s report: Include the details about the policy developed and implemented by the company on CSR initiatives along with the annual report on CSR undertaken during the year and display the same on the company’s website, if any.

Additional disclosure of the reasons for not spending the amount earmarked for CSR is required, in case the company fails to spend such amount.

A foreign company should also contain an annexure regarding the report on CSR in its balance sheet (filed under Section 381(1)(b)).

The above disclosures are being evaluated by the regulators and thus, companies should make robust disclosures in their financial statements and BOD’s report.


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Requirements prescribed by SEBI

Regulation 34(2)(f) of the Securities and Exchange Board of India (SEBI) (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations) requires mandatory submission of Business Responsibility Report (BRR) for top 500 listed companies based on market capitalisation (calculated as on 31 March of every year) along with the annual report.

The BRR should describe the initiatives taken by the said listed companies from an environmental, social and governance perspective, in the format as specified by SEBI from time to time.

Additionally, the listed companies other than top 500 listed companies and listed companies which have listed their specified securities on SME exchange, may include these BRRs on a voluntary basis in the specified format.

Consider this….

• Companies should formulate the CSR policy and effectively monitor the compliance with the CSR requirements.

• The CSR activities mentioned in Schedule VII of the 2013 Act are broad based and intended to cover a wide range of activities. Many more activities can be covered by the companies.

• The CSR expenditure does not specifically qualify for exemptions under the Income Tax Act, 1961. However, certain activities forming part of the Schedule VII of the 2013 Act are covered under tax exemptions.

• Reasons for not spending the amount set aside for CSR in a financial year also need to be disclosed in the BOD’s report.

• Companies conducting CSR through a Section 8 company, trust or society (established by it) should carefully evaluate if such a company, trust or society would be consolidated in its consolidated financial statements.

• KPMG in India published a survey report in January 2017 titled ‘India’s CSR reporting survey 2016’. This survey covers top 100 listed companies as per capital market as on 31 March 2016. Some of the important findings of the survey are as follows:

– Ninety eight per cent of the companies disclosed details regarding CSR committee in the Directors’ Annual Report

– Forty nine per cent of the companies presented their CSR vision/mission in the Directors’ report

– There has been an increase in the CSR spend (in 2016) by 11 per cent in comparison to 2015.


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Accounting deferred tax assets - carry forward losses


• Highlight factors to be evaluated for recognising deferred tax assets on account of carry forward unused tax losses under Accounting Standards and Ind AS.


When an entity has been incurring losses and has carry forward of unused tax losses, a question arises whether the entity can recognise deferred tax assets pertaining to those losses. In this regard, both Accounting Standards (AS) and Ind AS provide guidance that should be followed by an entity while recognising deferred tax assets when it has past history of losses.

In this article, we aim to highlight the factors that should be assessed while recognising deferred tax assets when an entity has past history of losses.

Guidance under AS 22, Accounting for Income Taxes

Recognition of deferred tax assets could take place in two situations:

• When an entity does not have carry forward of losses under tax laws: Deferred tax assets should be recognised only to the extent there is a reasonable certainty that sufficient future taxable income will be available against which such deferred taxes can be realised.

• When an entity has carry forward of losses under tax laws: An entity has to demonstrate ‘virtual certainty’ for future taxable profits supported by convincing evidence.

What constitutes ‘virtual certainty’ needs a careful consideration on a case to case basis. While determining virtual certainty, one has to assess (while applying judgement) that sufficient future taxable income will be available and that this judgement is based on a convincing evidence. Virtual certainty cannot be based merely on forecasts of performance such as business plans. Virtual certainty refers to the extent of certainty, which, for all practical purposes, can be considered certain.

To be convincing, the evidence should be available at the reporting date in a concrete form, for example, a profitable binding export order, cancellation of which will result in payment of heavy damages by the defaulting party.

Certain factors that an entity with history of past losses should assess are as follows:

Quantum of reversal of deferred tax liabilities in future: AS 22 states that the existence of unabsorbed depreciation or carry forward of losses under tax laws is strong evidence that future taxable income may not be available. Therefore, when an enterprise has a history of recent losses, the enterprise recognises deferred tax assets relating to all timing differences and past losses only to the extent that it has timing differences the reversal of which will result in sufficient income or there is other convincing evidence that sufficient taxable income will be available against which such deferred tax assets can be realised. In such circumstances, the nature of the evidence supporting its recognition is disclosed.

