accounting and auditing updatea preventive healthcare system rather than the current curative...

Issue no. 11/2016 | Healthcare

Accounting andAuditing UpdateIN THIS EDITION

Ind AS and its impact on the healthcare sector p01

Segment reporting – a new approach in Ind AS p07

Finance Act, 2016 – key impact areas p11

GST: Will it heal the healthcare sector? p15

Conversation with Dr. Om Prakash Manchanda and Mr. Dilip Bidani p17

Conversation with Krishnan Subramanian p21

Internal financial controls p25

Regulatory updates p31

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© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Accounting and Auditing Update - Issue no. 11/2016

This issue of the Accounting and Auditing Update (AAU) focusses on the healthcare sector. Indian Accounting Standards (Ind AS) largely converged with the International Financial Reporting Standards (IFRS) are bringing about a paradigm shift in financial reporting in India. The implementation of Ind AS is likely to impact revenue recognition, accounting of property, plant and equipment, consolidated financial statements (including acquisition of businesses), segment reporting, etc. Our articles aim to summarise each of these areas and their Ind AS requirements with a focus on the healthcare sector.

This AAU also carries two interviews with senior members of two leading companies in this sector: Dr. Om Prakash Manchanda, Whole-time Director and Chief Executive Officer and Mr. Dilip Bidani, Chief Financial Officer, Dr. Lal Pathlabs Limited; Mr. Krishnan Subramanian, Group Chief Financial Officer, HealthCare Global Enterprises Limited. Our

conversations with them explore some of the key accounting, reporting and other topical matters relevant to the sector.

The Finance Act, 2016 has introduced new sections that potentially provide benefits to the healthcare sector. Our article on this area focusses on the various recently introduced sections of the Income Tax Act, 1961 and is intended to help companies undertake an impact assessment and plan for ensuring compliance with these requirements.

On the indirect tax front, the proposed Goods and Services Tax (GST) legislation could bring about significant changes for this sector as it subsumes various indirect taxes into an integrated tax rate. Our article on the impact of GST provides an overview on the likely impact on the healthcare sector.

We also examine some the key considerations and challenges that companies in this sector could face while implementing Internal Financial Controls (as required by the Companies

Act, 2013) and outline a potential approach to manage these challenges.

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

This issue is the last issue in the sector-oriented series of the AAU that focussed each month on a specific sector and its accounting and financial reporting topics. From the next month, we are starting a new series of the Accounting and Auditing Update that will focus on the emerging Ind AS implementation issues that companies are experiencing in India.

Additionally, we are pleased to introduce a new feature in the Accounting and Auditing Update ‘Ask a question’. The new series of the Accounting and Auditing Update will compile these questions and provide possible approaches to address the same.

As always, we would be delighted to receive any kind of feedback/suggestions from you on the topics that we should cover.

Editorial

© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved

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Jamil Khatri Partner and Head Assurance KPMG in India

Sai Venkateshwaran

Partner and Head Accounting Advisory Services KPMG in India


Overview

Accounting and Auditing Update - Issue no. 11/2016

A resilient healthcare sector usually forms the spine of any developed or developing economy. In light of this fact, the traditional Indian healthcare system should be proud of its lineage. It comprises the ancient methods of Ayurveda, Yoga and Naturopathy, Unani, Siddha and Homoeopathy, which are constantly evolving and are viewed as the epitome of India’s rich history and knowledge in the field of medical sciences, by the developed world. Simultaneously, the progressive landscape of this sector includes hospitals, medical devices, medical diagnostic, telemedicine, online/e-commerce options and medical value travel. India’s burgeoning population, enhanced purchasing power, rising cases of Non-Communicable Diseases (NCDs), increasing health awareness and a demanding demography have created a significant demand–supply gap in healthcare — hospitals, doctors and healthcare specialists. The fact is that the sector impacts the Gross Domestic Product (GDP) through generation of employment and foreign currency, enhancement of productivity, and as a driver for innovation and entrepreneurship. In fact, the sector is forecasted to grow from INR684 billion in 2015 to INR 8,237 billion in 2018 with a Compound Annual Growth Rate (CAGR) of 12.1 per cent.01

India accounts for 20 per cent of the global disease burden.01 However, in terms of the global infrastructure share, India has only 6 per cent beds and 8 per cent doctors01, which is far from being sufficient to address the prevailing healthcare needs. In India, both the public and private sectors deliver healthcare services. The government, i.e. the public healthcare system, takes

care of the basic healthcare needs by providing primary healthcare services both in urban and rural centres. On the other hand, the private sector takes the lead in providing secondary healthcare by creating institutions of medical excellence across major cities and in some of the tier-I and tier-II cities.

The essence of Indian healthcare is the availability of a generous pool of skilled healthcare professionals and the inherent low-cost advantage, which collectively makes India a preferred destination for overseas patients. The government has also started to focus on this sector through various initiatives announced in its General Budget for 2016–17, such as the new health protection scheme, National Dialysis Services Programme, setting up of medical stores across the country to provide quality medicines at affordable prices and the launch of Pradhan Mantri Jan Aushadhi Yojana. These initiatives are expected to reduce the disease burden that affects the country, provide impetus for growth, and make healthcare both affordable and accessible to the masses. However, a lot more is desired to achieve the agenda of ‘Health for All’.01

According to data released by the Department of Industrial Policy and Promotion (DIPP), hospital and diagnostic centres attracted Foreign Direct Investments (FDIs) worth USD3.41 billion between April 2000 and December 2015. The story of modern India is slowly inching towards a preventive healthcare system rather than the current curative approach. This is owing to improving education standards, increasing income levels and advancing insurance sector that is

securing health of people for the future. The private sector is also witnessing an awe-inspiring interest from overseas and private equity investors, which is leading to a consolidation of the market space and increase in IPO activity.02 This is a testimony to the fact that there are many opportunities for investment in healthcare infrastructure, both in urban and rural India.

The corporate sector is now readying itself to deal with a plethora of changes in the regulatory and reporting environment, including those related to Ind AS, Goods and Services Tax (GST) and income tax accounting standards. Let us take a close look at these changes through a series of articles in this month’s ‘Accounting and Auditing Update’ edition.


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01. Healthcare: Union Budget 2016, post budget KPMG sector point of view, published in February 2016

02. India Healthcare Sector – poised for a healthy M&A scenario, ETHealthworld.com, 2 June 2016

Nilaya Varma Partner and Head Government and Healthcare KPMG in India

Ind AS and its impact on the healthcare sector

01 | Accounting and Auditing Update - Issue no. 11/2016


Provide an overview of the key impact areas on transition to Ind AS for companies operating in healthcare sector.

IntroductionThe International Financial Reporting Standards (IFRS) converged Indian Accounting Standards (Ind AS) have been notified by the Ministry of Corporate Affairs (MCA) in February 2015 under Section 133 of the Companies Act, 2013 (2013 Act). Similar to any other sector, the new standards are also expected to impact companies in the healthcare sector significantly. Given the pervasive nature of the impact of these new standards, in addition to the financial reporting impacts, companies in the sector will also have to assess impact on other stakeholders such as investors and analysts, impact of the standards on areas such as tax planning, compliance with loan covenants, incentive plans, new arrangements for acquisitions, funding, etc.

In view of the above, this article analyses the key impact areas on transition to Ind AS for companies operating in healthcare sector which includes hospitals, diagnostic services, medical equipment manufacturer/trader and other entities involved in rendering related services (including e-commerce).

In recent years, healthcare sector, similar to others, has also encountered certain complex and new type of transactions specifically bundled revenue arrangements, revenue/profit share agreements, business acquisition, stock based compensation and also structured arrangements (including financial instruments) for operating model. Ind AS provides more detailed guidance on some of these topics and therefore, is expected to have an impact on how such transactions are accounted for.

Revenue recognitionConsidering the global deferment of IFRS 15, Revenue Contracts with Customers, MCA has also deferred the mandatory application of the corresponding Ind AS 115 and recently notified Ind AS 18, Revenue and Ind AS 11, Construction Contracts. In this

article, the impact analysis on revenue recognition for healthcare sector has been made taking into account the principles laid down in Ind AS 18.

Multiple element arrangements

Under current principles, apart from the general criteria, revenue is recognised either on the transfer of property in the goods or transfer of significant risk and rewards of ownership.

A contract may include multiple components (for example, when medical equipment are sold with subsequent support or maintenance services with no additional charge). Currently, there is no specific guidance on multiple element transactions. In practice, many companies currently account for such arrangements in accordance with the legal form of the transaction and based on the prices stated in the contract for individual deliverables.

Under Ind AS, when an arrangement includes more than one component, it is necessary to account for the revenue attributable to each component separately. Consider the following example, a company engaged in manufacturing of medical equipment, sells a medical equipment along with a two year maintenance service for INR9 lakhs to a customer. If the customer buys the equipment and maintenance service separately, the company will charge INR8 lakhs and INR2 lakhs respectively. Ind AS 18, considers this situation as a contract containing multiple element arrangements (i.e. the sale of the machine and the maintenance services). Since revenue has to be recognised based on the fair value of consideration received or receivable, in this case, the fair value consideration for sale of equipment is INR8 lakhs and fair value of sale of services is INR2 lakhs.

