Presented by: Khushroo B. Panthaky Chartered Accountant ......of the Companies Act, 2013 (Revised...

Recent Regulatory Issues Impacting Audit Finalization for Year Ended 31 March 2016

Accounting, Auditing and Important Regulatory Updates

Presented by: Khushroo B. PanthakyChartered Accountant, Bombay

15 June 2016 – Indian Merchants Chambers

© 2016 Walker Chandiok & Co LLP All rights reserved 2

Contents

• Companies Act, 2013• Fraud Reporting• Companies Act, 2013- Other updates• Schedule II• Reporting on Internal Financial Controls• Companies (Auditor’s Report) Order 2016 (CARO 2016)• CSR• SEBI Updates• ICAI Updates• Other Updates• Ind AS

Companies Act, 2013

© Grant Thornton India LLP. All rights reserved.

Companies Act 2013 – Independence

Key changes• Independence requirements under Companies Act 2013 are

stricter than existing independence rules under IESBA Code

• Under the 2013 Act, an auditor is not allowed to render, among other services, “management service” to the company, its holding or subsidiary company

• Term management services has not been defined either in 2013 Act or the Rules.


Companies Act 2013 – Non Audit Services

Key changes

Restriction on services

• severe restrictions on providing non-audit services, directly or indirectly to the company, its holding or subsidiary company include:

‒accounting and book keeping services;

‒ internal audit;

‒design and implementation of any financial information system;

‒actuarial services;

‒ investment advisory services;

‒ investment banking services;

‒rendering of out sourced financial services; and

‒management services.


Companies Act 2013 – Non Audit Services

Restriction on services

• transition period

‒Complete / terminate all services mentioned above on or before 31 March 2015.

‒Not to enter into any new agreement to render above mentioned services on or after 1 April 2014.


Risk based approach

Understand theentity and its internal

control

Perform preliminaryanalytics

Link matters to financial statement risks and assertions

Perform tests of controls

Evaluate risk indicators

Perform inquiries

Perform walkthroughs

Identify controls thatrespond to the risks Yes

No

Perform appropriate substantive procedures

Assess inherent risk

Materialmisstatement is

reasonably possible?

Add

ition

al r

isks

iden

tifie

d du

ring

exec

utio

nIdentify mattersimpacting the

financial statements

Identify risks Evaluate risks Respond to risks


Companies Act 2013 – Accounts-Financial Statements

Key changes

• 31 March to be the mandatory FY end (except for the purpose of aligning the FY with that of holding/subsidiary incorporated outside India, with prior approval of the NCLT)

• consolidation mandatory for all companies including unlisted and private companies having subsidiaries (including associates and joint ventures)

• the 2013 Act prescribes the format (similar to existing revised schedule VI of the Act) for preparation of Consolidated Financial Statement (CFS).

• requirement to show minority interest separately within equity on the balance sheet

• in the CFS, the company would need to give all disclosures relevant for CFS only

Consolidated Financial Statements (CFS)

With the Companies Act, 2013 coming into effect

AGENDA

• Applicability of the CFS standard

• Exemptions provided under the Companies Act, 2013

• Areas of Interpretation

• How professional firms assist in preparation of CFS

Applicability of the CFS Standard

Companies Act, 2013 establishes the requirement for CFS for Indian Companies

• Preparation of CFS is mandatory for all companies, including unlisted and private companies having subsidiaries (including associates and joint ventures)

• Consolidation is done in accordance with the provisions of Schedule III of the Act and the applicable accounting standards (21, 23 and 27)

• Companies preparing CFS under IFRS would now need to prepare the CFS under Indian GAAP and are required to conform to the accounting policies of the parent company

Applicability of the CFS Standard

• Companies that do not have any subsidiary but only has associates and / or joint ventures also need to prepare CFS

• Unlisted companies that have foreign subsidiary (ies) need to prepare CFS

Ministry of Corporate Affairs (MCA) has provided th e below exemptions:-

• Intermediate parent companies need not prepare CFS as long as they are wholly-owned and the immediate parent is in India

How professionals can support in preparation of CFS

• Review consolidation requirements for the group

• Accounting and tax advice on the alignment of group structure

• Review of the financial reporting framework, manage multi GAAP reporting and prepare for India GAAP reporting

• Review of consistency in accounting policies

• Review of the CFS reporting related internal controls within the group

• Training and knowledge transfer

Fraud Reporting


MCA prescribes threshold for fraud reporting

• MCA notified 14 December 2015 as the date of commencement

of provisions of Companies (Amendment) Act, 2015 relating to

reporting of fraud

• MCA issued Companies (Audit and Auditors) Amendment

Rules, 2015

– all frauds to be reported to audit committee/board immediately

� no later than 2 days of auditor's knowledge of the fraud

– fraud involving / expected to involve individually INR 1 crore

or more to be reported to Central Government

– frauds not reported to Central Government: Board report to

disclose specified details

– amended provisions also applicable to cost auditor and

secretarial auditor

Effective date

Rules notified


Guidance Note on Reporting on Fraud under section 143(12) of the Companies Act, 2013 (Revised 2016)

Erstwhile GN modified pursuant to amendment to

section 143(12) of the 2013 Act and Rule 13 of the

Companies (Audit and Auditors) Rules, 2014, which

requires the statutory auditor to report to the Central

Government only for frauds which involve/expected

to involve individually an amount => INR 1 crore

In case of fraud involving lesser than above amount, statutory auditor to report matter to the audit committee/Board of company instead of Central Government.

Guidance Note

Effective date


Companies Act 2013 – Fraud Reporting

Directors' responsibility

directors has taken due care for preventing and detecting

fraud

ID's also to report concerns on suspected

fraud

listing agreement also

make board responsible for fraud related

matters

AC's responsibility

AC is responsible for reviewing findings of internal auditor's on

suspected fraud

reporting the fraud related matters to the

board

Auditorsresponsibility

auditor to report fraud to CG within 60 days

(first 45 days for board or AC to comment)

wide coverage & materiality greater than

INR 1 crore

applicable to secretarial and cost auditors

only specified frauds covered

Companies Act, 2013 - Other updates


Omnibus approval by Audit Committee

• MCA notified 14 December 2015 as the date of commencement of provisions of Companies (Amendment) Act, 2015 relating to omnibus approval for related party transactions (RPTs)

• MCA issued Companies (Meeting of Board and its Powers) Second Amendment Rules, 2015 to permit omnibus approval for RPTs subject to prescribed conditions including:

‒ audit committee to consider certain factors while specifying criteria for omnibus approval

‒ criteria to be approved by board; consideration for approval include:

� repetitiveness of the transaction (in past or in future)

� justification for the need of omnibus approval

‒ omnibus approval to be valid only for a period of 1 financial year

‒ no omnibus approval for selling/disposing of the undertaking of company

Amended rules aligned with the SEBI (Listing Obliga tions and Disclosure Requirements)

Regulations, 2015

Effective date

Rules notified


Companies (Amendment) Bill, 2016 introduced in Lok Sabha

Companies (Amendment) Bill, 2016 (the Bill)

• Finance Minister introduced the Bill on 16 March 2016 in Lok Sabha

• On 1 February 2016 MCA issued report of Companies Law Committee

(CLC) proposing several changes to the 2013 Act

• Recommendations would result in changes in 78 sections and more than

100 changes in the 2013 Act; proposed 50 amendments in rules

• Report aims at further improving ease of doing business and proposes to

– address transitional-cum-implementation challenges

– removal of inconsistencies between the 2013 Act and Accounting

Standards/SEBI requirements

– rectifying omissions and inconsistencies in the Act

• The Bill proposes amendments based on comments received fromstakeholders, ministries and recommendations of the CLC Report



Key Amendments Proposed

• Definition of subsidiary company and associate company to beamended

− term 'total share capital' to be replaced by 'total voting power' fordetermining holding subsidiary relationship