For example, company A incurred a net loss (before tax) aggregating to INR50 crores for the year ended 31 March 2016. Also, the company has unabsorbed depreciation balance as on 31 March 2016 amounts to INR900 crores.

If the company A prepared its business projections which are based on certain strategic steps proposed by it to ensure profitable operations (e.g. further investment to increase capacity, cost saving measures, development of backward integration facilities towards producing certain key input materials), then such projections would not be considered convincing as they are not based on confirmed binding revenue orders, etc.

Subsequent events: If the entity has forward sales contracts then it should assess if it has received any advance then such advance is non-refundable and that the contracts are binding.

Assess profitability post losses phase: When an entity becomes profitable, post a period of tax losses, it may provide indicators that it is expected to have future taxable income, however, such indicators should be based on convincing evidence e.g. committed sales contracts.

Guidance under Ind AS 12, Income Taxes

Under Ind AS, a deferred tax asset would be recognised for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilised (subject to certain exceptions).

It is important to note that the criteria for recognising deferred tax assets arising from the carry forward of unused tax losses and tax credits are the same as the criteria for recognising deferred tax assets arising from deductible temporary differences. However, the existence of unused tax losses is a strong evidence that future taxable profit may not be available. Therefore, if an entity has a history of recent losses, then a deferred tax asset is recognised only to the extent that:

• the entity has sufficient taxable temporary differences; or

• there is convincing evidence that sufficient taxable profit will be available against which the tax losses or tax credits can be utilised.

Ind AS 12 does not include the concept of virtual certainty, however, requires that to the extent that it is not probable that taxable profit will be available against which the unused tax losses or unused tax credits can be utilised, the deferred tax asset should not be recognised.

The term ‘probable’ is not defined in Ind AS 12. Entities would need to develop a working definition of ‘more likely than not’, which is consistent with the definition of ‘probable’ in other standards - e.g. in respect of provisions. However, Ind AS 12 does not preclude a higher threshold from being used. A single definition of ‘probable’ should be developed and applied throughout a group for the purpose of recognising deferred tax assets - e.g. more likely than not, or more than 60 percent likely.

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However, a ‘virtually certain’ threshold, as used in the test for contingent assets should not be used.

Convincing evidence means that future taxable profits will be available - e.g. signed contracts are in place and it is clear that the business can operate at a cost level that will result in taxable profits.

An entity should take into account all factors concerning its expected future profitability, both favourable and unfavourable, when assessing whether a deferred tax asset should be recognised on the basis of the availability of future taxable profits. A deferred tax asset would be recognised if:

• There is a stable earnings history

• There is no evidence to suggest that current earnings levels will not continue into the future

• There is no evidence to suggest that the tax benefits will not be realised for some other reason.

When an entity is assessing the availability of future taxable profits, then it should not include in its assessment any new deductible temporary differences that are expected to originate in future periods.

An entity should also consider whether any unused tax losses arise from identifiable causes that are unlikely to recur; if so, this makes it easier to justify recognition of the resulting deferred tax asset.

An entity should disclose both the amount of the deferred tax asset and the nature of the evidence supporting its recognition when:

• The recoverability of a deferred tax asset depends on future taxable profits in excess of the profits arising

from the reversal of existing taxable differences, and

• The entity has suffered a tax loss in the current or preceding period in a tax jurisdiction, in respect of which a deferred tax asset has been recognised in the financial statements.

Consider this under Ind AS .....

• To the extent carried forward losses and other items can be used to set-off taxable income arising on account of reversal of any deferred tax liabilities in future, deferred tax assets can be realised.

• The provisions of the Income tax Act, 1961 relating to period of carry forward of unabsorbed depreciation and carried forward losses should be taken into account in determining the extent to which deferred tax assets will be realised through reversal of deferred tax liabilities.

• Projections of profit are not in themselves the required convincing evidence of future taxable profits.

• Unused tax credits under Indian GAAP were presented as a receivable in the balance sheet, while under Ind AS they would be presented as part of deferred tax assets.


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Regulatory updates


CBDT issues FAQs on ICDS

BackgroundOn 31 March 2015, the Ministry of Finance (MoF) issued 10 Income Computation and Disclosure Standards (ICDS) operationalising a new framework for computation of taxable income by all assessees in relation to their income under the heads ‘Profit and gains of business or profession’ (PGBP) and ‘Income from other sources’. The ICDS are applicable to the specified assessees from Assessment Year (AY) 2017-18.