Additionally, Ind AS 18 requires the revenue to be recognised net of discounts. Hence, the discount of INR1 lakh has to be allocated between sale of equipment and maintenance service by either relative fair value method or

residual value method (by excluding fair value of undelivered item). For example, based on relative fair value (i.e. INR 80,000 towards sale of equipment and INR 20,000 towards maintenance service), the company will be able to recognise revenue of INR7.20 lakhs when the machine is delivered and INR0.80 lakhs to be recognised as sale of services on a straight line basis over the period of two years.

This is expected to result in a portion of revenue being deferred to the subsequent years when compared to present practice.

Extended Credit

In practice it is common in the healthcare sector, that a medical equipment manufacturer may give extended credit period to boost sales. Under current Indian accounting standards AS 9, Revenue Recognition, revenue is being recognised at the contractual value of the consideration receivable. Ind AS requires measurement of revenue at fair value of the consideration receivable. If the company offers an extended credit period to customers, revenue would be recognised at the present value of future cash inflows. The implicit interest in the arrangement (the difference between the revenue recognised and the stated transaction value) would be recognised over the credit period.

Sale of services by hospitals/diagnostic centres

In general, the healthcare service providers have a predetermined rate cards for the various medical services offered and the customers are charged with these management approved rates. Further, the healthcare companies also enter into Memorandum of Understanding (MOU) with various corporates for rendering certain medical services at agreed rates with the respective corporates. In India, in certain cases medical facilities are offered at empanelled hospitals based on insurance contracts entered, wherein patients are provided with

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This article aims to:



cashless medical services and the healthcare provider charges revenue to the government agencies/insurance managers. We do not expect any material impact on currently applied practice of recognising revenue as and when services are performed unless an impact arising from any other areas such as multiple element arrangement, longer credit terms, etc.

Fee for licenses and brand name

The revenue recognition principles in respect of consideration for use of brand name and revenue sharing arrangements are expected to be significantly different with the implementation of the new standard. In the recent past, many healthcare service providers from different states enter into MOU to share their expertise of medical and healthcare services and agree to share the revenue and pay certain portion as ‘consideration’ for use of brand name, etc.

For sales or usage based royalties that are attributable to a license of Intellectual Property (IP), the amount is recognised at the later of:

• when the subsequent sale or usage occurs, or

• the satisfaction or partial satisfaction of the performance obligation to which some or all of the sale or usage based royalties has been allocated.

If receipt of fee or royalty is contingent on a future event, then the entity should recognise revenue only when it is probable that the fee or royalty is received. This is normally when future triggering event relating to payment of fee or royalty occurs.

In certain cases, a profit sharing arrangement may also pose a challenge to evaluate whether revenue should be recognised on gross basis (i.e. as principal) or on net basis (i.e. as an agent).

Next steps on revenue recognition

Ind AS 115, introduces a single revenue recognition model, which applies to all types of contracts with customers, including sale of goods, sale of services, royalty arrangements, licensing arrangements, etc.

In contrast, under existing Indian GAAP, there is separate guidance that applies to each of these types of contracts i.e. sale of goods or sale of services. Ind AS 115 will bring in a five-step model, which determines when and how much revenue is to be recognised based on the principle that revenue is recognised when the entity satisfies its performance obligations and transfers control of the goods or services to its customers, as compared to the current standards which focus on transfer of risks and rewards. There are two approaches to recognition of revenue under this standard, i.e. at a point in time or over a period of time, depending on whether the performance obligations are satisfied at a point in time or over a period of time.

Companies have to make an impact assessment of the Ind AS 115 as well and create an awareness on the likely impact of implementation of Ind AS 115 to the stakeholders.

Property, plant and equipmentTreatment of foreign exchange differences

Currently, several companies have elected to either capitalise foreign exchange differences or accumulate exchange differences in the Foreign Currency Monetary Item Translation Difference Account (FCMITDA) (which is subsequently amortised through the statement of profit and loss over the tenure of the loan). Ind AS 101, First-time Adoption of Indian Accounting Standards permits such accounting treatment to be carried forward only for Long Term Foreign Currency Monetary Item outstanding as at the date of adoption of Ind AS (i.e. for phase 1 companies it will be 1 April 2016).

Government grants

It is common in the healthcare sector that the companies may be eligible for certain government grants like capital subsidy or allotment of land free of cost or at concessional rates for constructing hospitals, diagnostic centres, etc. in backward areas.

Under current principles, two broad approaches are followed for recognition of government grants -

the capital approach or the income approach. Government grants in the nature of promoter’s contribution are credited directly to the shareholders’ funds (reserves). Grants related to depreciable assets are either treated as deferred income and transferred to the statement of profit and loss in proportion to the depreciation; or deducted from the cost of the asset.

Ind AS does not permit recognition of grants directly in reserves. Therefore, government grants will be recognised as income, on a systematic basis, over the periods necessary to match them with the related cost, which they are intended to compensate. Further, government grants related to assets are presented in the balance sheet only by setting up the grant as deferred income and not as a reduction from property, plant and equipment.

Further, under the current practice, companies are required to account for government grants received in the form of non-monetary assets, at their acquisition cost. If non-monetary assets are given free of cost, they are recorded at a nominal value. Ind AS requires companies to account for government grants in the form of non-monetary assets, which are given at concessional rates, at fair value. This may result in major adjustment when creating the opening balance sheet under Ind AS 101.

Consolidation Under Indian GAAP, control is assessed based on ownership of more than one-half of the voting power or control of the composition of the Board of Directors.

However, Ind AS 110, Consolidated Financial Statements, introduces a new definition of control and a single control model as per which an investor controls an investee when the investor is exposed, or has rights, to variable returns from its involvement with the investee, and has the ability to affect those returns through its power over the investee.

This will require companies to perform assessment of various contractual terms impacting economic risk and returns much beyond voting interest alone and due to this fundamental difference in the definition of control, the universe of entities that get consolidated could potentially be different under the two frameworks.

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The other major areas that could impact the healthcare sector companies are discussed below:

Accounting for goodwill on acquisition date

Currently, goodwill arising on the acquisition of a subsidiary is determined as the excess of the purchase consideration over the book values of net assets as on the acquisition date. Under Ind AS, the acquisition of a subsidiary (which is a business) meets the definition of a business combination and hence, goodwill is determined based on the fair values of net assets (including certain assets and liabilities such as intangibles and contingent liabilities which were earlier not recognised under Indian GAAP by an acquirer) as on the acquisition date. Goodwill is not amortised but is tested for impairment at least once each year.

Accounting for non-controlling interest

The term ‘minority interest’ under current principles has been replaced with ‘non-controlling interest’ under Ind AS. Currently, minority interest is measured at proportionate share in the book values of the net assets of the company. Ind AS prescribes that the non-controlling interest to be measured

on the acquisition date at either its fair value or proportionate share of the fair value of the acquired company’s identifiable net assets. This choice can be applied on a case by case basis.

Under Ind AS any transaction between shareholders i.e. at the time of acquiring/selling non-controlling interest, any excess paid/received over book value or vice versa of acquired/sold non-controlling interest on the date of such acquisition/sale is recorded as an adjustment to equity. Currently under Indian GAAP acquisition transactions result into step up acquisition accounting (additional goodwill or capital reserve) and sale transaction results into recognition of profit or loss.

Under Indian GAAP, in case of losses attributable to minority/non-controlling interest in a subsidiary exceed the minority/non-controlling interest in the equity of the subsidiary, such excess and further losses are adjusted against the parent’s share, except where the minority has a binding obligation to make good such losses. Under Ind AS, losses relating to the subsidiary are attributed to the non-controlling interest even if it results in a negative balance of the non-controlling interest.

Both the above changes will have major impact in the shareholders’ fund

presented in a consolidated financial statements under Ind AS.

Potential acquisitions of non-controlling interest

Currently, there is no guidance on accounting for put options with non-controlling shareholders, which give the non-controlling shareholders a right to sell their interests either to the company or the majority shareholder(s). The exercise price of the put option can either be predetermined or based on fair value of the company. In the absence of guidance, generally companies do not record such put options in the financial statements until they are settled. On settlement, the shares acquired are reported as a capital transaction, being an increase in the ownership interest of the majority shareholder(s).

Under Ind AS, such options including forwards contracts would lead to classification as a ‘liability’ at the present value of the exercise price of the option or of the forward price. Further, the parent needs to determine whether the non-controlling shareholders have access to present economic benefits of the subsidiary (for example, if the put option is at fair value).



Other accounting issuesStock options

Ind AS 102, Share-based Payment, provides an extensive guidance on share-based payments. Currently, under Indian GAAP, there is a Guidance Note on Accounting for Employee Share-based Payments issued by the Institute of Chartered Accountants of India (ICAI).