− significant influence means control of at least 20 percent of totalvoting power or control of or participation in taking businessdecisions under an agreement

• Removal of requirement for annual ratification of appointment orcontinuance of auditor

• Re-opening of financial statements restricted to eight years

• Removing restriction on layers of subsidiaries and investmentcompanies




• Simplification of the private placement process by doing away withseparate offer letter

• Removing provisions relating to forward dealing and insider tradingfrom the existing company law

• Replacing central government approval with special resolutionapproval of shareholders in case managerial remuneration crosses theprescribed thresholds

• Introduction of test of material for pecuniary interest for testingindependence of independent directors




• Companies may advance loan to any other person in whom director isinterested subject to prior approval by special resolution

• Align prescription for companies to have Audit Committee andNomination and Remuneration Committee with that of IndependentDirectors

• Exempting certain class of foreign companies from registering andcompliance regime under the Act

• Process of incorporation to be made easier for companies andunrestricted objects clauses to be permitted in the Memorandum ofAssociation




• The requirement of deposit of INR one lac is proposed to bedone away with in cases of independent directors and directorsnominated by Nomination and Remuneration committee

• Disclosure in prospectus to be aligned with SEBI regulations(omitting prescription in 2013 Act and allowing theseprescriptions to be made by SEBI)

• Central Government to prescribe abridged form of annualreturn for One Person Company and small company


Relaxation in audit limits under the 2013 Act - Eligibility

Earlier provision

• As per section 141 (3) (g) of the 2013 Act, “a person who is in full time

employment elsewhere or a person or a partner of a firm holding

appointment as its auditor, if such persons or partner is at the date of such

appointment or reappointment holding appointment as auditor of more than

twenty companies” shall not be eligible for appointment as an auditor

of a company . 20 companies included all companies without any

exemption

MCA notification

• MCA has excluded one person companies, dormant companies, small

companies and private companies having a paid up share capital less than

₹100 crores from the audit limit of 20 companies as specified under section

141(3)(g) of the 2013 Act.


Other Updates - At glance

- MCA issued Companies (Share Capital and Debentures) Third

Amendment Rules, 2015 additionally permitting certain classes of

companies to issue secured debentures for a period upto 30 years

- companies permitted by a Ministry or Department of the Central

Government or by RBI or by the National Housing Bank or by any

other statutory authority to issue debentures for a period exceeding

10 years

Large number of companies can now issue secured deb entures for term exceeding 10 years

Schedule II


Companies Act 2013 – Schedule II

• Useful life of an asset and residual value shall not be different from that indicated in Schedule II – Part C

• In case an entity choses a useful life or residual value different from Schedule II, it shall disclose the justification of the same

•The carrying amount of the asset on the date this Schedule becoming effective:

a) shall be depreciated over the remaining useful life of the asset as per this Schedule;

b) after retaining the residual value, shall be recognised in the opening balance of retained earnings where the remaining useful life of an asset is nil.


Guidance Note (GN) on Accounting for Depreciation in Companies

• The GN provides guidance on significant issues arising from practical

application of Schedule II like:

• Extra shift depreciation applicable where useful life estimated on single shift

basis at the beginning of the year

- Company, which estimated the useful life of an asset on single shift basis

at the beginning of the year, used the asset on double /triple shifts during

the year, the depreciation expense to be increased by 50% /100%

- multiple shift depreciation - estimation of residual value

- revaluation of assets - depreciation on low value items

- component approach - pro rata depreciation etc.

Component approach already permitted in paragraph 8.3 of the current AS 10. Under AS 10, there seems to be a choice in this matter; however, Schedule II requires mandatory application of component accounting


Guidance Note (GN) on Accounting for Depreciation in Companies

– Component approach made mandatory under Schedule II –

effective from 1 April 2015

– Companies will need to identify and depreciate significant

components with different useful lives

– Unlike Schedule XIV, no requirement to provide depreciation at the

rate of 100% any for low value items in Schedule II

– a company may have a policy to fully depreciate the assets upto

certain threshold limits considering materiality aspect in the year of

acquisition

• GN applicable for accounting periods beginning on or after 1 April

2016; earlier application is encouraged

Reporting on Internal Financial Control


• Reporting on internal financial controls (IFC) for financial years beginning on or after 1

April 2014 by directors

Internal financial controls defined as the policies and procedures adopted by the company for ensuring the orderly and efficient conduct of its business, including adherence to company’s policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information

• The reporting on IFC would apply to audits of standalone and consolidated annual financial

statements . Auditor’s reporting on the adequacy of internal financial control system and its

operating effectiveness mandatory from financial years beginning on or after 1 April 2015

Listed companies Other companies

Reporting requirement for directors

• That ‘internal financial controls’ were adequate and effective

- Special comment on internal financial controls with reference to the financial statements

Reporting requirement for directors• Report on adequacy of internal financial

controls with reference to the financial statements only


ICAI issued guidance note on Audit of Internal Fina ncial Controls Over Financial

Reporting in September 2015


Companies Act 2013 – Board Responsibilities

Section 134 Board of Directors

• State in Director's responsibility statement that directors had laid down "internal financial controls " to be followed by the Company and that such internal financial controls were adequate and operating effectively

• Applicable only in case of listed entity

Companies (Accounts) Rules, 2014

Board of Directors

• Include the details in respect of adequacy of "internal financial controls " with reference to the financial statements in Board's report

• Applicable to all companies


Companies Act 2013 – Audit Committee and Independent Director's role

Section 177 Audit Committee

• Evaluation of internal financial controls and risk management systems;• Call for and discuss auditor's comments on internal control systems and their audit

observations and discuss those with management, if considered necessary.

Schedule IV Independent Directors

• Satisfy themselves on the integrity of financial information and that financialcontrols and the systems of risk management are robust and defensible


Companies Act 2013 – Auditor's Responsibilities

Section 143 Auditor

• Report on whether the company has adequate internal financial controls system and operating effectiveness of such controls

• Applicable to all companies

CARO, 2015 Auditor

• Report if there are adequate internal control procedures for purchase of inventory and fixed assets and for sale of goods and services


Companies Act 2013 – IFC Applicability

Requirements Listed companies Specific class of companies*

Other companies

Director's Responsibility Statement (Section 134)

aaaa

The Companies (Accounts)Rules, 2014 (Rule 8)

aaaa aaaa

Audit Committee (Section 177) aaaa aaaa

Independent Directors (Schedule IV)

aaaa aaaa

Auditor Report (Section 143) aaaa aaaa aaaa

* Specified class of companies:• public companies with a paid up capital of Rs.10 Crores or more;• public companies having turnover of Rs.100 Crores or more;• public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding

Rs.50 Crores or more.

The above thresholds as existing on the date of last audited Financial Statements shall be taken into account.

© 2015 Grant Thornton India LLP. All rights reserved.


Key highlights of the guidance note

36

Internal financial controls framework:Permits the Company to establish its own internal control over financial reporting criteria using the guidance in other auditing standards in addition to permitting the use of COSO framework, Turnbull Report, CoCo framework.

Materiality:Based on quantitative and qualitative risk factors

Approach:Top down approach - Identify risk of material misstatements due to error or fraud at financial statements level (including disclosures). Consider the auditor's understanding of the overall risks to internal financial controls over financial reporting while identifying the risk of material misstatement.

© 2015 Grant Thornton India LLP. All rights reserved.37

Extent of testing:Provides number of samples to test the design and operating effectiveness of internal financial controls

Audit opinion:Auditor may choose to issue combined report (i.e., one report containing both an opinion on the financial statements and an opinion on internal financial controls over financial reporting) or separate reports on those.


Key highlights of the guidance note



Key Definitions

38

DeficiencyDeficiency in internal financial control over financial reporting exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis.