However, certain changes have been made to them. They are as follows:

• Revised ICDS issued: On 29 September 2016, the Central Board of Direct Taxes (CBDT) notified revised ICDS and repealed its earlier notification no. 32/2015, dated 31 March 2015. These revised ICDS are applicable to all assessees other than an individual or a Hindu undivided family who is not required to get his/her accounts of the Previous Year (PY) audited in accordance with the provisions of Section 44AB of the Income-tax Act, 1961 (IT Act).

• Revised Tax Audit Report (Form No. 3CD): On 29 September 2016, the CBDT also amended Tax Audit Report in Form No. 3CD in the Income-tax Rules, 1962 (IT Rules) and inserted a new sub-clause in the Form No. 3CD to provide details of adjustments with respect to ICDS and disclosures as per ICDS.

• MAT computation formulae for Ind AS companies: The Finance Bill, 2017 introduced on 1 February 2017 proposed a separate formulae for computation of book profit for the companies that prepare financial statements under Ind AS. According to it, Minimum Alternate Tax (MAT) would be calculated using the profits as per the statement of profit and loss before Other Comprehensive Income (OCI) as per Ind AS as the starting point. The Finance Bill, 2017 proposes certain adjustments to book profits for MAT computation. These proposals should be read together with the existing provisions for computation of MAT under Section 115JB of the

IT Act, in particular the adjustments discussed in Explanation 1 to sub-section 2. The proposed adjustments can be grouped into following two categories:

– Adjustments relating to annual Ind AS financial statements

– Adjustments relating to first-time adoption of Ind AS.

New developmentThe CBDT received a number of queries on various aspects of ICDS. Therefore, on 23 March 2017, CBDT issued clarifications in the form of Frequently Asked Questions (FAQs) on issues relating to the application of ICDS.

Following issues have been dealt in the FAQs:

• Applicability of the principles of ICDS

• Financial instruments

• Revenue recognition

• Treatment of expenditure before commercial production

• Recognition of opening FCTR balance

• Government grants

• Treatment of securities held as stock-in-trade

• Provisions relating to borrowing costs

• Transitional provisions.

Please refer KPMG in India’s First Notes dated 28 March 2017 for an analysis of the responses issued by the CBDT corresponding to the ICDS related issues raised.

(Source: FAQs issued by CBDT dated 23 March 2017)

SEBI revises the regulatory framework for schemes of arrangements by listed entities

BackgroundSEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations) provide the procedure (through a circular dated 30 November 2015) to be followed by listed entities for undertaking schemes of arrangements such as amalgamations, mergers, reconstruction, etc.

The Ministry of Corporate Affairs (MCA) on 7 December 2016 notified certain

sections of the Companies Act, 2013 (2013 Act) such as sections relating to compromises, arrangements, amalgamations (including fast track amalgamations and demergers), reduction of capital and variations of shareholders’ rights. These sections became effective 16 December 2016 and the National Company Law Tribunal (NCLT) assumed jurisdiction of the High Courts as the sanctioning authority for certain sections such as compromises, arrangements, reduction of capital and variations of shareholders’ rights.

In order to align SEBI requirements with the 2013 Act, SEBI in its board meeting held on 17 January 2017 had given an in-principle approval for the revised regulatory framework for the schemes of arrangements. Accordingly, it issued following circulars highlighting following important changes:

• The schemes of arrangement for merger of a wholly owned subsidiary with the parent entity would not be required to be filed with SEBI (under the Listing Regulations). Such schemes would be filed with stock exchanges for the purpose of disclosures (circular issued on 15 February 2017)

• Where under a scheme of arrangement allotment of shares takes place only to a select group of shareholders or shareholders of unlisted companies then the pricing provisions of Chapter VII of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 would be applicable (circular issued on 15 February 2017).

New development • In line with the above two circulars

issued on 15 February 2017, SEBI on 10 March 2017 revised certain obligations in the Listing Regulations (given in circular dated 30 November 2015) in relation to the schemes of arrangements. The new circular issued on 10 March 2017 brings about certain important changes and carries forward many requirements of the SEBI circular dated 30 November 2015.

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• Additionally, on 23 March 2017, SEBI has issued another clarification with respect to the circular issued on 15 February 2017 regarding the scheme of arrangements where allotment of shares takes place only to a select group of shareholders or shareholders of unlisted companies. The 15 February 2017 circular (as explained in the background section above) requires such schemes to follow the pricing provisions of Chapter VII of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (ICDR Regulations). The recent circular on 23 March 2017 clarifies that the ‘relevant date’ for the purpose of computing pricing would be the date of board meeting in which such scheme is approved.