Following are some of the critical GAAP differences between Indian GAAP and Ind AS:

• Mandatory use of fair value and resultant increase in employee compensation costs

• Accelerated costs for options with graded vesting

• Consolidation of trusts dealing with employee share-based payment plans.

Discounting of provisions

Current principles explicitly state that provisions should not be discounted to their present value. Ind AS requires provisions to be discounted to their present value where the effect of the time value of money is material. The discount rate to be applied for such calculations is generally the pre-tax incremental borrowing rate of the company. Discounting will result in lower provision upfront and higher interest cost over the provision period.

Actuarial gains and losses on defined benefit plans

Under current principles, actuarial gains and losses on post-employment benefit plans and other long term employment plans are to be recognised immediately in the statement of profit and loss. Under Ind AS, all actuarial gains and losses with respect to defined benefit plans and other long term employment benefit plans are to be recognised in other comprehensive income.

Segment reporting

Under AS 17, Segment Reporting companies in the healthcare sector disclose segmental information based on business and geographical reporting–one as primary format, the other as secondary. The segments are identified based on the risks and rewards model.

Certain companies in the healthcare sector conclude that they are operating in one single segment i.e. healthcare and accordingly no segmental reporting is made.

However, Ind AS 108, Operating Segments requires segment has to be determined on the basis of how the chief operating decision-maker evaluates financial information for the purposes of allocating resources and assessing performance of the business or geographical verticals of the business. This may result in change in segment disclosures for many companies.

Also refer to a detailed article on the impact of Ind AS on the healthcare sector in this publication.

Leases

Many companies in the sector usually run their business in leased premises under operating leases. The present guidance under AS 19, Leases requires companies to straight-line the escalation in the lease rent over the lease term.

However, under Ind AS, where the escalation of operating lease rentals is to compensate the lessor for expected inflationary cost, rentals are not required to be recognised as an expense on a straight-line basis. Companies may require to revise the estimate of rent charge to the statement of profit and loss based on the new principles.

Additionally, some of the transactions such as operating and management arrangement in the sector may require additional analysis to evaluate whether those arrangement contain an element of lease in accordance with Appendix C of Ind AS 17, Determining Whether An Arrangement Contains A Lease.

Restatement of financial statements

Current principles require companies to disclose prior period items separately in the financial statements of the current period and do not require an adjustment to the previously reported numbers of the period to which the errors relate (i.e. a restatement of the previous periods is not required or permitted for such errors). Under Ind AS, material prior period errors are corrected retrospectively by restating the

comparative amounts for prior periods in which the error occurred. If the error occurred before the earliest period presented, the opening balance of equity/retained earnings for the earliest period presented are adjusted.

Changes in accounting policies

Currently, a change in an accounting policy does not require a restatement of the comparative amounts for previous periods. In certain cases, any change in an accounting policy which has a material effect should be disclosed. The impact of, and the adjustments resulting from, such change, if material, should be shown in the financial statements of the period in which such change is made, to reflect the effect of such change. Under Ind AS, a company is generally required to retrospectively apply changes to accounting policies, by adjusting the opening balance of equity/retained earnings for the earliest period presented, and restating comparative amounts (including the comparative statement of profit and loss) for each period presented.

ConclusionGiven the wide scope of the Ind AS standards, healthcare sector companies should consider carrying out an assessment of the potential impacts on the balance sheet and the statement of profit and loss. Such an assessment is likely to involve significant judgement and would depend on the facts and circumstances of each contract.

Source: KPMG in India publication - Transition to Ind AS - Practical Insights published in May 2011 and KPMG in India’s IFRS Notes

- IFRS convergence - a reality now! dated 23 February 2015)

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Segment reporting – a new approach inInd AS



Summarise the key principles of Ind AS 108, Operating Segments and how these differ from the existing Accounting Standard (AS) 17, Segment Reporting

Evaluate the consequent changes to the disclosure requirements with specific emphasis on the healthcare sector

Provide a perspective on the impact of the new segment reporting principles on the assessment of impairment under Ind AS 36, Impairment of Assets.

Healthcare as a sector has evolved over the years and, as it stands today, encompasses various elements of health and wellness. Broadly, some of the individually-identifiable elements include:

• Hospitals (specialty-focussed or multi-discipline)

• Diagnostic centres (hospital-based centres or diagnostic chains or stand-alone centres)

• Medical practitioners (clinic-based or part of hospitals)

• Health insurance

• Medical equipment (manufacture or lease)

• Wellness chains.

Companies in the healthcare landscape generally cater to at least one of these elements. With the increasing augmentation of technology, the growing need for specialisation and intensified competition, companies tend to focus on specific components of the broad spectrum within healthcare. For example, specialty-focussed hospitals may specialise in specific therapeutic segments such as cardiology, neurology, oncology, etc. and diagnostic centres may specialise in specific tests such as thyroid function tests or specific imaging services such as PET/CT scans, etc. However, there are larger healthcare houses that cater to a broad spectrum of healthcare and related services.

Each of these components have associated risks and rewards and accordingly will influence the allocation of resources. The differing risks and rewards will also drive the performance of these components and will

consequently drive the monitoring by the decision makers as well. Hence, segment reporting will increasingly be of relevance for a reader to understand the performance of a company at the level of each business unit as well as of the enterprise as a whole which cannot be fully appreciated from the aggregated data of a diversified or multi-locational enterprise.

The underlying objective of segment reporting is to enable users to evaluate

• The nature and financial effects of the different types of business activities in which it engages, and

• The economic environment in which it operates.

The existing standard - AS 17The existing standard AS 17 is more rule-based and requires the identification of two sets of segments, one that is based on the risks and rewards of related products and services and the other based on geographical presence (primary and secondary segments).

Primary and secondary segments are identified based on the dominant source and the nature of risks and returns. If the risks and returns of an enterprise are predominantly affected by the differences in the products or services, its primary segment is the business segment with the secondary segment is a geographical segment. However, if the operations in different geographies drive the risks and rewards of an enterprise, its primary reporting segment would be the geographical segments. The internal organisation and management structure of an enterprise and its system of internal financial reporting to the board of directors and

the chief executive officer also steer segment reporting.

Under the existing AS 17, certain companies seem to be reporting a single business segment i.e. healthcare services for hospitals or diagnostic/pathology services for pathology labs.

Ind AS 108Ind AS 108 moves from a rule-based approach to reporting based on how the management reviews the business. The intention is to give a perspective to the readers that is available to the management when they make decisions on the allocation of resources, etc.

Operating segments under Ind AS 108 are identified based on the internal reports of the operating segments as reviewed by the entity’s Chief Operating Decision Maker (CODM). As a consequence, there is no requirement to identify primary and secondary segments. Rather, segments are identified based on the business activities from which they earn revenue and incur expenses, whose operating results are regularly reviewed by the entity’s CODM to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available.

The CODM as referred to in the standard as a function, and not a person with a specific title, which is responsible for allocating resources and assessing the performance of operating segments of an entity. Most often the

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CODM of an enterprise can be identified within the ‘CXO’ group or as a group of executives that is entrusted to make the relevant decisions. In certain situations identification of the CODM can be a matter of judgement. Internationally as well, in practice, CODM could be Managing Director, CEO, COO, Board or a sub group of the Board which are identified as CODM. Several healthcare companies operate within diversified services and operate in both domestic and international markets. A careful assessment of CODM will be required to ascertain the right set of reporting segments.

One of the key differentiating factors of an operating segment is that it usually has a segment manager who is held directly responsible for the performance of the segment. Here, again, the term manager is used to define the function rather than a title.

If there are multiple sets of segments, then the sets for which the segment managers are held responsible could constitute the reportable segments.Further, if there are overlapping sets of components, managers are responsible for each of these sets and CODM regularly reviews the performance of all these sets, then the management should determine the most appropriate reportable segment.

One of the significant consequences of the change in approach is the proliferation of disparity in reporting. The operating segments, which are based on the internal reporting and review mechanism of each organisation, would essentially lead to the presentation of segmental information in the financial statements in different forms depending upon the way the information is reviewed by a CODM.

Many multi-location healthcare companies review the performance of individual centres separately and each centre may have a centre manager (e.g. chain of hospitals). Some evaluate based on the type of services rendered and others review both elements in a matrix format. While presently many companies present their operations as a single segment, this would need careful consideration under Ind AS 108. A careful evaluation of the business components and how information about each of these components is structured

for management review will form the basis of reporting. For example a CODM of a healthcare company could review the information in the following categories and the likely segments could be:

• Regional hospital units

• Specialty, outpatient, diagnostics, pharmacy, surgical, etc.

• Pathology, imaging, etc.

Some additional points to note are:

• While AS 17 required the segment reporting to be prepared on the basis of the accounting policies adopted for preparing and presenting the financial statements, Ind AS 108 requires segment disclosures to mirror the reporting to the CODM such that the readers have access to the information that enables the CODM to make decisions on the allocation of resources and evaluation of performance of the segments. A reconciliation of the reported segments with the entity’s profit and loss is prescribed.