Significant deficiency: A significant deficiency is a deficiency, or a combination of deficiencies, in internal financial control over financial reporting that is important enough to merit attention of those charged with governance since there is a reasonable possibility that a misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis.

Material weakness:A ‘material weakness’ is a deficiency, or a combination of deficiencies, in internal financial control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis.


Methodology for IFCOFR

39

Key strategic considerations Key operation considera tionPLAN EXECUTE REPORT

Materiality

Significant locations/accounts

Project plan and timelines

Entity-Level Controls

Relevant Processes

Process Risks

Control Design

Control Effectiveness

Control ImprovementsInternal ControlReport

Elements

StepsPreliminary assessment

Assess Current State and Identify

Relevant Processes

Document Design and

Evaluate Critical

Processes and Controls

Design Solutions for

Control Gaps

Implement Solutions for Control Gaps

Report

IT Controls

Project Management

Knowledge Sharing

CommunicationContinuous Improvement- moving

towards control rationalisation

IT Organisation and structure

IT Entity-Level Control Evaluations

IT Process Level Control Evaluations

External auditors engagement at each stage


Approach on IFCOFR

40

Ste

ps ScopingCurrent State Analysis – “AS IS” processes

Conduct gap analysis

Design and validate ‘ To

be’ processes1 2 3 4

Key

Act

iviti

esD

eliv

erab

les

• Identify financial reporting elements, critical processes, supporting systems and locations

• Account level materiality and chart of accounts analysis

• Confirm the methodology for the engagement

• Prepare a detailed project plan

• Identify process owners

• Devise communication and reporting protocols

• Understand the ‘as-is’ process and sub-processes by interviewing key operating personnel

• Review entity level controls

• Conduct process / system walk-through including all the process steps where finance has an interface.

• Review ITGC Controls on the accounting systems being used

• Map risk factors and dependencies

• Identify ‘gaps’ and ‘what can go wrong’ in existing processes

• Identify control points with improvement opportunities

• Identify anti-fraud controls w.r.t. segregation of duties, safeguarding and authorization controls

• Suggest remedial action for gaps identified , in line with leading practices, and to ensure compliance

• Prepare ‘To-be’ process maps

• Update the risk control matrix and obtain buy-in from the process owners

• Develop and institutionalize a frame-work to make a continuous assessment on internal controls

• Detailed project plan • ‘As-is’ process documentation

• Gap Analysis Report • ‘To-be’ process maps • Risk control matrix • Control Dashboard for

the Leadership Team

Focus on significant risks and controls having an interface with finance function for each in-scope process

Companies (Auditor’s Report) Order 2016 (CARO 2016)



• Supersedes CARO 2015 w.e.f. FY commencing on or after 1 April 2015• Exemption to private limited company, not being a subsidiary or holding

company of a public company satisfying all the following conditions:• paid up capital and reserves and surplus =< INR 1 crore• total borrowings =< INR 1 crore • total revenue =< INR 10 crores

• Private company which is a parent/subsidiary of a public company not exempted

Applicability

CARO 2016 not applicable to Consolidated financial statements – A welcome relief!



• Banking company

• Insurance company

• Company licensed to operate under section 8 of the Act 2013

• Small Company as defined under the Act 2013

Exclusions

CARO 2016 is now compatible with The Companies Act ,2013!!!


Companies (Auditor’s Report) Order 2016

• Reporting on internal control system- purchase of FA/inventory, sale of goods/services.

• Whether amount has been transferred to Investor Education and Protection Fund.

• Reporting on accumulated losses and cash losses.

• Reporting on procedures of physical verification for inventory

• Reporting on maintenance of records of Inventories

Matters Omitted in CARO 2016 as compared to CARO 2015



• Clause on reporting whether company has granted any loans, secured or unsecured to companies, firms or other parties • LLPs also included• additional reporting whether terms and conditions in

respect thereof are not prejudicial to the company’s interest and whether schedule of repayment/payment is stipulated

• reporting of amounts overdue for > 90 days instead of monetary limit

• Additional reporting on whether moneys raised by way of IPO/ further public offer (including debt instruments) have been applied for the purposes for which those are raised. If not, the details thereof

• Reporting on compliance with Section 185 and 186 of The Companies Act, 2013

New Clauses



• Reporting on managerial remuneration and compliance with Section 197 of The Act

• Reporting on non cash transaction with the directors or persons connected with him as per Section 192 of The Act

• Requirement for registration of The Company under Section 45 IA of the Reserve Bank of India Act

• Reporting on title deeds of the immovable properties in the name of the company

New Clauses


CARO 2015 Vs. CARO 2016-Modifications

CARO 2015 CARO 2016 Change

Applicability

-a private limited company with apaid up capital and reserves not more than rupees fifty lakh -Loan outstanding not exceeding rupees twenty five lakh from any bank or financial institution

-Turnover not exceeding rupees five crore

at any point of time during thefinancial year.

Applicability

private limited company, notbeing a subsidiary or holdingcompany of a public company , having-a paid up capital and reserves andsurplus not more than rupees onecrore as on the balance sheet date -total borrowings not exceeding rupees one crore from anybank or financial institution at anypoint of time during the financialyear -total revenue as disclosed in Scheduled IIIto the Companies Act, 2013(including revenue fromdiscontinuing operations) not exceeding rupees ten crore during the financial year as per the financial statement

A Private company notbeing a subsidiary or holding company of a public companyexcluded now from theOrder 2016

-The term ‘reserve ’ hasbeen replaced with‘reserve and surplus’

-The term ‘turnover ’ hasbeen replaced with ‘revenue as disclosed in Scheduled III to theCompanies Act, 2013(including revenue fromDiscontinuing operations)’

-The term ‘loan outstanding’ has been replaced with ‘totalborrowings ’

-All the thresholds wereearlier seen at any pointof time during the financial year . Now, wrt to capital and reserves(and surplus) , it has been changed to as on the balance sheet dateand wrt turnover (revenue) , it has been changed to during the FY.




Inventory

Matters to be included in theauditor's report. -

(a) whether physical verificationof inventory has been conducted atreasonable intervals by themanagement

Inventory

Matters to be included in theauditor's report. -

whether physical verification ofinventory has been conducted atreasonable intervals by the managementand whether any materialdiscrepancies were noticed and if so,whether they have been properlydealt with in the books of account

Reporting on materialdiscrepancies, reportedseparately earlier (pointc) clubbed with this point




Borrowings

Matters to be included in theauditor's report. --if overdue amount is more thanrupees one lakh , whether reasonablesteps have been taken by the companyfor recovery of the principal and interest

Borrowings

Matters to be included in theauditor's report. --if the amount is overdue , state thetotal amount overdue for more thanninety days, and whether reasonablesteps have been taken by the companyfor recovery of the principal andinterest;;

Any overdue amount(exceeding 90 days ) is tobe stated as againstexceeding Rs. 1 lakhearlier (for any period )

Dues/Borrowings

Matters to be included in theauditor's report. –

whether the company hasdefaulted in repayment of dues to afinancial institution or bank ordebenture holders? If yes, the periodand amount of default to be reported

Dues/Borrowings

whether the company hasdefaulted in repayment of loans orborrowing to a financial institution,bank, Government or dues todebenture holders? If yes, the periodand the amount of default to be reported(in case of defaults to banks, financialinstitutions, and Government, lenderwise details to be provided).

The word ‘dues’ has beenreplaced with ‘loans orborrowing’The word ‘government’addedLender-wise details arenow asked to be provided


Companies (Corporate Social Responsibility Policy) Amendment Rules, 2016

• MCA has issued Companies (Corporate Social Responsibility Policy) Amendment Rules, 2016 (‘Amendment Rules’) amending Rule 4(2) of the Companies (Corporate Social Responsibility Policy) Rules, 2014.

