voices on reporting - 20 january 2015

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Voices on Reporting

20 January 2015

kpmg.com/in


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© 2015 KPMG, an Indian 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.2

Voices on ReportingWelcome

Series of knowledge sharing calls

Covering current and emerging reporting issues

Look out for our Accounting and Auditing Update,

IFRS Notes and First Notes publications

Scheduled towards the end of each month


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Voices on ReportingYour speakers

Sai Venkateshwaran Partner and Head

Accounting Advisory

Services

KPMG in India

Nirav PatelDirector

KPMG in India


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Voices on ReportingTopics for today

Revised drafts of Income Computation and

Disclosure Standards (ICDS) 2

Exposure draft (ED) on Guidance Note (GN)

on Accounting for Derivative Contracts3

Ind AS implementation roadmap1


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Voices on ReportingInd AS implementation in India:

Story so far

Since the deferral in 2011, major road blocks faced earlier are being addressed and India is once again

gearing up for a successful Ind AS implementation.

• Started in the year 2007, with an intention to converge from April 2011, in line

with India’s commitment at the World Trade Organisation (WTO)

• In 2009, the Securities and Exchange Board of India (SEBI) permitted voluntary

adoption of IFRS by listed entities for consolidated financial statements4

• Roadmap issued by the Ministry of Corporate Affairs (MCA) in early 20101

• The MCA published 35 IFRS-equivalent standards referred to as converged

Indian Accounting Standards (Ind AS) in February 20111; EDs under Ind AS for

the IFRS standards issued post 2011 were issued in December 20142

• Despite the efforts made, IFRS convergence in India was deferred mainly on

account of:– unaddressed ambiguities with respect to impact on taxation

– non-alignment with other regulations such as the Companies Act

– impending issuance of additional critical standards under IFRS

–inadequate time for readiness and implementation by the Indian corporate sector which was attributed tothe delayed issuance of Ind AS and lack of regulatory clarity.

• On 2 January 2015, the MCA issued a press release announcing the revised roadmap for implementation of

Ind AS for entities other than banks, NBFCs and insurance companies.3


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Voices on ReportingInd AS implementation from 2015-16

In April 2014, the ICAI submitted a revised roadmap for implementation of Ind AS in

India to the MCA8

In July 2014, the Finance Minister in his budget speech announced the implementation

of Ind AS mandatorily from Financial Year (FY) 2016-17, with a voluntary option

available from FY 2015-165

Tax issues are being addressed through a separate issuance of Income Computation

and Disclosure Standards (ICDS) on 8 January 20157.

In September 2014, the Accounting Standards Board (ASB) of the Institute of Chartered

Accountants of India (ICAI) has started revisiting the carve-outs that were issued earlierunder Ind AS with an objective to align them with the requirements under IFRS6

Road blocks faced in 2011 has been addressed with the introduction of the Companies

Act, 2013 effective from 1 April 2014 and its alignment with IFRS principles

MCA’s press release on 2 January 2015 provides the revised roadmap for Ind ASimplementation in a phased manner. The details have been discussed on the next

slide3


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Voices on ReportingRevised roadmap

Implementation in a phased manner

Phase I - All listed companies and unlisted

companies with net worth in excess of INR500

crores + related entities - mandatorily from 1

April 2016 and voluntarily from 1 April 2015

Phase II - All listed companies and unlisted

companies with net worth in excess of INR250crores + related entities – mandatorily from 1

April 2017

Banks, NBFCs and insurance companies to

implement at a later date

Convergence expected for both standalone and

consolidated financial statements

Final notification from the government expected soon.

While the

final

notificationis still

awaited, the

revised

roadmap is

not expected

to change

Source: Press release dated 2 January 2015, Ministry of Corporate Affairs


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Voices on ReportingCertain points to consider

Comparatives required

• Unlike the earlier roadmap, no exemption from presentation of comparatives as per Ind AS

Wider coverage of entit ies

• Covers related entities viz. holding, subsidiary, associate and joint venture even though they may notbe covered by the thresholds

Two phased implementation with lower thresholds

• Unified threshsolds have been prescribed based on the net worth and implementation is prescribed intwo phases as against three phases in the earlier roadmap

Clarifications needed

• On reference date for calculation of net worth

• On whether net worth calculation is to be based on standalone financial statements (SFS) orconsolidated financial statements (CFS)

• Lack of clarity on whether Ind AS is to be applied only to CFS or SFS as well.