• Ind AS 108 specifies the aggregation criteria for the aggregation of two or more segments. The existing AS 17 does not deal specifically with this aspect. Ind AS 108 requires that the companies should identify operating segments even if these segments are yet to earn revenue e.g. start-up operations, joint ventures or associates – if the CODM reviews them separately. The healthcare sector, in the recent past, is increasingly moving towards expansion through various models of acquisitions, mergers, joint ventures, etc. Each of these will require careful evaluation under Ind AS 108.

• An explanation has been given in the existing AS 17 that in case there is only one business segment or geographical segment, the segment information is not required to be disclosed. However, this fact shall be disclosed by way of a footnote. Ind AS 108 requires certain disclosures even in case of entities having a single reportable segment. Certain additional disclosures

are stipulated including those for companies that have a single segment. These cover:

– revenue from external customers for products and services/geographical area

– key customers that represent 10 per cent or more of the total revenue of the company, however the companies are not required to disclose the identity of the customers

– factors used to identify the reportable segment.


Ind AS 36Ind AS 36 defines a Cash-Generating Unit (CGU) as the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The independence of cash flows is indicated by the way management reviews its business activities, for example by revenue models, locations, or therapeutic segments.

There is no change in the definition of the CGU under Ind AS 36 as compared to existing AS 28, Impairment of Assets. However, the change in the principles for segment reporting may provide a fresh perspective to the evaluation. Based on the CODM approach, if operating segments are identified by

the company e.g. individual centres headed by a centre manager, such centres would, most likely, also fall under the definition of the smallest identifiable CGU. Companies will have to evaluate whether one or more of these centres can be treated as a single CGU, whether each therapeutic segment/revenue model/geographical location can be separately monitored or whether operating segments are independent of each other. Aggregation/disaggregation of operating segments for CGU evaluation will require a high level of judgement.

Additionally, Ind AS 36 prescribes extensive disclosure requirements for an entity that reports segment information in accordance with Ind AS 108.

ConclusionThe new standard on segment reporting is designed to bring in increased transparency on how different components of the business of an enterprise perform and a perspective on how the management reviews the business. This involves judgement and can have an impact on other judgement areas such as impairment assessment.


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Finance Act, 2016 – key impact areas



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This article aims to:Highlight the new sections introduced in the Finance Act, 2016 which could potentially provide benefits to the healthcare sector.

The annual finance budget is a big event in India’s economic and political landscape and has been reflective of the government’s vision of boosting the Indian economy and rationalising the tax structure.

The Finance Bill, 2016 proposed by the Finance Minister on 29 February 2016 received presidential assent on 14 May 2016. The changes to the Income-tax Act, 1961 (the IT Act) focus on the simplification of procedural aspects, countering black money, phasing out exemptions/deductions, incentivising domestic investment and ‘Make in India’ initiatives.

We have taken a closer look at the changes in this year’s Finance Act which could have a significant impact on the healthcare industry from an income tax perspective. Some of the significant amendments impacting healthcare sector are discussed below.

Tax incentive for employment generation (Section 80JJAA)Section 80JJAA of the IT Act provides for an additional deduction with respect to the employment of new workmen. However, the erstwhile section restricted the benefit only to those assessees who were engaged in the manufacture of goods in a factory. The service sector forms a large part of employment generation in India and therefore the government felt the need to extend this benefit to all the industries and not just restrict it to the manufacturing sector as is evident from the revised section enumerated upon below.

The old Section 80JJAA is now substituted by the new Section 80JJAA effective from financial year 2016-17. The new section provides for an additional deduction of 30 per cent of additional employee costs for three years beginning with the year in which the employment is provided.

The deduction is available only where:

• There is an increase in the number of employees

• The emoluments paid do not exceed INR25,000 per month

• The minimum number of days of employment is 240

• The employee contributes to a recognised provident fund.

Given the fact that the healthcare sector employs people at all levels including a large number of employees with a lower salary base such as those engaged in nursing care, the cleaning and upkeep of hospitals, running dispensaries, people employed in collecting medical samples, etc. the incentive is expected to yield direct benefits for the healthcare sector.

Phase out plan of incentives available under the IT ActDeduction for specified business (Section 35AD)

Section 35AD provides for a weighted deduction of 150 per cent in relation to the capital expenditure incurred on building and operating a new hospital with at least 100 beds for patients provided the hospital commenced operations on or after 1 April 2012. The section provides for an accelerated deduction of capital expenditure in the year of incurrence and provides a huge incentive to capital-intensive sectors such as hospitals where a majority of the expenditure is attributed towards the purchase of modern medical equipment. The Finance Minister had announced in last year’s budget that the country will gradually move towards a reduction in corporate tax rates and rationalisation of special deductions and exemptions.

In line with this expressed intent, the Finance Act, 2016 has done away with the weighted deduction while still retaining 100 per cent deduction on the capital expenditure incurred on new hospitals (with effect from 1 April 2017).

This will result in reducing the benefit available to hospitals going forward, however, the retention of 100 per cent accelerated depreciation in relation to capital expenditure is expected to still provide a substantial benefit in terms of managing the tax outflows to assessees engaged in building and operating hospitals.

Weighted deduction for In-house Research and Development (R&D) (Section 35(2AB))

Section 35(2AB) provides for a weighted deduction for expenditure (excluding expenditure on land and buildings) on scientific research incurred by a company engaged in the business of bio-technology or in the business of manufacture of any article or thing. The deduction is allowed in relation to the expenditure incurred on scientific research in an approved in-house research and development facility. The weighted deduction is specifically relevant for companies engaged in the manufacture of medical and related equipment and undertaking in house R&D. The Finance Act, 2016 seeks to restrict the weighted deduction to 150 per cent from FY 2017-18 and further restricts the same to 100 per cent from FY 2020-21 onwards.

Widening of the Tax Base and Anti Abuse Measures (Section 206C)

The Finance Act, 2016 has mandated the collection of tax at source at 1 per cent if the payment of the value of services provided exceeds INR2,00,000 in cash. The amendment has been introduced to discourage the use of cash payments and to curb the black money menace prevailing in the country.

It is common knowledge that a large number of patients hailing from rural India settle their hospital dues in cash. Collection of 1 per cent Tax Collected at Source (TCS) while providing healthcare services by hospitals may lead to complexity in the operational dynamics of hospitals. This will not only increase the administrative burden for hospitals but would also require a fair amount of



counselling of the service recipient in terms of explaining the provisions of the law. The high cost of healthcare is likely to make the rigors of the amended TCS provision being felt on a large scale across healthcare industry.

As the amendment is effective from 1 June 2016, companies should plan implementation of the amendment to ensure compliance with TCS provisions.

Tax implications on outbound investmentThere has been an increasing trend in the healthcare sector to set up operations in the African and other regions to tap the healthcare demand supply gap in these jurisdictions. This has led to increased outbound investments in the healthcare sector. In the last year’s budget the Finance Minister had introduced the concept of Place of Effective Management (POEM) which requires even the foreign companies which are effectively managed from India to pay taxes on their global income in India. The CBDT

had issued draft guiding principles on POEM on 23 December 2015 laying down the tests for determining POEM of a foreign company in India. Though the final rules are yet to be notified, while making outbound investments the assessment of POEM needs to considered for mitigating any additional tax exposures for such foreign companies on account of being qualified as a ‘resident’. This is specifically relevant for the financial year 2016-17. The Finance Act, 2016 has also laid down an enabling provision for implementation of various provisions of the IT Act in case a foreign company qualifies as a resident in India.

Rationalisation of taxation of income by way of dividends

– Levy of tax on dividend income (Section 115BBDA)Dividend distributed by domestic companies on which Dividend Distribution Tax (DDT) has been paid is exempt in the hands of shareholders. The levy of DDT at rate of 20.36 per cent leads to an effective tax rate of

45.67 per cent on the company’s profits. The Finance Act, 2016 has introduced a new Section 115BBDA to provide that any dividend income received by individual, firm or Hindu Undivided Family (HUF) in excess of INR10 lakhs will be taxable at the rate of 10 per cent. This tax cost is in addition to the DDT already being paid by the domestic companies declaring dividends. As an aftermath, this is bound to lead to an augmentation in the overall tax cost for individual investors. It is relevant to note that historically hospitals have been funded directly by the individual promoters and the additional tax on dividends will result in an increased tax cost in the hands of individual promoters. The amendment will compel the industry to look at Limited Liability partnership (LLP) as a probable entity structure for setting up hospitals where a share in the profits of LLP is exempt in the hands of partners making it more tax efficient as compared to the company model.

The amendment is applicable from FY 2016-17.

01. Companies set-up or registered after 1 March 2016

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Reduction in corporate tax rates (Section 115BA)In line with announcement made in last year’s budget of gradually moving towards a reduction in corporate tax rates and rationalisation of special deductions and exemptions, newly set up manufacturing companies01

have been provided with an optional corporate tax rate of 25 per cent instead of 30 per cent. The reduced corporate tax rate of 25 per cent is subject to the condition that the company has not claimed any benefit under Section 10AA, a benefit of additional depreciation, investment allowance, expenditure on scientific research and any deduction under Chapter VI-A (except Section 80JJAA).