The key changes to the 10 March 2017 circular relate to the following topics:

• Schemes of arrangement involving unlisted entities

• E-voting instead of postal voting

• Lock-in requirements for a scheme for hiving-off of a division from a listed entity to unlisted entity

• Submission of a new report called ‘compliance report’.

Please refer to KPMG in India’s First Notes dated 27 March 2017, which provides an overview of the key changes in the requirements to be followed by the listed entities involving the schemes of arrangements.

(Source: SEBI circular no. CFD/DIL3/CIR/2017/21 dated 10 March 2017 and SEBI circular no. CFD/DIL3/CIR/2017/26 dated 23 March 2017. )

Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Amendment Rules, 2017

The MCA through its notification dated 28 February 2017, has amended the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016. The amendment relates to the definition of ‘company’ for the purpose of these rules. The revised definition includes

subsidiary bank as defined under State Bank of India (Subsidiary Bank) Act, 1959. Additionally it includes definition of corporate action which includes ‘any action taken by the company relating to transfer of shares and all the benefits accruing on such shares namely, bonus shares, split, consolidation, fraction shares, etc. except right issue to the authority.’

Further, it amends the rule relating to manner of transfer of shares which inter-alia provides that where the period of seven years for transfer of unclaimed dividend to the Investor Education Protection Fund falls due during 7 September 2016 to 31 May 2017, the due date of such transfer would be deemed to be 31 May 2017.

The amended rules are applicable from 28 February 2017.

(Source: MCA notification G.S.R. 178(E) dated 28 February 2017)

Companies (Transfer of Pending Proceedings) Amendment Rules, 2017

The MCA through its notification dated 28 February 2017, has amended the Companies (Transfer of Pending Proceedings) Rules, 2016. The amended rules increase the time limit from 60 days to 6 months, for submission of all information (other than information forming part of the records transferred) to admit a petition before National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy Code, 2016.

(Source: MCA notification G.S.R. 175(E) dated 28 February 2017)

Clarification with regard to scope of application of Section 391(2) of the Companies Act, 2013

The MCA through its circular dated 22 February 2017, has clarified that the provisions of Section 391(2) of the Companies Act, 2013 (2013 Act) which relate to closure of place of business by a foreign company, would apply only where the foreign company has issued prospectus or Indian Depositary Receipts

pursuant to provisions of Chapter XXII of the 2013 Act.

(Source: MCA general circular no. 1/2017 dated 22 February 2017)

ICAI has issued the Guidance Note on Audit of Banks (2017 edition)

The Institute of the Chartered Accountants of India (ICAI) has issued Guidance Note on Audit of Banks (2017 edition) (guidance note). The guidance note discusses in great details the various important items in relation to the financial statements of banks, its peculiarities, manner of disclosure in the financial statements, the Reserve Bank of India (RBI) prudential directions thereon, audit procedures, reporting on Long Form Audit Reports, Ghosh and Jilani Committee requirements, special purpose reports and certificates, etc.

The guidance note, inter alia, has been updated for the impact of the master directions and other relevant circulars issued by RBI in 2016, guidance on demonetisation at appropriate places, relevant pronouncements of ICAI having bearing on bank audits.

Additionally, the guidance note contains illustrative formats of engagement letter, auditor’s report, written representation letter, updated bank branch audit programme for the year 2016-17, the text of Master Directions issued by RBI in 2016, the text of master circulars and relevant general circulars issued by RBI.

(Source: Twelfth edition of guidance note issued by ICAI, February 2017)

IFRS 9 impairment – Revolving credit facilities

The International Accounting Standard Board (IASB) in its recent meeting for February 2017 discussed the issue of measuring expected credit losses under IFRS 9, Financial Instruments for revolving credit facilities such as credit cards and determining the period of exposure which presents challenges. The issue was earlier raised by the IFRS Transition Resource Group (ITG) for Impairment of Financial Instruments.


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The IASB provided a summary of relevant requirements of IFRS 9 and observations made by ITG members at their previous meetings. This included the following:

• In determining the period of credit exposure an entity is required to consider all three factors listed in paragraph B5.5.40 of IFRS 9 i.e. the entity considers if and how its credit risk management actions affect the period of exposure

• If an entity chooses to not take credit risk-mitigating actions on some instruments, then this decision affects the expected life of the related financial instrument

• An entity is required to consider the effects of its credit risk management actions to the extent that they mitigate credit risk.