• The Amendment Rules, inter alia, provide the following: • Registered trust or a registered society through which CSR activities will be undertaken should be

established by the company either singly or along with any other company;

• Company established under section 8 of the 2013 Act or a registered trust or a registered society, established by the Central Government or State Government or any entity established under an Act of Parliament or a State legislature are now also included in list of entities through which CSR activities can be undertaken.

• If the Board of Directors of a Company decide to undertake its CSR activities through a company established under section 8 of the 2013 Act or a registered trust or a registered society, other than those specified in Rule 4(2), such company or trust or society should have an established track record of three years in undertaking similar programs or projects; and the company has specified the projects or programs to be undertaken, the modalities of utilisation of funds of such projects and programs and the monitoring and reporting mechanism .

• These amendment rules are effective from 23 May 2016.


FAQs on Corporate Social Responsibility under section 135 of the 2013 Act

MCA, through FAQs issued following clarifications on 12 January 2016:

• Holding or subsidiary of a company (which fulfils criteria under section 135(1)) to comply with

section 135(1) only if it also fulfills such criteria

• Section 8 companies not exempted from CSR provisions

• Foreign company's balance sheet filed under section 381(1)(b) to contain annexure regarding report

on CSR

• Contribution in kind cannot be monetized as CSR expenditure

• Excess amount spent on CSR cannot be carried forward to subsequent years

• ‘any financial year ’ referred to under sub-section (1) of section 135 of the Act read with Rule 3(2) of

Companies CSR Rule, 2014, implies ‘any of the three preceding financial years’

• Amount spent towards CSR not to be claimed by the company as business expenditure

• Computation of net profit for section 135 to be as per section 198 i.e. ‘Profit before tax ’

Objective of government behind CSR provisions is not to monitor, but to enable corporates to conduct themselves in socially responsible manner. Monitoring/implementation continues to be the responsibility of BOD/CSR

committee/auditors

A company which does not meet the criteria in the relevant financial year however, meets criteria in any of the preceding 3 FYs, would need to constitute a CSR Committee and comply with provisions of sections 135 (2) to (5)

read with CSR Rules

SEBI Updates


• SEBI has issued circular on ‘Disclosure of the impact of audit qualifications by the listed entities’ under regulation 33 and regulation 52 of SEBI (Listing and Other Disclosure Requirements) Regulations, 2015.

This circular, inter alia, provides following: • For audit reports with unmodified opinion, the listed entity should furnish a declaration to that

effect to the stock exchange(s) while submitting the annual audited financial results;

• For audit reports with modified opinion, a statement showing impact of audit qualifications should be filed with the stock exchanges in a format as specified in Annexure I to the circular.

• The format requires mentioning the following: - figures for key financial items such as turnover, total expenditure, net profit, total assets, total

liabilities etc. before and after adjusting for the audit qualifications; - details of audit qualification/type/frequency etc.

SEBI (Listing and Disclosure Requirements) Regulati ons, 2015


• The management of the listed entity shall have the option to explain its views on the audit qualifications;

• Where the impact of the audit qualification is not quantified by the auditor , the management shall make an estimate . In case the management is unable to make an estimate, it shall provide reasons for the same. In both the scenarios, the auditor shall review and give the comments.

• This circular shall be applicable for all the annual audited standalone/ consolidated financial results, as applicable, submitted by the listed entities for the period ending on or after 31 March 2016.

SEBI (Listing and Disclosure Requirements) Regulati ons, 2015


FAQs on SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

SEBI through additional FAQs issued following clarifications on 29 January 2016:

• As per regulation 23(8) all existing material related party contracts/ arrangements entered into prior to

the date of notification of these regulations, which may continue beyond such date should be placed

for approval in the first General Meeting subsequent to notification of these regulations:

– the listed entity need not take fresh approval in case the entity has already fulfilled the

requirement of the regulations

• Companies having subsidiaries to prepare two sets of Form A and/or Form B, one for standalone

results and another for consolidated results based on the respective audit report

• Mandatory reporting of Business Responsibility Report in Annual Report for 500 listed entities

applicable from 1 April 2016 i.e. FY 2016-17

• Regulation 35 for a listed entity to submit to the stock exchange(s) an Annual Information

Memorandum will become applicable as and when it is specified by SEBI

• All unlisted subsidiaries (whether material or not) should periodically bring to the notice of the BOD

the listed entity, a statement of all significant transactions/arrangements entered into by the unlisted

subsidiary

• A director of a listed entity can be member in maximum ten committees and chairperson of more than

five committees of listed entities and unlisted public limited compani es put together


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

• SEBI has issued SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations,

2016. These amendment regulations have amended the following regulations:

• Regulation 33 - Financial results

• The key changes, inter alia, include that instead of submission of Form A (for audit report with

unmodified opinion), the listed entity shall submit a declaration to that effect to stock exchange

while publishing the annual audited financial results. Further, instead of submission of Form B (for

audit report with modified opinion), listed entities will be required to submit ‘Statement on impact

of audit qualifications’.

• Regulation 34 - Annual report

• ‘Statement on impact of audit qualifications’ as stipulated in Regulation 33(3)(d) also needs to be

submitted with annual report.

• Regulation 52 - Financial results

• The key changes, inter alia, include that instead of submission of Form A (for audit report with

unmodified opinion), the listed entity shall submit a declaration to that effect to stock exchange

while publishing the annual audited financial results. Further, instead of submission of Form B (for

audit report with modified opinion), listed

• entities will be required to submit ‘Statement on impact of audit qualifications’.


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

• Regulation 53 - Annual report

• ‘Statement on impact of audit qualifications’ as stipulated in Regulation 52(3)(a) also needs to be

submitted with annual report.

• Regulation 95

• Reference of ‘Form B accompanying annual audit report’ replaced by ‘Statement on impact of audit

qualifications accompanying Annual Audit Report’.

• Schedule IV - Disclosures in financial results

• The key changes, inter alia, include that management of the listed entity has the option to explain its

views on the audit qualifications and the same shall be included in the ‘Statement on impact of audit

qualifications’. Further, for audit qualifications where the impact is not quantifiable, the management

should make an estimate and the auditor will review the same and report accordingly. Where the

management is unable to make an estimate, it should provide the reasons and the auditor will review

the same and report accordingly. This will be included in the ‘Statement on impact of audit

qualifications’.

• Schedule VIII - Manner of reviewing Form B accompanying annual audited results has been deleted.

• These amendment regulations shall come into force on 01 April 2016.


SEBI (Issue of Capital and Disclosures Requirements) (Second Amendment) Regulations, 2016

• Dissenting shareholders to be given an exit opportunity by promoters and shareholders having control

over the company as per SEBI regulations (Section 13(8) and 27(2) of the 2013 Act)

– dissenting shareholders mean shareholders who voted against the resolution for change

in objects or variation in terms of a contract, ref erred to in the prospectus of the issuer

• Accordingly, SEBI amended SEBI ICDR 2009 to introduce new chapter VI-A on ‘Conditions and

Manner of Providing exit opportunity to Dissenting Shareholders’ providing for:

- Conditions for exit offer - Eligibility of shareholders for availing the exit offer

- Determination of Exit offer price - Manner of providing exit to dissenting shareholders

etc.

• Promoters/shareholders in control to make exit offer if:

- the public issue has opened after 1 April 2014 and

- offer is dissented by at least 10% of the shareholders and

- the amount to be utilized for the objects for which the prospectus was issued is less than 75% of

the amount raised

• Amended regulation not applicable in case of no identifiable promoters/shareholders in control of listed

issuer

Amended regulations effective from 17 February 2016

• Consequential amendments made to SEBI (Substantial Acquisition of Shares and Takeovers)

(Amendment) Regulations, 2016


SEBI (Issue of Capital and Disclosures Requirements) (Third Amendment) Regulations, 2016

• These amendment regulations, inter alia, provide following:

Definition of wilful defaulter has been included in regulations;

No person who is a wilful defaulter will make a public announcement of an open offer for acquiring shares or enter into any transaction that would attract obligation to make a public announcement of an open offer for acquiring shares.