The reduced tax rate is especially relevant for companies which are proposing to set up manufacturing facilities for medical and related equipment.

Widening of the Tax Base and Anti Abuse Measures (Section 115TD - Accreted income of trust/charitable institution) In India, a large number of healthcare institutions are organised under the trust/charitable institution structure which are availing income tax exemption under Section 11 and 12 of the IT Act. The Finance Act seeks to levy an exit tax on accreted income at maximum marginal rate where the charitable organisation is converted into a non-charitable organisation or gets merged with a non-charitable organisation. Further, such a new levy is also applicable on ‘deemed’ conversion where for any reason registration granted to trust under Section 12AA is cancelled. As the cancellation of registration under Section 12AA is generally resorted to by the revenue authorities in case of any dispute, such exit tax will cause additional hardship to the assesses. It is important to keep the new provisions in perspective

while weighing the consequences of cancellation of registration by the tax authorities. The newly inserted provisions are applicable from 1 June 2016.

Concluding remarks The Finance Act, 2016 has brought in significant changes regarding deductions, tax collection obligations, taxability of dividends, taxability of trusts and other charitable organisations. It is important for players in the healthcare sector to undertake an impact assessment of the relevant provisions impacting their specific business models to plan ahead for the future compliances.

GST: Will it heal the healthcare sector?



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This article aims to:Provide an overview of the impact of GST on the healthcare sector.

With the government confident of making the Goods and Services Tax (GST) a reality soon in the monsoon session, India is all set to witness arguably one of the most crucial indirect tax reforms since independence. Armed with the prime objective of integrating most of the central and state taxes and designed to reduce the cascading effect of indirect taxes, GST could possibly facilitate the much needed ease of doing business in the country. Also, the draft Model GST law has been released by the government after getting an in-principle nod from the Empowered Committee of State Finance Ministers.

GST is expected to be a destination-based consumption tax which would bring about a paradigm shift in the present indirect tax regime by subsuming most of the indirect taxes (viz. central levies such as excise duty, service tax, and also state levies such as Value Added Tax (VAT), octroi, entry tax, etc.) and thereby seeking to integrate multiple indirect taxes. Aligned with the federal structure, India is stepping up for a Dual GST wherein Central Goods and Services Tax (CGST) and State Goods and Services Tax (SGST) would be levied on intra-state supplies and interstate supplies would attract Integrated Goods and Services Tax (IGST), which would be a summation of both SGST and CGST.

With the arrival of GST as we strive towards building a better economy, it is imperative that the social sector particularly, healthcare, receives much needed consideration as healthier citizens build a healthier nation.

As far as indirect tax benefits under the present regime is concerned, it is pertinent to note that healthcare services (except high end healthcare services viz. cosmetic/plastic surgery) including services provided by an authorised medical practitioner or para-medics are exempt from service tax levy. Also, VAT at concessional rate is levied on medicines, medical devices and other goods intended to be used by the healthcare sector across states. The government has also conferred certain

excise duty exemptions/concessions on goods meant for the healthcare sector namely implants, surgical tools, etc. Additionally, there are also certain duty/tax exemptions and export-linked benefits under the Foreign Trade Policy which are availed on imports by the healthcare sector (such as Export Promotion Capital Goods Scheme). In line with the prevailing benefits, it is expected that with the introduction of GST, such concessions/exemptions should be sustained by the government.

Under the GST, a broad rate structure has been proposed with lower rate at around 12 per cent and standard rate ranging between 17 to 18 per cent. Accordingly, it needs to be witnessed as to whether the inputs for the healthcare sector would be kept under the standard rate slab or would be extended beneficial treatment. The same would be significant on account of the multiple indirect tax exemptions/concessions currently available on the procurement of goods by this sector, which if done away with under GST would substantially increase the cost of inputs and thereby have an impact on the overall cost of medical treatment for the patients.

It is also pertinent to mention that there are certain ongoing controversies surrounding the healthcare sector which pertain to the VAT exposure on supplies made to in-patients both in respect of packaged and non-packaged treatment. Currently no VAT is discharged by the hospitals on such supplies, however the same continues to be an industry issue and states have adopted divergent views on the taxability of the same. Also, the service tax authorities have been disputing the levy of service tax on the consideration paid by the hospital to the doctors and vice versa treating the same as infrastructure support services. A similar dispute arises in case of various revenue sharing arrangements entered into between the hospitals for setting up a department in hospitals, pathology centres, etc. which are ultimately aimed at providing healthcare services to the patients. GST is expected to remove

the ambiguity around these issues and rightly address them.

The government in its move to support this sector for its contribution to humanity, may seek to announce key GST benefits. One such benefit may relate to healthcare services being zero rated so as to allow free flow of credit in line with the underlying principle of GST. Alternatively, the government may also seek to exempt key procurements by the healthcare sector from GST so that the benefit of the same is passed on to the patients in the form of affordable healthcare services.

The implementation of GST is keenly awaited as its introduction is expected to resolve many of the issues currently being faced by this vital sector. It is imperative that as technical advances continue to change the healthcare sector in India, the country progresses to where it ensures that its citizens have an affordable, sustainable healthcare system.


Conversation withMr. Dilip BidaniChief Financial OfficerDr. Lal Pathlabs Limited

Dr. Om Prakash ManchandaWhole-time Director and Chief Executive Officer Dr. Lal Pathlabs Limited


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Q Dr. Lal Pathlabs was one of the first healthcare firms to go for Initial Public Offering (IPO) in India. How was the IPO experience and what were the key challenges you faced with the regulators and authorities?

On an overall basis, while the journey to become public, specifically the last few months, was hectic but we must admit that it was an enriching experience. The level of detail with which all parties involved (such as bankers, lawyers, auditors and investors along with regulators) go through each aspect included in Draft Red Hearing Prospectus (DRHP) was overwhelming. Additionally, one of the key learnings for the top management was to interact with the investors under the framework of what can be communicated and what cannot be. From a regulatory perspective, we are of the view that broadly speaking, the authorities have put adequate checks and balances in the documentation process to protect investors.

Q Post IPO, what has been your experience in terms of:

• Collaborating with a diverse and large body of investors

• Keeping the promises made at the time of the IPO

• Maintaining the market’s interest in your growth?

We became public only a short while ago and therefore, we have not made any changes to the expectations stated to the investors at the time of Initial Public Offering (IPO).

With respect to dealing with investors, a significant amount of the top management’s time is spent interacting with them and updating them on developments. Our investor relations team helps us maintain momentum and the right level of engagement to ensure that investors’ interest and communication is maintained.

Q Post listing there must have been a significant increase in the compliance requirements that need to be adhered to by the company with the regulators such as ROC, SEBI, etc.? What are the efforts and costs involved to do so?

Yes, being a listed entity, there has been a significant increase in compliance requirements (such as quarterly filings of results, annual report circulation to shareholders, various requirements of SEBI, Listing Agreements, Internal Financial Controls, etc.).

While it is difficult to quantify the exact amount, in addition to the direct cash cost of hiring employees to strengthen the finance and compliance teams or consultant/advisors/other service providers, a significant amount of management time is spent to ensure that all requirements are complied with.

Q As per the Ind AS adoption road map, Dr. Lal Pathlabs would be adopting Ind AS from 1 April 2017, with the date of transition being 1 April 2016. How are you addressing the challenges in the following areas:

• Technical challenges

• Capacity and infrastructure challenges such as capacity building of the finance department and creating awareness both internally/externally, changes to contracts/business practices and changes to IT systems/processes

• Non-technical challenges such as managing expectations and communication with stakeholders both internal and external?

Please share your learnings and/or insights as you gear up to meet these challenges.

Both the healthcare industry and our company will be impacted due to the adoption of Ind AS and few of relevant areas are accounting for business

combination, consolidation and stock option accounting. It is also important to keep stakeholders updated on the likely impact to avoid any last minute surprises and we expect to cross that bridge nearer to the applicable date (i.e. 1 April 2017).

From a readiness perspective, our approach has been to first identify gap differences and then plan changes across departments/resources i.e. the finance team, chart of accounts, IT systems, etc.

From the business perspective, we have built an awareness beyond the finance team to ensure that the impact of Ind AS is considered for all our new transactions including our budgeting process.

Q The Income Computation and Disclosure Standards (ICDS) have been notified and are applicable from Assessment Year 2017-18 onwards. The adoption of ICDS is expected to significantly alter the way companies compute their taxable income, as many of the concepts from existing Indian GAAP have been modified. This may also require changes to the existing process and systems. What are the key implementation challenges of ICDS that you foresee?