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Voices on ReportingFirst time implementation:

When and how to start (1/2)

Voluntary implementation

1 Apri l 2014 31 March 2015

30

September

2014

31

December

2014

30 June

2014

30

September

2015

31

December

2015

30 June

2015

31 March 2016

Date of transition

Ind AS opening

balance sheet

For interim reporting, Ind AS may first be

applicable from the quarter ending 30 June 2015

First Ind AS financial statements

Comparative period Reporti ng date

Source: KPMG in India analysis


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Voices on ReportingFirst time implementation:

When and how to start (2/2)

Mandatory implementation

1 Apri l 2015 31 March 2016

30

September

2015

31

December

2015

30 June

2015

30

September

2016

31

December

2016

30 June

2016

31 March 2017

Date of transition

Ind AS opening

balance sheet

For interim reporting, Ind AS may first beapplicable from the quarter ending 30 June

2016

First Ind AS financial statements

Comparative period Reporting date

Mandatory implementation for entities covered in Phase II will have comparatives for the period

ending on 31 March 2017 and annual reporting period ending on 31 March 2018.

Source: KPMG in India analysis


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Voices on ReportingImpact … beyond accounting and

reporting

Efforts for converting opening balance

sheet

Develop new accounting policies and

practices

Increased judgement & estimates

Impact on taxation, along with the newICDS

Accounting, Tax and Repor ting

Identify information and data ‘gaps’ for

implementation

Revised chart of accounts

Changes to IT systems

Extensive disclosures – quantitative and

qualitative

Multi GAAP, including ICDS considerations

Systems and Processes

Training & development

Impact on compensation plans

Managing the first-time implementation

People and Change

Impact on earnings & net worth –

communicating with internal & external

stakeholders

Segment reporting and MIS

Internal management reporting

Impact on contractual terms

Debt covenants

Business


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Revised drafts of ICDS

2

ED on GN on Accounting for Derivative

Contracts3



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Voices on ReportingStages towards adoption of ICDS

1996 October 2012

The CBDT constituted AS Committee to suggest thefollowing:

AS to be notified under the Act

Amendments to the Act

Method to determine book profit for MAT purposes on

transition to Ind AS.

Final report of the Committee

and 14 TAS issued for public

comments

Finance Bill 2014 amended section 145(2)

of the IT Act. TAS applicable from FY 1

April 2015

TAS to be notified separately

December 2010 July 2014 January 2015

• CBDT issued draft of 12 ICDS, after

incorporating suggestions by

stakeholders and providing

transitional provisions for these ICDS

• The draft ICDS are open for

comments and suggestions up to 8

February 2015

The Central Government notified

two accounting standards under

section 145(2) of the Income Tax

Act, 1961 (the IT Act)


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Voices on Reporting Approach for formulation of ICDS

Certain standards were relevant for disclosure purposes only (e.g. AS 17, AS 20)

Act separately contained specific provisions on issues covered by AS (e.g. AS 14)

AS on consolidation were not relevant for tax purposes (AS 21, AS 23, AS 27)

AS on financial instruments are not yet notified; hence not considered (AS 30, AS 31, AS 32).

Committee deliberated on 31 AS issued by the ICAI and not ified

ICDS equivalent to 12 AS

Committee shall issue ICDS on the follow ing topics in the

future

Share-based payment

Revenue recognition by real estate developers

Service concession arrangements

Exploration for and evaluation of mineral resources.


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Voices on ReportingOverview of key revisions made in the

revised draft ICDS (2015)

Transitional provisions proposed in all draft ICDS except for the

revised draft on Securities (2015)

Transitional provisions

Alignment with generally accepted account ing principles

Revenue should be recognised when there is reasonable certaintyof ultimate collection

In the 2012 draft no

transitional provisions were

provided

The 2012 draft did not permit

non-recognition of revenue

due to uncertainty ofcollection in certain cases

Revised drafts of ICDS (2015) allows practical expedient to use

approximate exchange rate between foreign currency and reporting

currency to record foreign exchange transactions

Revised drafts of ICDS (2015) proposes that inventory of a service

provider to be measured at lower of cost or net realisable value as

per general inventory valuation principles.

The 2012 draft did not permit

the use of average rates

The 2012 draft required

inventories of service

provider to be measured at

cost


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Voices on ReportingOverview of key revisions made in the

revised draft ICDS (2015)

ICDS 2012 required capitalisation of the cost of general

borrowings utilised for acquiring a qualifying asset in the ratio that

average cost of qualifying assets bore to the average total assets.

For the purposes of calculating the average it used the amounts

appearing in the balance sheet on the first and the last day of the

previous year

ICDS 2015 amends the formula to cover qualifying assets that did

not exist at the first and the last day of the previous year.

Formula for borrowing cost revised

The 2012 ICDS did not

envisage situations when the

qualifying assets (capital

work in progress) did not

appear in the balance sheeteither on the first day and/or

last day of the previous year

ICDS 2015 proposes that in case of exchange transactions to

acquire tangible fixed assets/intangible asset/security, the actual

cost of such asset would be reocgnised at the value of asset

acquired.