Next stepsThe staff informed IASB of their intention to develop educational material on this topic and other challenging areas in case should the need arise to support IFRS 9 implementation.

(Source: KPMG IFRG Limited’s IFRS Newsletter | IFRS 9 Impairment | Revolving credit facilities dated 1 March 2017)

Exposure draft of IRDAI (Preparation of Financial Statements of Insurers) Regulations, 2017

On 15 March 2017, the Insurance Regulatory and Development Authority of India (IRDAI) based upon the report of the Implementation Group on Indian Accounting Standards (Ind AS), has proposed to replace the existing IRDA (Preparation of Financial Statements and Auditor’s Report of Insurance Companies) Regulations, 2002 with IRDAI (Preparation of Financial Statements of Insurers) Regulations, 2017 which will be effective from 1 April 2018.

These regulations include the following:

• Schedule A (for Life Insurance business), and Schedule B (for General Insurance business, including

health and reinsurance), comprising following parts:

– Part I: General Instructions for Preparation of Financial Statements

– Part II: Accounting Principles for Preparation of Financial Statements

– Part III: Balance Sheet including Statement of Changes in Equity

(Statement of Changes in Equity is an extension of the balance sheet and gives detailed information with regard to the share capital, reserves, etc. It is included as part of the balance sheet)

– Part IV: Statement of Profit and Loss, Revenue (Policyholders) and Profit and Loss (Shareholders) Accounts

– Part V: Other disclosures.

• Segments which need to be reported by the insurers. In addition, insurers are required to provide operating segment information as per Ind AS 108, Operating Segments, wherever applicable.

• Considering the distinct nature of insurance business, as against the requirements of Ind AS 40, Investment Property, the regulations require life companies to revalue investment property at a minimum of every three years.

• The figures in the financial statements are to be rounded off to the nearest rupees in lakh.

• All other disclosures are to be made in compliance to Ind AS and regulatory stipulations.

The exposure draft sought comments and the last date to provide comments is 31 March 2017.

(Source: Exposure draft issued by IRDAI on 15 March 2017)

Disclosure of Specified Bank Notes in Balance Sheet and Auditor’s report

The MCA through its notification dated 30 March 2017 issued

• Amendments to Schedule III to the 2013 Act

• Companies (Audit and Auditors) Amendment Rules, 2017

Amendments to Schedule III: The MCA amended Schedule III of the 2013 Act and requires every company to disclose the details of Specified Bank Notes (SBNs) held and transacted during the period from 8 November 2016 to 30 December 2016 in the following format:

The MCA also clarified that, for the purpose of this disclosure the term ‘Specified Bank Notes’ should have the same meaning as provided in the notification S.O. 3407(E) of the Ministry of Finance, dated 8 November 2016.

Companies (Audit and Auditors) Amendment Rules, 2017: The MCA amended Companies (Audit and Auditors) Rules, and require every auditor to include in its auditor’s report ‘whether the company had provided requisite disclosures in its financial statements as to holdings as well as dealings in SBNs during the period from 8 November, 2016 to 30 December, 2016 and if so, whether these are in accordance with the books of accounts maintained by the company’.

The above notifications are applicable from 30 March 2017.

(Source: MCA notifications GSR 307(E) and GSR 308(E) dated 30 March 2017)


SBNs Other denomina-tion notes

Total

Closing cash in hand as on 08.11.2016

(+) Permitted receipts

(-) Permitted payments

(-) Amount deposited in Banks

Closing cash in hand as on 30.12.2016

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KPMG in India’s second annual KPMG Accounting, Reporting and Compliance Conference (KARCC)The first of the series was held on 7 March 2017 in Delhi, followed by Chennai on 9 March 2017 and third and last one in Mumbai on 27 March 2017. The conference is one of the knowledge sharing platform of KPMG in India, with an aim to provide participants with an industry insights on the recent developments in the accounting, reporting and compliance matters. There were multiple sessions by industry experts, regulators and panel discussions.

The day began with the welcome note addressing the audience and the speakers at the conference provided the insights on the developments in the space of accounting, reporting and regulatory issues in the last one year and share various practical experience on issues relevant to various corporates.

Session I – Regulatory updates - The session provided insights into recent developments in the field of corporate reporting including updates from the Companies Act 2013, SEBI, MCA, and IFRS (new standards)

Session II – The second session was a panel discussion where industry experts provided insights into Ind AS impact on corporate results in India and provided their perspectives regarding requirements under Ind AS. The session was followed by Q&A.