Recently, the ICDS have been deferred. That being said, these standards did have an impact on the tax computation of many companies and we were also impacted. ICDS does not recognise the concept of prudence and materiality which is a sharp departure from the existing Indian GAAP and accordingly makes compliance more cumbersome. Having said this, ICDS will also act as a reconciling platform with the existing Income Tax Act, 1961, once our company migrates to Ind AS a basis for the preparation of financial statements.



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

Q The Companies Act, 2013 (2013 Act) has introduced Section 134(5)(e) of the 2013 Act which requires the directors’ responsibility statement to state that the directors, in the case of a listed company, have laid down Internal Financial Controls (IFC) to be followed by the company and that such internal controls are adequate and were operating effectively. How have you approached these areas and what have been the key considerations relating to the implementation of reporting on IFC?

Very early in the year, we internally formed a team which was responsible for implementing IFC with the assistance of external advisors wherever necessary. While a majority of controls were already in place and documented in one form or another, IFC implementation has helped in consolidating all those by processes at one place in the required format. One of the biggest challenges was to communicate the additional requirements including documentation thereof to non-finance teams and the impact of non-adherence thereof. However, through an early start to implementation and continuous communication in various meetings/forums from senior management, this challenge was largely overcome.

While this has added a cost burden both in terms of cash and time involved in documenting certain activities, we believe that over a period of time, this will help in a more robust control environment especially in growing organisations.

Q Have there been other areas such as related party transaction approvals required under the 2013 Act that have been challenging to implement?

While we have a few related party transactions, we did not come across any area which was challenging to implement so far.

QWhat has been your overall evaluation of the 2013 Act and are there any learnings on how such a significant economic legislation should be implemented for the country?

The 2013 Act implementation is a good initiative to simplify the provisions, protect investors and raise corporate governance to global standards. This being a significant change in corporate law after so many decades, there were various implementation challenges encountered by corporate India since it did not have sufficient time to adjust to the new requirements. In our view, some of those could have been avoided by providing some more time to corporate India after the final Act was available and the effective date thereof. This would have helped in avoiding few of the revisions which were more driven to clarify or eliminate inconsistency in the 2013 Act.

Q Goods and ServicesTax (GST) is a path breaking business reform, and not just a tax reform for India. It is likely to trigger a major ‘business transformation’. Given the recent development, a view is that the long pending GST bill is expected to be passed in ongoing monsoon session of the parliament with an expected implementation from April 2017. Viewed from this perspective, how are you approaching this area and how do you plan to achieve significant efficiencies of business and perhaps even gain a competitive edge in the market?

GST will be big change which will impact our business especially considering that healthcare services currently enjoy tax exemption and the incremental GST payment on input will be an additional cost to the company. It will be premature to comment whether this will be entirely passed on to the customer or not.

Consistent with our approach to various changes, we have formed a team to assess the impact of GST and the approach to manage that impact.

Q The Government has introduced mandatory Corporate Social Responsibility (CSR) requirements in the 2013 Act. The 2013 Act mandates that companies should spend on social and environmental welfare, making India perhaps one of the very few countries in the world to have such a mandate. What were the key considerations and challenges your company is facing in implementing this law for the first time? Could you please elaborate on the CSR programmes being undertaken by the company?

In our view, CSR is a great initiative which can contribute significantly financially as well as bridge the gap of effective management of social schemes. Initially, similar to all other companies, we also took some time to understand the intricacies of the regulations before hitting the ground with our CSR projects. Being in the healthcare sector, our thematic areas have been education and preventive healthcare. We are actively involved in running vocational education programmes in healthcare delivery for phlebotomists, technicians and similar vocations. We are constantly collaborating with various stakeholders to design and implement highly effective healthcare programmes for underprivileged communities.

Frankly speaking, while each corporate is trying to undertake activities for CSR, there is room for having a more focussed and integrated/consolidated approach. In our view, there is ample opportunity available in the area of healthcare for CSR, considering the state of poor people’s health in India.

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Conversation withKrishnan SubramanianGroup Chief Financial OfficerHealthCare Global Enterprises Limited



Q As per the Ind AS adoption road map, the HealthCare Global Enterprises group would be adopting Ind AS from 1 April 2016, with date of transition being 1 April 2015. How are you addressing the challenges in the following areas:

• Technical challenges

• Capacity and infrastructure challenges such as capacity building of the finance department and creating awareness both internally/externally, changes to contracts/business practices and changes to IT systems/processes

• Non-technical challenges such as managing expectations and communication with stakeholders both internal and external?

Please share your learnings and/or insights as you gear up to meet these challenges.

We are transitioning to Ind AS and the major areas impacted are the assessment of control for consolidation, recording of minority interest, accounting for leases, revenue sharing arrangements and accounting of deferred taxes.

The interpretation of the controlling rights definition is going to be a tricky and painful area. There needs to be detailed evaluation of the substantive potential voting rights and call and put options.

We have completed the assessment of areas impacted by the Ind AS implementation. The members of the finance team were briefed about the changes and requirements of the Ind AS and senior finance team members were encouraged to attend a training session organised by reputed consultants.

Communication about the impact of the Ind AS implementation to the stakeholders will be a little challenging. There can be a significant impact on account of the classification of leases and fair value measurement. The relevant stakeholders will be aligned in

due course once the quantification is ready.

Ind AS are based on substance over form i.e. economic reality of a transaction. Hence all the transactions and agreements need a closer view from Ind AS perspective as accounting and reporting are an integral part of the business.

Q The Income Computation and Disclosure Standards (ICDS) have been notified and are applicable from Assessment Year 2017-18 onwards. The adoption of ICDS is expected to significantly alter the way companies compute their taxable income, as many of the concepts from existing Indian GAAP have been modified. This may also require changes to the existing process and systems. What are the key implementation challenges of ICDS that you foresee?

Though the ICDS are no longer applicable, we do not expect to have major challenges in computing income as per those standards. We expect a little impact in borrowing costs.

The ICDS was expected to work as a uniform base for computing the tax profits to bring all taxpayers at par. Although, the government’s intention was good, it has led to the creation of a few ambiguities and stands postponed now.

Q The Companies Act, 2013 (2013 Act) has introduced Section 134(5)(e) of the 2013 Act which requires the directors’ responsibility statement to state that the directors, in the case of a listed company, have laid down Internal Financial Controls (IFC) to be followed by the company and that such internal controls are adequate and were operating effectively.

How have you approached these areas and what have been the key considerations relating to the implementation of reporting on IFC?

We have always laid strong emphasis on internal controls and internal audits. Though our internal control and compliance records are maintained manually, we are adopting a centralised Hospital Information System (HIS) and Enterprise Resource Planning (ERP) system for a more efficient management of the internal controls.

As a group, we have always focussed on processes and controls. With the new requirement, we had to standardise the documentation and ensure that all the geographies are aligned to the new requirement to ensure a greater level of compliance.

We did not have any major challenge in this area.

Q Have there been other areas such as related party transaction approvals required under the 2013 Act that have been challenging to implement?

We have not faced any challenges in implementation of related party transactions or securing approvals, as all the related party transactions entered into by the company, are in its ordinary course of business and are at arm’s length basis. As per the 2013 Act and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, the company seeks approval of the audit committee for all related party transactions and subsequent modifications thereto. This is irrespective of whether they are in the ordinary course of business and consummated at arm’s length. We also have established a related party transaction policy which lays down standards for analysing whether the transactions are in the ordinary course of business and are at arm’s length.

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Q What has been your overall evaluation of the 2013 Act and are there any learnings on how such significant economic legislation should be implemented for the country?

Enforcement of the 2013 Act commenced in 2013 with an objective to reduce the administrative and regulatory burdens on companies, good governance, ensure the companies would move in a progressive manner, have a fair, modern and effective framework of company law which is crucial to economic development. It is a modern legislation, which has a strong and modern regulatory mechanism, which will have a substantial impact on the functioning of the directors and officers within the effective corporate governance system.

The 2013 Act also requires the board of directors of the company to discharge their corporate social responsibilities by way of statutory regulation as part of their duties and brings in lot of accountability to the shareholders and to the public as a whole. However, the corporates, be it small or large had its own share of issues while implementing the 2013 Act in its true spirit and letters. The government from time to time had been bringing out amendments to the Rules, clarifications/notifications, where there had been ambiguity in the provisions of the 2013 Act and in order to remove these difficulties, the Companies (Amendment) 2015 was passed. I feel, the implementation of the 2013 Act, was not planned well and not much thought had initially gone, on the how it could be effectively implemented, the timing and manner of phasing out of the Companies Act,1956, training the government officials and all the stakeholders to effectively address the teething problem and preparing them to welcome a new era with the 2013 Act. But one thing I would appreciate is that, the government is very serious in considering the voice of the stakeholders and is ready to go for the change, if the suggestions are logical.

Q The Goods and Services Tax (GST) is a path breaking business reform, and not just a tax reform for India. It is likely to trigger a major ‘business transformation’. Given the recent development, a view is that the long pending GST bill will be passed in ongoing monsoon session of the parliament with an expected implementation from April 2017. Viewed from this perspective, how are you approaching this area and how do you plan to achieve significant efficiencies of business and perhaps even gain a competitive edge in the market?