• These amendment regulations shall come into force on 25 May 2016.


SEBI issued clarification to align financial information disclosure in offer document per SEBI (ICDR) Regulations, 2009 with MCA's roadmap on Ind AS

.

*to be disclosed by making suitable restatement adjustments to the accounting heads from their values as

on the dates of transition following accounting policies consistent with that used at date of transition

Clarification on applicability of Ind AS to disclosures in offer documents under SEBI (ICDR) Regulations, 2009

Filing of offer doc

Latest FY

2nd

latest FY3rd FY 2nd

earliest FY

Earliest FY

Upto 31 Mar'17

IGAAP IGAAP IGAAP IGAAP IGAAP

B/w 1 Apr'17-31 Mar'18

Ind AS Ind AS Ind AS* IGAAP IGAAP

B/w 1 Apr'18-31 Mar'19

Ind AS Ind AS Ind AS IGAAP IGAAP

B/w 1 Apr'19-31 Mar'20

Ind AS Ind AS Ind AS Ind AS IGAAP

On or after 1 Apr'20

Ind AS Ind AS Ind AS Ind AS Ind AS

For

com

pani

es w

here

Ind

AS

app

lies

from

FY

201

6-17

(pha

se I)

Circular provides clarity to companies that are in the process/contemplating a listing on the Indian markets

• Applicable to all companies required to disclose financial information in accordance with Ind AS per MCA’s roadmap & whose offer document is filed with SEBI on/after 01 April 2016

• Disclosure of Interim period to be in line with the accounting policies followed for latest FY

• All five FY may be voluntarily presented using Ind AS

• Issuer company to explain the difference between Ind AS and the previously applicable AS, and impact thereof

• For phase II companies (FY 2017-18), timelines to be applicable with a time lag of 1 year

• Consistent accounting policies to be followed for each FY

Key Takeaways-• Up to 31 Mar'17, latest FS can be as per Indian GAAP, from 1 Apr'17, they should be

as per Ind AS• Companies to determine the feasibility of preparing the five-year Ind AS financial

statements vis-a-vis the information gaps that the hybrid approach may create


SEBI provided following relaxations-

- the CFR for the quarters ending December 2015 & March 2016 and year ending March

2016 may continue to be filed under IFRS

- the relaxation granted does not affect the requirements of the 2013 Act

CFS for year ending March 2016 to be prepared as per IGAAP

• Option to submit CFR• Option to use IFRS for CFR

Earlier requirement (Listing Agreement)Earlier requirement (Listing Agreement)

• Option to submit CFR continues• CFR to be prepared as per Indian GAAP• IFRS results may be submitted additionally (optional)

New Requirement (Listing Regulations)New Requirement (Listing Regulations)

Interim relaxation for submission of consolidated financial results (CFR) under IFRS


• SEBI issued circular providing requirements to be fulfilled by a listed entity and stock

exchange in respect of schemes of arrangement

– Requirement to submit auditor's certificate for compliance with IGAAP continued

� mere disclosure of deviations in accounting treatment in the scheme with the

aforesaid AS shall not be deemed as compliance

– Requirement of valuation report from an independent CA continued

� Additionally, valuation reports to be considered by audit committee

• SEBI also provided eligibility conditions for companies seeking relaxation under rule 19(7)

of the Securities Contracts (Regulation) Rules, 1957

SEBI prescribes requirements for schemes of arrangement

Applicable from 1 December 2015; schemes submitted prior to 1 December 2015

continue to be governed by earlier circulars


SEBI through FAQs issued following clarifications on 20 November 2015:

• Restriction on grant of ESOPs to independent directors under these Regulations and

2013 Act applies only to fresh grants of ESOPs

• grant made prior to commencement of these provisions to remain valid subject to

fulfillment of terms and conditions of relevant ESOP scheme

Un-appropriated inventory of shares not backed by grants but acquired through secondary

acquisition by the trust to be sold on the recognized stock exchange within a period of 5 years

from the date of notification of regulations; SEBI clarifies:

• appropriation towards ESPS/ESOP/SAR/General Employe e Benefits Scheme/

Retirement Benefit Schemes by 27 October 2015 to be considered as compliance with

above provisions

• company may appropriate towards individual employees or sell in the market during

next 4 years so that no un-appropriated inventory remains thereafter

Clarifications on SEBI (Share Based Employee Benefits) Regulations, 2014


SEBI amends formats for financial results

• SEBI (Listing Obligations And Disclosure Requirements) Regulations, 2015 are effective

from 1 December 2015 (Listing regulations)

• SEBI revised formats for listed entities for publishing financial results on 30 November

2015

– Revised formats largely similar to those prescribed under clause 41 of the erstwhile

listing agreement

• Companies adopting Ind AS while publishing financial results

– to include disclosures as per Ind AS 34, Interim Financial Reporting to be included

– to comply with Ind AS 101, First time adoption of Indian Accounting Standards

– Comparatives for quarterly/annual results to be Ind AS compliant

Companies may need to get their Ind AS financial Statements for the year ended 31

March 2016 audited

• Investor complaints to be disclosed to stock exchange separately from the financial

results

• Details of public shareholding and promoter/promoter group shareholding no longer

For interim reporting, Ind AS will be applicable fr om quarter ending 30 June 2016 onwards


SEBI amends formats for financial results

• Formats also to be used by companies adopting Ind AS; key issues include:

– Manufacturing, trading and service companies proposing to follow functional

classification of expenditure in annual profit and loss account to furnish quarterly

financial results in alternative formats

� Functional classification not permitted by Ind AS 1, Presentation of Financial

Statements

– statement of financial results includes 'exceptional items' not defined in Ind AS

– separate disclosure of financial and non-financial assets and liabilities not provided in

the Statement of Assets and Liabilities

– minority interest included under ‘Equity and Liabilities’ as a separate heading;

Schedule III to the 2013 Act requires that minority interests be presented within equity

separately from the equity of the owners of the parent


Penal provisions on non- compliance with Listing Regulations

• Stock exchanges to monitor compliance by listed entities with the provisions of the Listing

Regulations

• Stock exchanges required to adopt:

‒ standard operating procedure for suspensions and revocation of suspension trading

of specified securities

‒ uniform structure for imposition of fine

• Depositories, on receipt of intimation from concerned exchange, to freeze or unfreeze the

entire promoter/promoter group shareholding

• Stock exchanges to disclose on their website action taken against listed entities including

details of amount of fine, period of suspension etc.

ICAI Updates

Standard on Auditing (SA) 700 (Revised)

Forming an Opinion and Reporting on Financial Statements

Introduction

• Earlier known as SA 700 (AAS 28), “ The Auditor’s Report on Financial Statements”

• Deals with auditor’s responsibility to form an opinion on the financial statements (FS)

• Deals with form and content of the auditor’s report issued on General Purpose FS

• Promotes consistency in the auditor’s report which enables global acceptance of the auditor’s report

• Consistency also helps promote user’s understanding and identify unusual circumstances when they occur

• Effective for audits of FS for periods beginning on or after April 1, 2012

Auditor’s report – Auditor’s Responsibility section

• The auditor’s report shall include a section with the heading “Auditor’sResponsibility”

• It shall state that the responsibility of the auditor is to express anopinion on the FS based on the audit

• It shall state that the audit was conducted in accordance with Standardson Auditing issued by the ICAI . It shall also explain that thoseStandards require that the auditor comply with ethical requirements andthat the auditor plan and perform the audit to obtain reasonableassurance about whether the FS are free from material misstatement