Session III – Goods and Services Tax (GST) The third session provided an understanding of few basic concepts envisaged under the model GST law. Additionally, the speaker provided insights into the impact of GST on certain specific business sectors such as power, manufacturing, etc. and also highlighted key issues for consideration that are expected to be important for corporates while they are preparing for GST implementation.

Session IV – The fourth session was to provide practical perspective to the Ind AS quarterly results including an overview on Ind AS implementation issues. The speaker provided an update relating to overall trends of Ind AS impact, based on results published by BSE 100 companies for the first three quarters of the year 2016-17. Further, the speaker provided an overview of

the key first-time adoption exemption available for the corporates and key Ind AS issues that should be considered by the corporates while implementing Ind AS standards.

Session V – The fifth session was a panel discussion where eminent independent directors from the industry shared their experiences and the role they play to maintain a strong framework of corporate governance in the functioning of a company. They also shared their perspective about the increasing role and responsibility of the independent directors in bringing the accountability and credibility to the board process.

Session VI – The sixth and the last session was to address the new framework of tax computation under the Income Computation and Disclosure Standards (ICDS). The speaker addressed the matters for consideration while implementing ICDS by corporates in India. Additionally, the session provided an overview of the new framework proposed for MAT computation by Ind AS compliant companies.

We launched the following two thought leadership publications at the second annual KARCC

Financial Instruments: Application issues under Ind AS

The publication highlights practical Ind AS implementation issues on accounting for financial instruments for Indian corporates. It sets out the relevant accounting and disclosure principles in a clear and concise manner with the help of flow charts and detailed case studies that illustrate the application of key concepts.

The SEBI ICDR and Listing Regulations Checklists

This publication is a compilation of the requirements of the SEBI ICDR Regulations and the Listing Regulations in relation to an Initial Public Offer (IPO), Further Public Offer (FPO) and rights issue in a checklist format.

This publication includes two components:

• SEBI ICDR Regulations checklist

• SEBI Listing Regulations checklist

These are expected to assist companies by bringing under one roof important provisions of these regulations and are relevant for the IPO as well as post-IPO phase.


These publications are available to download from KPMG.com/in.

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Second annual KARCC events


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.

CBDT issues FAQs on ICDS

28 March 2017

On 2 September 2015, On 31 March 2015, the Ministry of Finance (MoF) issued 10 Income Computation and Disclosure Standards (ICDS) operationalising a new framework for computation of taxable income by all assessees in relation to their income under the

heads ‘Profit and gains of business or profession’ (PGBP) and ‘Income from other sources’. The ICDS are applicable to the specified assessees from Assessment Year (AY) 2017-18.

However, certain changes have been made to them. They are as follows:

On 29 September 2015 revised ICDS issued

Revised Tax Audit Report (Form No. 3CD)

The Finance Bill, 2017 introduces MAT computation formulae for Ind AS companies

New development

The CBDT received a number of queries on various aspects of ICDS. Therefore, on 23 March 2017, CBDT issued clarifications in the form of Frequently Asked Questions (FAQs) on issues relating to the application of ICDS.

This issue of First Notes provides an overview of the responses issued by the CBDT corresponding to the ICDS related issues raised.

Special session on FAQs on ICDS issued by CBDT

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

On 29 September 2016, the Central Board of Direct Taxes (CBDT) notified revised Income Computation and Disclosure Standards (ICDS) operationalising a new framework for computation of taxable income by all assessees in relation to their income under the heads ‘Profit and gains of business or profession’ (PGBP) and ‘Income from other sources’. The ICDS are applicable to the specified assessees from the assessment year 2017-18.

New development

The CBDT received a number of queries on various aspects of ICDS. Therefore, on 23 March 2017, CBDT issued clarifications in the form of Frequently Asked Questions (FAQs) on issues relating to the application of ICDS.

In our recent call, on 30 March 2017, we provided an overview and implications of these clarifications.

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

Illustrative Ind AS consolidated financial statements – First time adoption

This publication is intended to help preparers in the preparation and presentation of consolidated financial statements in accordance with Indian Accounting Standards (Ind AS) and Schedule III to the Companies Act, 2013 by illustrating a format for consolidated financial statements for

a hypothetical multinational company involved in general business. This company (‘Classic Company (India) Limited’) is a first-time adopter of Ind AS and accordingly Ind AS 101, First-time Adoption of Indian Accounting Standards has been applied in making the transition from previous GAAP to Ind AS.

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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The KPMG name and logo are registered trademarks or trademarks of KPMG International.

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Introducing

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