GST is a path breaking legislation doing away with the hassles of multiples taxes. GST is supposed to make our routine operations easier. At this stage, we do not envisage a significant change to our current operation model.

Q The government has introduced mandatory Corporate Social Responsibility (CSR) requirements in the 2013 Act. The 2013 Act mandates that companies should spend on social and environmental welfare, making India perhaps one of the very few countries in the world to have such a mandate. What were the key considerations and challenges your company is facing in implementing this law for the first time? Could you please elaborate on the CSR programmes being undertaken by the company?

Even before the CSR provisions were introduced by the 2013 Act, most companies undertook initiatives for the welfare of society. The 2013 Act only made it mandatory by fixing the minimum limit.

The provisions of the CSR as per the 2013 Act are not applicable to our company.



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

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Internal financial controls


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Highlight the aspects relating to Internal Financial Controls (IFC) implementation and its potential impact on the healthcare sector


Globally, the United States and Japan were among the first countries to embrace the requirements of internal control over financial reporting which were formalised in these jurisdictions in 2003 and 2006 respectively. The Sarbanes – Oxley Act was passed in the year 2002 to address some of the serious lapses in corporate financial reporting and was meant to reinstill confidence in investors by bringing in a level of transparency in financial reporting which had never been seen before. India has been a recent entrant in the world of IFC reporting with the Companies Act, 2013 (2013 Act) ushering in new provisions which have significantly magnified the scope of internal controls to be considered by the management of Indian companies to cover all aspects of the operations of the company.

Over the last one year, corporate India including companies in the healthcare sector have been dealing with the implementation of IFC regulation in India.

From an applicability and responsibility perspective, the 2013 Act re-emphasised the importance of a robust IFC environment by casting specific responsibility on the board, audit committee, management as well as auditors aiming to strengthen all the three lines of defence as explained in the paragraph below:

• Section 134(5)(e) of the 2013 Act requires directors’ responsibility statement to state that the directors had laid down IFC to be followed by the company and that such controls are adequate and were operating effectively.

• Rule 8(5)(viii) of the Companies (Accounts) Rules, 2014 require

Board of Directors’ report to state the details in respect of adequacy of IFC with reference to the financial statements. It is important to note that this is applicable to all companies including private limited companies.

• Under Section143(3)(i), statutory auditors are required to make a statement in their auditor’s report, whether the company has an adequate control framework system in place and the operating effectiveness of such controls. It is important to note that the responsibility of the auditors was limited to reporting on the results of testing of design and operational controls relating to financial reporting alone.

• Under Section 177(4)(vii), the duties of the audit committee include evaluation of IFC and to make a report to the board.

• The roles and functions codified in Schedule IV of the 2013 Act clearly state that independent directors shall satisfy themselves on the integrity of financial information and that financial controls and the systems of risk management are robust and defensible.

It is also pertinent to note that the 2013 Act did not provide any specific guidance on implementation. The Institute of Chartered Accountants of India had issued a guidance note on this subject which provided the guiding principles to both the company and its auditors. It was also reasonably clear that the implementation of the guidance note would necessitate the setting up a robust governance structure, the primary role of which will be to assess risk, identify controls,

plan for the performance of design and operating effectiveness testing reviews and ensure that detailed documentation is contemporaneously maintained. This is not only expected to result in an improvement in the quality of financial reporting but also result in raising the bar on corporate governance in India.



The dynamism of the healthcare sector lies in the fact that there is a direct interaction with the consumer of services i.e. patients unlike other sectors where manufacturers do not directly interact with the end consumer. The human and social element associated with healthcare is what makes this sector highly regulated and riddled with challenges which are not usually faced by others. Hospitals in today’s environment are constantly looking at ways and means to enhance a patient’s experience, manage costs, optimise resources and achieve revenue assurance. The sector is also bereft with challenges related to medical ethics, independence and conflict of interest of medical practitioners. A healthcare company also has to ensure adequate data security measures of patient records, the confidentiality of which is non-negotiable.

From an IFC perspective, the ‘Tone at the top’ is, therefore, pivotal for any healthcare organisation. The robustness of entity level controls and the general Information technology control environment form a backbone of the IFC implementation process. Healthcare organisations should also develop and implement a policy to avoid conflict of interest and develop disclosure policies to mitigate

of the challenges associated with this sector.

The risk environment in a healthcare organisation is ever evolving and thus it is important for companies to have a risk-based approach which can enable it to envisage the significant risk impacting each of the components of internal control and plan for an effective control environment both from a

design and operational effectiveness view point. A general theme of some of the risks that may impact the sector is depicted in table 2.

The healthcare organisations may also face a challenge in terms of formulation and assessment of the control environment on the clinical side of their business including but not limited to patient safety and quality.

IFC and the healthcare sector

The term, ’internal financial controls’ is defined by the 2013 Act 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’.

Table 1: Building blocks of IFC

Table 2: Risks that could impact healthcare sector

Building block (component) Key objectives of coverage

Policies and procedures

Assignment of responsibility, delegation of authority, segregation of duties and establishment of related policies and procedures to provide a basis for accountability and controls.

Safeguarding of assets • Assets and ownership interests exist at a specific date• Assets are the rights of the entity at a specified date.

Prevention and detection of frauds and errors

Enable proactive anti-fraud controls and a fraud risk management framework to mitigate fraud risks to the company.

Accuracy and completeness of the accounting records

• All transactions occurred during a specific period have been recorded• Assets, liability, revenue and expense components are recorded at

appropriate amounts.

Timely preparation of reliable financial information

• Financial items are properly described, sorted and classified

• Financial information is provided as per the timelines defined by the relevant stakeholders.

Source: KPMG in India’s analysis 2016

Source: KPMG in India’s analysis, 2016

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Apart from the above, the recent spate of consolidation in the form of merger and acquisition, also brings forward the need to assess the risk and related control environment with respect to gathering of consolidated

financial information across entities/units within a company which may be sometimes operating in different Hospital Information System (HIS) and ERP systems.

Strategy to address the challenges

For companies operating in the healthcare sector it is important that they gauge the relevant impact of risks along with each of the components of the control environment in order to adopt an acceptable internal controls framework which encompasses the ‘entity level’ controls, ‘process level’ controls, controls around information technology and anti- fraud controls. Due to the challenges, organisations may consider deploying self-assessment tools to assess the existing design and operation environment. An example of strategy execution that companies in this sector might have largely executed is highlighted in table 3.

Table 3: An example strategy

Assess the governance tone at the top

• Define entity level governance policies like whistle blower, code of conduct, etc.

• Define process level policies and procedures• Develop a delegation of authority.

Identify key and non-key controls

Perform an assessment of entity level controls, process level controls, IT controls and fraud controls.

Document all existing financial and operating controls

• Develop a robust financial close process and document controls around the process

• Document controls in form of Risk Control Matrix (RCM) • Controls on accuracy of judgement and estimates• Define and document user responsibilities.

Monitor effectiveness of existing controls

• Consider implementing an ongoing framework for monitoring and evaluation of defined controls and internal certifications

• Perform periodic assessments to review the operating effectiveness of the controls.

Consider preventive and detective anti-fraud controls

• Carry out fraud risk assessment and identify fraud risks and existing controls in the processes

• Define mitigating controls for any gaps identified.

Review technology support

• Review the existing technology set up and use of IT modules/software.

• Ensure adequacy of Information Technology General Controls (ITGCs) and Information Technology Application Controls (ITACs).

• Consider automation of routine activities to reduce incidence of manual errors.

Source: KPMG in India’s analysis, 2016



IFC implementation01

KPMG in India recently conducted a survey across various sectors including healthcare with the objective to understand the approach adopted by various companies to meet the provisions/requirements with respect to IFC. A significant majority of 76 per cent of the respondents believe that the IFC will facilitate streamlining of the control environment in companies. 67 per cent of the respondents believe that successful IFC implementation can enhance the overall governance framework of their companies and 54 per cent believe that implementation of IFC is expected to benefit them by reducing leakages and potential frauds. The survey also highlighted some the challenges steaming from the initial stages of IFC implementation, some of which are reproduced below:

Conclusion

IFC is a strong tool in the hands of corporate India including those operating in the healthcare sector to usher in a culture of formal documentation of the controls and the related activities performed in order to mitigate risks. Although IFC does increase the cost of compliance, it has the potential to not only help companies identify internal gaps in control environment but also enable

it to incorporate a concept of global leading practices thereby improving the quality of earnings for the stakeholders. The first year of IFC suggests that corporate India has taken a firm step in implementation of IFC in its true spirit. It appears that the industry may now consolidate and refine the learnings from year one in order to be able to reap benefits and not merely treat IFC as a tick in the box.