• It shall describe an audit by stating that:

a) An audit involves performing procedures to obtain audit evidenceabout the amounts and disclosures in the FS;

b) The procedures selected depend on the auditor’s judgment ,including the assessment of the risks of material misstatement of theFS, whether due to fraud or error

c) In making those risk assessments, the auditor considers internalcontrol relevant to the entity’s preparation of the FS in order todesign audit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on theeffectiveness of the entity’s internal control


d. In circumstances when the auditor also has a responsibility toexpress an opinion on the effectiveness of internal control inconjunction with the audit of the FS, the auditor shall omit thephrase that the auditor’s consideration of internal control is not forthe purpose of expressing an opinion on the effectiveness of internalcontrol; and

e. An audit also includes evaluating the appropriateness of theaccounting policies used and the reasonableness of accountingestimates made by management, as well as the overallpresentation of the FS

Auditor’s opinion

• The auditor’s report shall include a section with the heading “Opinion”

• When expressing an unmodified opinion on FS prepared in accordancewith a fair presentation framework, the auditor’s opinion shall, unlessotherwise required by law or regulation, use one of the following phrases,which are regarded as being equivalent:

a) The FS present fairly , in all material respects, in accordance with[the applicable financial reporting framework]; or

b) The FS give a true and fair view of ------- in accordance with [theapplicable financial reporting framework]

• When expressing an unmodified opinion on FS prepared in accordancewith a compliance framework , the auditor’s opinion shall be that the FSare prepared, in all material respects, in accordance with [the applicablefinancial reporting framework]

Other Reporting Responsibilities – Separate from the Audit Report

• If the auditor addresses other reporting responsibilitiesin the auditor’s report in addition to the responsibilityunder the SAs, these shall be in a separate section inthe auditor’s report and sub-titled “ Report on OtherLegal and Regulatory Requirements,” or otherwise asappropriate to the content of the section

• The “Report on Other Legal and RegulatoryRequirements” shall follow the “Report on the FinancialStatements.”

• The separate section helps clearly distinguish themfrom the auditor’s responsibility under the SAs

Other Requirements on Auditor’s report

• The auditor’s report shall be signed in the personal name withmembership number and the name of the audit firm with registrationnumber

• The auditor’s report shall be dated no earlier than the date on which theauditor has obtained sufficient appropriate audit evidence on which tobase the auditor’s opinion on the FS, including evidence that:

a) All the statements that comprise the FS, including the related notes,have been prepared ; and

b) Those with the recognised authority have asserted that they havetaken responsibility for those FS.

• The auditor’s report shall name specific location, which is ordinarily thecity where the audit report is signed

Standard on Auditing (SA) 705

Modifications to the Opinion in the Independent Auditor’s Report

Introduction

• This SA deals with the auditor’s responsibility to issue an appropriatereport in circumstances when, in forming an opinion in accordance with SA700 (Revised), a modification to the auditor’s opinion is necessary

• This SA establishes three types of modified opinions , namely, aqualified opinion, an adverse opinion, and a disclaimer of opinion. Thedecision on type of modified opinion depends upon:

a) The nature of the matter giving rise to the modification, i.e., whether theFS are materially misstated or, in the case of an inability to obtainsufficient appropriate audit evidence, may be materially misstated;

b) The auditor’s judgment about the pervasiveness of the effects orpossible effects of the matter on the FS

• This SA is effective for audits of FS beginning on or after April 1, 2012

Definitions

• Pervasive – A term used to describe the effects on the FS ofmisstatements or the possible effects on the FS of misstatem ents , ifany, that are undetected due to an inability to obtain sufficientappropriate audit evidence . Pervasive effects on the FS are those that,in the auditor’s judgment:

a) Are not confined to specific elements, accounts or items of the FS;

b) If so confined, represent or could represent a substantial proportionof the FS; or

c) In relation to disclosures , are fundamental to users’ understandingof the FS

• Modified opinion – A qualified opinion, an adverse opinion or adisclaimer of opinion

Types of Modified Opinions

Qualified OpinionThe auditor shall express a qualified opinion when:

a) The auditor, having obtained sufficient appropriate audit evidence,concludes that misstatements, individually or in the aggregate, arematerial, but not pervasive, to the FS; or

b) The auditor even though unable to obtain sufficient appropriate auditevidence concludes that the possible effects on the FS of undetectedmisstatements, if any, could be material but not pervasive

Adverse OpinionThe auditor shall express an adverse opinion when the auditor, havingobtained sufficient appropriate audit evidence, concludes thatmisstatements, individually or in the aggregate, are both , material andpervasive to the Financial Statements

Types of Modified Opinions

Disclaimer of Opinion

• The auditor shall disclaim an opinion when the auditor is unable to obtainsufficient appropriate audit evidence on which to base the opinion, andthe auditor concludes that the possible effects on the FS of undetectedmisstatements, if any, could be both material and pervasive

• The auditor shall disclaim an opinion when, in extremely rarecircumstances involving multiple uncertainties , the auditor concludesthat, notwithstanding having obtained sufficient appropriate audit evidenceregarding each of the individual uncertainties, it is not possible to form anopinion on the FS due to the potential interaction of the uncertaintiesand their possible cumulative effect on the FS

Opinion paragraph in Modified Audit Report

• When the auditor modifies the audit opinion, he shall use the heading“Qualified Opinion”, “Adverse Opinion”, or “Disclaimer of Opinion”, asappropriate, for the opinion paragraph

• When the auditor expresses a qualified opinion due to a materialmisstatement in the FS, the auditor shall state in the opinion paragraph that,except for the effects of the matter(s) described in the Basis for QualifiedOpinion paragraph:

a) The FS present fairly , in all material respects in accordance with theapplicable financial reporting framework when reporting in accordancewith a fair presentation framework; or

b) The FS have been prepared, in all material respects , in accordancewith the applicable financial reporting framework when reporting inaccordance with a compliance framework

Communication with Those Charged With Governance (TCWG)

• When the auditor expects to modify the opinion in the auditor’s report, theauditor shall communicate with TCWG the circumstances that led to theexpected modification and the proposed wording of the modification

• The auditor should give notice to TCWG of the intended modification(s)and the reasons (or circumstances) for the modification(s)

• The auditor should seek the concurrence of TCWG regarding the facts ofthe matter(s) giving rise to the expected modification(s), or to confirmmatters of disagreement with management as such; and

• TCWG to have an opportunity, where appropriate, to provide the auditorwith further information and explanations in respect of the matter(s)giving rise to the expected modification(s)

Summary on Modified Opinions – a snapshot

Nature of the Mattergiving rise to theModification

Auditor’s Judgment about the

Pervasiveness of the Effects; or Possible Effects on the FS

Material but Not Pervasive

Material and Pervasive

FS are materially misstated

Qualified opinion Adverse opinion

Inability to obtain sufficient appropriate audit evidence

Qualified opinion Disclaimer of opinion

Standard on Auditing (SA) 706

Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report

Scope and effective date

• To be applied when the auditor considers it necessary to draw users’attention:

a) to matters presented or disclosed in the FS that are fundamentalto users’ understanding of the FS (defined as 'Emphasis ofMatter Paragraph' ); or;

b) to matters other than those presented or disclosed in the FS thatare relevant to users’ understanding of the audit, the auditor’ sresponsibilities or the auditor’s report (defined as 'OtherMatter Paragraph' )

• Effective for audits of FS for periods beginning on or after April 1, 2012

Requirements – Emphasis of Matter Paragraph

• Obtain sufficient appropriate audit evidence that the matter is notmaterially misstated in the FS

• The auditor shall:

(a) Include it immediately after the Opinion paragraph in the report;

(b) Use the heading “Emphasis of Matter”, or other appropriate heading;

(c) Include in the paragraph a clear reference to the matter beingemphasised and to where relevant disclosures that fully describe thematter can be found in the FS; and

(d) Indicate that the auditor’s opinion is not modified in respect of thematter emphasised.