The 2012 draft had various

rules for measurement of

such assets in exchange

transactions including value

of the asset given up

Recognition and init ial measurement requirements modified


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Voices on ReportingOverview of the key revisions made in

the revised draft ICDS (2015)

Spares: ICDS 2015 proposes machinery spares to be charged to

revenue when consumed

When such spares can be used only in connection with an item of

tangible fixed asset and their use is expected to be irregular, then

they should be capitalised

Intangible assets: ICDS 2015 proposes to include exchange

fluctuations as an adjustment to cost of an intangible asset

subsequent to its acquisition.

Other key revisions

The 2012 ICDS required

machinery spares to be

charged to revenue when

such spare is consumed for

the purpose of preserving or

maintaining an existing

tangible fixed asset

Events occurring after the previous year

Prior period expense.

Draft ICDS (2012) not re-issued


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Voices on ReportingNext steps

Final Standards to be

notified

Notify the changes to the

Income Tax Act

Transitional provisions

Internal implantation

guidelines and training

Impact assessment

Developing an

implementation plan

Changes to the information

systems and processes

Trainings

Standard Setters Stakeholders


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Revised drafts of ICDS 2

ED on GN on Account ing for Derivative

Contracts3



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Voices on ReportingED on GN on Accounting for Derivative

Contracts

Background and objective of the GN

Currently there is lack of mandatory guidance on accounting for derivative contracts

The current guidance is primarily governed by AS 11,The Effects of Changes in Foreign

Exchange Rates, AS 1, Disclosure of Accounting Policies, AS 30, Financial Instruments:

Recognition and Measurement, AS 31, Financial Instruments: Presentation and any

prescribed requirements of a regulator

This GN is an interim measure to provide recommendatory guidance

on accounting for derivative contracts and hedging activities and:

─ aims to bring uniformity in the accounting and presentation of

derivative contracts in the financial statements by providing

guidance on their recognition, measurement, presentation and

disclosure

─ is expected to help companies which will not be covered by the

roadmap for convergence with Ind AS with one set of guidance

for accounting for derivatives

─ to the extent possible will allow continued application with

minimal changes for entities that follow AS 30 type guidance.


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Contracts

Scope

Does not cover foreign exchange forward contracts

covered by AS 11

Does not cover derivatives that are covered by

regulations specific to a sector or specified set of entities

Accounting for embedded derivatives not covered

The GN will, however, be applicable to banking, NBFCs

and insurance entities to the extent the guidance

prescribed in this GN is not in conflict with the

regulations prescribed by the concerned regulator

Addresses some aspects of hedging activities, however,

the GN does not purport to provide guidance on all

hedging activities.

This GN also provides guidance on accounting for

assets covered by AS 2, Valuation of Inventories, AS 10,

Accounting for Fixed Assets, AS 13, Accounting for

Investments, etc., which are designated as hedged

items.


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Contracts

Key accounting principles

Key definitions such as derivative, hedged item, hedging

instrument are largely comparable with those used internationally

All derivative contracts should be recognised on the balance sheet

and measured at fair value (FV)

Fair value should represent:

─ the ‘exit price’ i.e. the price that would be paid to transfer a

liability of the price that would be received when transferring an

asset to a knowledgeable, willing counterparty and

─ the effect of credit risk associated with the fulfillment of future

obligations and the availability of the collateral should be

considered while arriving at the FV.

Hedge accounting continues to be optional

If hedge accounting is not chosen, then derivatives should be recognised at FV with changes

in FV to be recognised in profit or loss

Synthetic accounting is not permitted by the GN.


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Contracts

Hedge accounting

The GN recognises three types of hedge accounting i.e. fair

value hedge, cash flow hedge and hedge of a net

investment in a foreign operation

The concepts and application are consistent with the current

international guidance

Application of principles of hedge accounting requires strictdocumentation requirements regarding identification of risk

management objectives, hedged item, effectiveness testing,

etc.

The GN clarifies that permissibility (e.g. by the RBI) of a

product is not adequate to qualify for hedge accounting

To judge hedge effectiveness the GN removes bright line80:125 tests and allows for qualitative assessments

The GN allows basis adjustments for hedges relating to

recognition of non-financial items

No voluntary hedge de-designation is permissible.


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Contracts

Presentation in financial s tatements

The GN lays down principles for presentation of derivative assets and liabilities as current and

non-current e.g.

─ Derivatives that are intended for trading or speculative purposes should be reflected as

current assets and liabilities

─ Derivatives that are hedges of recognised assets or liabilities should be classified as

current or non-current based on the classification of the hedged item

─ Derivatives that are hedges of forecasted transactions and firm commitments should be

classified as current or non-current based on the settlement date/maturity dates of the

derivative contracts

The GN also includes detailed disclosure requirements.