Requirements – Emphasis of Matter Paragraph (EOM)

• Emphasis Of Matter (EOM) may be necessary in the followingcircumstances:

(a) An uncertainty relating to the future outcome of an exceptionallitigation or regulatory action;

(b) Early application (where permitted) of a new accountingstandard that has a pervasive effect on the FS;

(c) A major catastrophe that has had, or continues to have, asignificant effect on the entity’s financial position

Other relevant aspects

• Communicate with TCWG regarding the expected inclusion and theproposed wording of the paragraph

• EOM does not affect the auditor's opinion and is not a substitute for :

a) The auditor expressing a qualified opinion or an adverse opinion, ordisclaiming an opinion, when required or

b) Disclosures in the FS that the applicable financial reportingframework requires management to make

• In the rare circumstance where the auditor is unable to resign from anengagement due to a limitation on the scope of the audit imposed bymanagement being pervasive, the auditor may include an 'Other Matterparagraph' to explain why it is not possible for the auditor to resign fromthe engagement

POWERS AND DUTIES OF AUDITOR U/S 143 OF COMPANIES ACT, 2013

• Section 143(1): Make enquiries during audit

• Section 143(2): Prepare report to members of company on the accounts and financial statements.

• Section 143(3): Matters to be reported in audit report.(a) Obtain information & explanation to the best of his knowledge,(b) Maintenance of proper books of accounts,(c) Report of accounts of branch office of a company,(d) Balance sheet and P& L dealt are in agreement with books of accounts,(e) Compliance of Accounting Standards,(f ) Observations or comments having adverse effect on functioning of company,(g) Disqualification of any director,(h) Any qualification, reservation or adverse remark on maintenance of accounts.

RELEVANT EXTRACT“The auditor’s report shall also state-(h) Any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith.”

‘Books of Accounts’ include:• Sums of money receipts and expenditure,• Sales and purchases of goods and services,• Assets and liabilities,• Items of cost u/s 148 in the case of a company which belongs to any class

of companies specified.

REPORTING U/S 143(3)(H) OF COMPANIES ACT,2013


ICAI's new/revised Standards on Auditing (SA)

New SA 701, Communicating Key Audit Matters in the Independent Auditor’s Report

Revised SA 700, Forming an Opinion and Reporting on Financial Statements

Revised SA 706, Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report

Revised SA 705, Modifications to the Opinion in the Independent Auditor’s Report

Revised SA 570, Going Concern

New/Revised SAs are effective for audits of financials statements for the periods beginning on or after

1 April 2017



• Key audit matters (KAM)- those matters which have been communicated with those charged with governance, which auditor understands to be of most significance

• Applicable in case of audit report of listed entities and where auditor otherwise decides or where required by law and regulations

• To be categorised under a separate sub heading in the auditor’s report

• KAM include areas involving significant judgements, significant difficulties encountered during the audit, critical accounting estimates

• KAMs are not a substitute for expressing a modified opinion

New SA 701- Salient features



• Revised order of elements in audit report:• the first section of the auditor’s report to include the auditor’s opinion• 'basis of opinion' to be placed after the opinion section

• Audit report to include a statement that the auditor is independent of the entity in accordance with the relevant ethical requirements:• the statement shall refer to the Code of Ethics issued by ICAI

• Management Responsibility section, to include a statement regarding:• its responsibility for assessing the Company’s ability to continue as a

going concern (GC)• whether the use of the GC basis of accounting is appropriate

• Detailed Auditor's responsibility section. Responsibilities include:• to conclude on the appropriateness of management’s use of the GC

basis • statement that auditor communicates with TCWG regarding, inter-alia,

the planned scope and timing of the audit and significant audit findings etc.

• Location of auditor's responsibility- Body of Report/ as Appendix/ on Website

Revised SA 700- Key changes



• Gives relationship between Emphasis of Matter paragraphs (EOM) and KAM in the Auditor’s Report• when proposed SA 701 applies, the use of EOM is not a

substitute for a description of individual KAMs.• EOM/OM cannot be used when the matter has been

determined to be a KAM • Reiterates examples of circumstances from other SAs where

EOM may be given• Explains EOM is not a substitute for reporting in accordance

with Proposed SA 570 (Revised) when a material uncertainty exists relating to events or conditions that may cast significant doubt on an entity’s ability to continue as a GC

• Guidance on placement of EOM/OM where KAM is there• Gives list of SAs containing requirements for EOM/OM




• KAM section not to be included when the auditor disclaims an opinion on the financial statements (FS), unless required by law

Revised SA 705 – Key change

• In situations when a material uncertainty related to going concern exist and for which adequate disclosure have been made in financial statements• include separate titled, “Material Uncertainty Relating to Going Concern"

as against an EOM used earlier• Material uncertainty related to going concern is, by its nature, a KAM

• dealt with in accordance with Proposed SA 570• Where events or conditions are identified that may cast significant doubt on

the entity’s ability to continue as a going concern but, based on the audit evidence obtained, the auditor concludes that no material uncertainty exists• the auditor to evaluate whether, as per the applicable financial reporting

framework, the FS provide adequate disclosures about these events or conditions.


Other updates


• Payment of Bonus (Amendment) Act, 2015 (effective retrospectively

from 1 April 2014)

– Salary or wage ceiling for calculation of bonus increased from INR

3,500 to INR 7,000 per month or minimum wage fixed by appropriate

Government, whichever is higher

– Salary limit for eligibility for payment of bonus increased from INR

10,000 to INR 21,000 per month

Other updates- Payment of Bonus (Amendment) Act, 2015

A welcome step for workers- number of employees enti tled for bonus payments will be

increased


Other updates-Employees' Provident Fund Organisation (EPFO)

Withdrawal of grace period by Employees' Provident Fund

Organisation (EPFO)

• Employers required to pay provident fund contributions and

administrative charges within 15 days of close of every month and had

a grace period of 5 days to remit contribution

− EPFO removed the grace period for depositing dues under

Employees' Provident Funds and Miscellaneous Provisions Act,

1952 and schemes framed thereunder

(effective from February 2016 – contributions for month of January

2016 to be deposited within above timelines)


Amendments relating to disclosure requirements in Schedule III of Companies Act, 2013

- The MCA has issued a notification to expand the disclosures relating to

trade payables . The companies are now required to disclose trade

payables to micro enterprises and small enterprises separately from other

trade payables on the face of the Balance Sheet.

- Further, Company is required to disclose certain additional details

including principal amount and interest due thereon remaining unpaid at the

end of each accounting year, amount of interest paid by the buyer and

amount of interest due and payable for the period of delay in making

payment relating to trade payables to micro enterprises and small

enterprises.

- The notification is effective from 4 September 2015


Other updates - Income Computation and Disclosure Standards

• The Ministry of Finance has issued the Income Computation and Disclosure Standards (ICDS) for computation of taxable income by all assesses following the mercantile system of accounting in relation to their income under the heads ‘Profit and gains of business or profession’ and ‘Income from Other Sources’.

• The ICDS have been notified under Section 145(2) of the Income-tax Act, 1961.These standards are applicable for the assessment year 2016- 2017 (previous year 2015-2016) i.e. applicable immediately with effect from 1 April 2015. ICDS also provides transitional provisions to facilitate first time adoption and consideration of the resultant impact.


Other updates- Key changes to Engagement letter

• Explicit reference to reference to the management’s and auditor’s responsibility in the event of identification of any fraud, in accordance with the provisions of Section 143(12) of the Companies Act, 2013 (“the Act”)

• Requirement to include reporting on internal financial controls in the scope of engagement

• Cash flow statement is a part of financial statements

Ind AS


Ind AS implementation journey so far

MCA notified IND AS implementation

roadmap for companies other than Banks/

Insurance/NBFC on 16 Feb'15

RBI recommended a roadmap for

banks/NBFCs and issued report of working group

on implementation of Ind AS by Banks in Sept-

Oct'15

IRDA in Nov'15 announced insurance sector to

converge with IFRS post the issue of revised IFRS 4, Insurance Contracts, by

the IASB and issued discussion paper on

convergence to Ind AS in Dec'15

MCA issued press release on 18 Jan'16 providing

roadmap for implementation of Ind As

by Banks/ Insurance/NBFC

RBI and IRDA issued roadmap for

implementation of Ind AS for banks and insurers in

Feb/Mar'16

MCA notified Ind AS amendment rules

including roadmap for NBFC and confirming the roadmap for bank

and insurance companies on 30 Mar'16


Companies (Indian Accounting Standards) (Amendment) Rules, 2016

• MCA issued aforesaid amendment rules to amend Companies (Indian Accounting Standards)

Rules, 2015 (Published in the Official Gazette on 30 March 2016)

– Banking/insurance companies to apply Ind AS per roadmap notified by RBI/IRDA

– Roadmap for implementation of Ind AS by Non-Banking Financial Companies

– Omission of Ind AS 115, ‘Revenue from Contracts with Customers’, and insertion of Ind AS

11, ‘Construction contracts’ and Ind AS 18, ‘Revenue’

– Consequential amendments to other Ind AS

The omission of Ind-AS 115 is on expected lines due to implementation issues arising on account of IASB deferring the new revenue recognition standard by a further one year compared to the initial planned go-live date


Implementation of Ind AS by NBFCs

Category Phase I (FY 2018-19) (Comparatives for period ending 31 March 2018)

Phase II (FY 2019-2020) (Comparatives for period ending 31 March 2019)

Listed NBFC

NBFC with net worth =>INR500 crore NBFCs whose equity/ debt securities are listed /in process of listing in India/outside India and having net worth < INR500 crore

Unlisted NBFCs

NBFC with net worth =>INR500 crore NBFCs that are unlisted companies and having a net worth=> INR250 crore but < INR500 crore

GroupCompanies

Applies to holding, subsidiary, joint venture or associate companies of the above companies (other than those already covered under MCA's road map of February 2015 )• If parent NBFC prepares CFS under AS Rules 2006- its subsidiaries, associates

and JV covered under Ind AS Rules 2015 to additionally provide financials as per accounting policy of parent for consolidation until NBFC falls within the purview of the road map above

• If parent company covered by Ind AS rules 2015 has a NBFC subsidiary, associate or JV- such NBFC subsidiary, associate or JV to additionally provide financials as per accounting policy of parent for consolidation until NBFC falls within purview of road map above

OthersNBFCs with a net worth < INR250 crore and not covered in Phase I or II wouldcontinue to comply with the existing accounting standards

• Ind AS would be applicable to both consolidated and individual financial statements• Early adoption seems to be not permitted for NBFCs as per the roadmap


Implementation of Ind AS by Insurers and Banks

• IRDA and RBI issued a roadmap for insurers and banks to follow the Ind AS notified under the

Companies (Indian Accounting Standards) Rules, 2015 (as amended)

• To be in preparedness to submit pro-forma Ind AS financial statements to the IRDA/RBI

• To disclose in the Annual Report, the strategy and progress made for Ind AS

implementation

• Above roadmap applicable to holding, subsidiary, joint venture or associate companies of

banks, notwithstanding the roadmap for companies

Applicable for accounting periods beginning from 1 April 2018 onwards, early adoption NOT

permitted

For Insurers For Banks

From quarter ended 31 Dec'16 onwards

From half-year ended 30 Sept'16 onwards

For Insurers For Banks

From FY 2015-16 until implementation From FY 2016-17 until implementation

- Comparatives for the period ending 31 Mar'18

- Applicable to both Standalone FS and CFS


Implementation roadmap for Ind AS by Companies

Mandatory adoption Phase I (FY 2016 – 17) Phase II (FY 2016 – 17)

Listed companiesAll companies with equity/debt listed or in the process of being listed in/outside India with net worth >= INR 500 crore

Companies with equity/debt listed or in the process of being listed in/outside India (excluding those listed or in the process of being listed on SME exchange)

Unlisted companiesAll companies with net worth >= INR 500 crore

Companies having net worth >= INR250 crore

Group companiesApplicable to holding, subsidiaries, joint ventures, or associates of companies covered above

Any other company can voluntarily adopt Ind AS

• Applicable to CFS as well

• Net worth to be calculated based on the stand-

alone financial statements as on 31 March 2014

or first audited financial statements for

accounting period ending after that date

• Net worth – as per definition of Companies Act,

2013 (2013 Act)

• Once applied (even if voluntarily), Ind AS will

have to be followed irrevocably

• Provision of law (including regulations and

rules) to prevail where Ind AS not in conformity

with law


Companies (Accounting Standards) Amendment Rules, 2016

• MCA issued aforesaid amendment rules to amend AS Rules 2006 (Published in the Official

Gazette on 30 March 2016)

– The Accounting Standard (AS) 2, AS 4, AS 10, AS 13, AS 14, AS 21 and AS 29 as specified

in these Rules to substitute the corresponding AS with the same number as specified in AS

Rules 2006

– AS 6 has been omitted

– As Overview of key changes in AS

AS 2, 'Valuation of inventories'- Aligned with revised AS 10 for spare parts accounting

AS 4, 'Contingencies and Events after the balance sheet date'- Dividend declared after balance sheet to be non-adjusting item

AS 10, 'Property, Plant and Equipment'--Component accounting mandatory (in line with 2013 Act), -Clarity on spare parts accounting

AS 13, 'Accounting for Investments'- Investment property to be accounted for in accordance with cost model as prescribed in AS 10

AS 14, 'Accounting for amalgamations'- Reference to 1956 Act replaced with 2013 Act

AS 21, 'Consolidated Financial Statements'- A company without a subsidiary but having associate / JV to prepare CFS

AS 29, 'Provisions, Contingent Liabilities and Contingent Assets'-Decommissioning liability provision would be on discounted basis


Other updates on Ind AS

Clarifications issued by Ind AS Transition Facilita tion Group (ITFG)

• ITFG has issued ITFG Clarification Bulletin 1

• Bulletin 1 primarily provides clarifications on issues relating to

– Applicability of Companies (Indian Accounting Standards) Rules, 2015 (Rules)

• Any company that meets threshold of net-worth (as specified in the rules) in a particular

financial year (FY) should apply Ind AS from immediately next FY

• A holding, subsidiary, JV or associate company of a 'company' to which the Rules apply (e.g.

phase I companies)- to apply Rules for accounting periods commencing from the period as

applicable to the 'company'

– Accounting for exchange differences arising from translation of long-term foreign currency

monetary items recognised in financial statements for period ending immediately before the

beginning of first Ind AS reporting period

– Functional currency assessment as at the date of transition


Other updates on Ind AS

• MCA notified amendments Schedule III to the 2013 Act for companies whose financial statements are

drawn up in compliance of Companies (Indian Accounting Stand ards) Rules, 2015 . The existing

Schedule III has been divided into two parts:

• (a) Division I - applicable to a company whose financial statements are required to comply with the Companies (Accounting Standards) Rules, 2006; and

• (b) Division II - applicable to a company whose financial statements are drawn up in compliance with Ind AS.

• Applicable to standalone and consolidated financial statements

• The salient features of Division II include provides following formats-

– Balance Sheet (presenting assets and liabilities in the order of liquidity not permitted)

– Statement of profit and loss , presented in two sections-

• Profit/loss for the period

• Other comprehensive Income

- Statement of changes in equity

- Statement of cash flows (to be prepared as per Ind AS)

• The disclosure requirements specified in schedule III are in addition to and not in substitution of the

disclosure requirements specified in the Ind AS

Thank You

Presented by: Khushroo B. Panthaky Chartered Accountant ......of the Companies Act, 2013 (Revised...

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Transcript of Presented by: Khushroo B. Panthaky Chartered Accountant ......of the Companies Act, 2013 (Revised...