The GN represents significant move forward in the reporting guidance for companies

Expected to bring much needed transparency in the area of derivative and hedge accounting

using such derivative instruments

Companies to gear up and undertake impact assessment.

Potential impact

Commentperiod

ends 21

January2015


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Voices on Reporting

Q&A


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Voices on ReportingSources

1. The Ministry of Corporate Affairs website

2. The ICAI’s website - http://www.icai.org/post.html?post_id=9258 and http://www.icai.org/post.html?post_id=7680

3. Press release dated 2 January 2015, Ministry of Corporate Affairs

4. SEBI circular CIR/CFD/DIL/1/2010 http://www.sebi.gov.in/circulars/2010/cfddilcir01.pdf

5. The Budget Speech of the Finance Minister dated 10 July 2014

6. ICAI exposure drafts on ‘Amendments to Indian Accounting Standards – consideration of carve-outs/ins’7. Draft Income Computation and Disclosure Standards released by the Ministry of Finance on 8 January 2015

8. The ICAI’s announcement dated 9 April 2014.

http://www.icai.org/post.html?post_id=9258http://www.icai.org/post.html?post_id=7680http://www.sebi.gov.in/circulars/2010/cfddilcir01.pdfhttp://www.sebi.gov.in/circulars/2010/cfddilcir01.pdfhttp://www.icai.org/post.html?post_id=7680http://www.icai.org/post.html?post_id=9258


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Voices on ReportingIntroducing IFRS Notes

Issue 2015/01

Government announces roadmap for implementation of Ind AS

On 2 January 2015 the Ministry of Corporate Affairs issued a press

release announcing a revised roadmap for implementation of Indian

Accounting Standards (Ind AS), converged with International

Financial Reporting Standards (IFRS). This roadmap is applicable to

companies other than banking companies, insurance companies and

non-banking finance companies.

In this issue of IFRS Notes, we have provided an overview of therevised roadmap of implementation of Ind AS along with our points of

view.

Issue 2014/02

IFRS Convergence: ICAI issues exposure drafts on financial

instruments and revenue recognit ion

As part of the initiatives towards India’s convergence with IFRS from

2016-17, the Accounting Standards Board of the Institute of

Chartered Accountants of India has recently issued exposure drafts

on Ind AS 109, Financial Instruments (ED on financial instruments)

and Ind AS 115, Revenue from Contracts with Customers (ED on

revenue). In this issue of IFRS Notes, we have provided an overviewof these exposure drafts along with key impact areas.


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© 2015 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMGInternational”), a Swiss entity. All rights reserved.

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Voices on ReportingTopics discussed in AAU and First

Notes

Accounting

and Auditing

update

The Companies Act, 2013

− Increased reporting framework

− Emphasis on investor protection

− Impact on auditors

− Corporate social responsibility: an analysis

− Enhanced responsibility for directors

− The impact on M&A/restructurings

A step closer to reporting on internal financial control: On path of

better governance

Regulatory updates

First Notes

The Ministry of Corporate Affairs had earlier announced a roadmap for

transition to Indian Accounting Standards (Ind AS) from 1 April 2011. To

address lack of clarity of tax implications on adoption of Ind AS by the

companies, the Central Board of Direct Taxes (CBDT) constituted a

committee to harmonise the accounting standards issued by the Institute

of Chartered Accountants of India with the provisions of the Act. In August

2012, the committee, after deliberations issued 14 draft tax accountingstandards. These accounting standards are now termed as Income

Computation and Disclosure Standards (ICDS). Considering the draft

ICDS (2012) by the CBDT had significant differences with generally

accepted accounting principles, the Ministry of Finance reworked on the

standards and on 8 January 2015 issued revised drafts of 12 ICDS

(2015) for public comments. Our First Notes provides an overview of key

revisions made in the revised draft ICDS (2015).


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© 2015 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMGInternational”), a Swiss entity. All rights reserved.

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Voices on ReportingOthers

Coming up next

January 2015

• New Issue of Account ing and Auditing

Update

• First Notes

• Voices on Reporting

• IFRS Notes

Missed an issue of the

Accounting and

Aud it ing Update?

Missed an issue of theFirst Notes?

Download from www.kpmg.com/in


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Thank you

www.kpmg.com/in

The views and opinions expressed herein are those of the presenters to the topics covered in today’s ‘Voices on Reporting’ knowledge sharing call and do not necessarily represent the views

and opinions of KPMG in India. The information contained in the slide pack 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.

The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International Cooperative (“KPMG International”)

© 2015 KPMG an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”) a Swiss

Feedback/queries can be sentto [email protected]

Nirav Patel

Director

KPMG in India

E-mail: [email protected]

Sai Venkateshwaran

Partner and Head, Accounting Advisory

Services,

KPMG in IndiaE-mail: [email protected]

voices on reporting - 20 january 2015

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