01. KPMG in India publication Internal Financial Controls – Perspectives published in April 2016

51% believe that determining control effectiveness during business transactions would be a challenge on account of the increased documentation

40% also believe that change management is expected to be a key area of focus for the ongoing effectiveness of IFC frameworks defined by them

60% of the respondents believe that they do not have the required resource bandwidth within their company to support the initiative

40% believe that managing compliance costs and determining stakeholders’ involvement and buy in beyond finance department may be difficult

40% believe that ensuring adequate stakeholder involvement and obtaining a buy in from functions other than finance would be a challenge

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Regulatory updates



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The MoF announces deferment of ICDS by one year01

BackgroundThe Ministry of Finance (MoF), on 31 March 2015, issued 10 Income Computation and Disclosure Standards (ICDS), operationalising a new framework for the computation of taxable income. All assesses were required to adopt these standards for the purposes of computation of taxable income under the heads ‘Profits and Gains of Business or Profession’ or ‘Income from Other Sources’.

The Central Board of Direct Taxes (CBDT) notified these standards under Section 145(2) of the Income-tax Act, 1961 (the IT Act) vide ‘Notification No. 33/2015 dated 31 March 2015. These standards were applicable for the previous year commencing from 1 April 2015, i.e. Assessment Year (AY) 2016-17 onwards.

New developmentSubsequent to notification of ICDS, a number of representations were made by many stakeholders which were examined by an Expert Committee (the Committee) comprising departmental officers and professionals. The Committee has recommended amendments to the notified ICDS as well as issuance of clarifications in respect of certain points raised by the stakeholders.

The MoF, on 6 July 2016, announced that the revision of ICDS as recommended by the Committee, is under consideration. Revision to the Tax Audit Report is also under process for ensuring compliance with the provisions of ICDS and capturing the disclosures mandated by them. Further, some of the taxpayers might have filed their return of income and obtained Tax Audit Report without incorporating the compliance with the ICDS and related disclosures in the absence of the revised Tax Audit Report.

In light of the above, MoF has announced that ICDS shall be applicable from 1 April 2016 i.e. Previous Year 2016-17 (AY 2017-18), instead of 1 April 2015. A notification to this effect is expected to be issued shortly.

Banks to submit pro forma Ind AS financial statements02

On 23 June 2016, the Reserve Bank of India (RBI) issued a circular (reference DBR.BP.BC.No.106/ 21.07.001/2015-16) (the RBI circular) providing directions to all scheduled commercial banks (excluding regional rural banks), to submit their pro forma financial statements prepared on the basis of the Indian Accounting Standards (Ind AS) for the half-year ended 30 September 2016, latest by 30 November 2016.

Banks will be guided by the Ind AS notified by the Ministry of Corporate Affairs (MCA) from time to time and should also refer to the report published by RBI’s Working Group on ‘Implementation of Ind AS by Banks in India’ in October 2015.

Overview of the RBI circularEssential aspects

The following are key points from the RBI circular:

1. All scheduled commercial banks (banks) are required to submit their pro forma Ind AS financial statements, for the half-year ended 30 September 2016, latest by 30 November 2016.

2. The pro forma Ind AS financial statements need not be audited, since this information, while being a fair estimate of the impact to opening equity, is likely to change.

3. The pro forma financial statements should consist of the following:

• Balance sheet, including statement of changes in equity

• Statement of profit and loss

• Notes.

4. The RBI circular prescribes formats for the above, which are to be considered only for the preparation and submission of pro forma Ind AS financial statements.

5. The formats for the Ind AS financial statements for the accounting period beginning 1 April 2018 shall be notified separately.

6. A one-time exemption from preparing consolidated pro forma financial statements has been provided to banks which are not

in a position to submit both stand alone and consolidated pro forma Ind AS financial statements for the half-year ended 30 September 2016. Such banks are permitted to submit only stand-alone financial statements for this half-year. However, banks shall submit both stand-alone and consolidated pro forma Ind AS financial statements in the subsequent periods.

Key disclosures in the pro forma Ind AS financial statementsAccounting policies

In addition to the financial information prepared on the basis of the prescribed formats, the RBI circular requires banks to disclose the significant accounting policies applied while preparing the pro forma financial statements. These include policies relating to:

• Financial assets and financial liabilities, including the use of the ‘fair value option’ in designating financial assets or financial liabilities at Fair Value Through Profit or Loss (FVTPL) upon initial recognition

• Impairment of financial assets, with details relating to the approach, assumptions and estimation techniques used. These include information on methodology for computation of Expected Credit Losses (ECL), level of segmentation in the portfolio used, criteria used for movement from stage 1 to stage 2 and 3 for ECL estimation, the method used to compute lifetime ECL, inclusion of forward looking information in ECL estimates and the impact of moving from the current approach to the ECL approach.

• Derivatives and hedge accounting

• Derecognition of financial assets and financial liabilities

• Employee benefits

• Offsetting financial instruments

• Income taxes

• Significant areas of estimation uncertainty, critical judgements and assumptions in applying the accounting policies

• Approach on exemptions under Ind AS 101, First-time Adoption of Indian Accounting Standards.01. CBDT press release dated 6 July 2016 and KPMG in India First

Notes: The MoF announces deferment of ICDS by one year dated 7 July 2016

02. RBI circular RBI/2015-16/429 dated 23 June 2016 and KPMG in India IFRS Notes dated 24 June 2016)


Date of transition for banks

The notional date for transition to Ind AS for the purposes of preparation of pro forma Ind AS financial statements for the half-year ending 30 September 2016 is 1 April 2016.

However, the date for transition to Ind AS for preparation of Ind AS financial statements for accounting periods beginning on or after 1 April 2018, remains unchanged and shall be as per the provisions of Ind AS 101.

Reconciliations

The RBI has directed banks to provide certain reconciliations which are to be given in sufficient detail so as to

understand the material adjustments to the balance sheet as well as the statement of profit and loss. These reconciliations are expected to foster better understanding of how the transition from the existing financial reporting framework to Ind AS affected the reported balance sheet and financial performance. In addition, these reconciliations are expected to enable RBI to understand the significant adjustments to equity that could impact regulatory capital.

Following are the reconciliations which are to be included in the pro forma financial statements:

• Reconciliation of equity reported in accordance with the existing

financial reporting requirements as on 1 April 2016 to its equity in accordance with Ind AS as on the same date.

• Reconciliation of equity reported in accordance with the existing financial reporting requirements as on 30 September 2016 to its equity in accordance with Ind AS as on the same date.

• Reconciliation of the total comprehensive income in accordance with Ind AS for the half-year ended 30 September 2016 with the profit or loss under the existing financial reporting requirements.

Format of Statutory Auditors’ Certificate (SAC) to be submitted by NBFCs03

Every Non-Banking Financial Company (NBFC) shall submit a certificate from its statutory auditor that it is engaged in the business as a non-banking financial institution and holds a Certificate of Registration under Section 45-IA of the

RBI Act. NBFCs are required to have this certificate to do business as non-banking financial institutions.

The RBI, with a view to ensure consistency in the manner in which

the information is received from the auditors, through its circular RBI/2015-16/433 dated 23 June 2016, has prescribed a uniform format for the SAC. NBFCs are required to submit the details in the prescribed format.

Dividend distribution policy for listed companies04

The Securities and Exchange Board of India (SEBI) through its notification dated 8 July 2016 issued the SEBI (Listing Obligation and Disclosure Requirements) (Second Amendment) Regulations, 2016. Through the amended regulations, SEBI approved the proposal to formulate and disclose the dividend distribution policies in the annual reports and on the websites of the top 500 listed companies calculated by market capitalisation as on 31 March of every financial year.

The following items should be included in companies’ dividend distribution policies:

• The circumstances under which the shareholders may or may not expect dividends

• The financial parameters that will be considered while declaring dividends

• Internal and external factors that would be considered for the declaration of dividends

• How the retained earnings will be utilised

• Provisions with regards to the various classes of shares.

Further, it provides that whenever a company proposes to declare dividends on the basis of the parameters other than what is mentioned in such a policy, or if a company proposes to change its dividend distribution policy, the same along with its rationale should be disclosed in the annual report and on its website.

Additionally, it has been clarified that the listed entities other than top 500 listed entities may disclose their dividend distribution policies on a voluntary basis in their annual reports and on their websites.

SEBI issues a consultation paper on the disclosure of financial information in offer document/placement memorandum and valuation of the units of Infrastructure Investment Trusts

The SEBI issued a consultation paper on 15 June 2016, proposing continuous financial disclosures and other continuous disclosures to be made by Infrastructure Investment Trusts (InvITs) registered under the SEBI (Infrastructure Investment Trusts) Regulations, 2014 (InvIT Regulations).

Continuing with its recommendations, SEBI on 8 July 2016, issued a consultation paper proposing the following:

• Guidelines for financial disclosures in the offer document/placement memorandum

• Valuation of the units of InvITs.

The consultation paper seeks public comments on the proposals suggested, with the last day for the same being 31 July 2016.

Please refer to KPMG in India’s IFRS Notes dated 20 July 2016 that provides an overview of the SEBI consultation paper.

03. RBI circular RBI / 2015-16/433 dated 23 June 2016 04. SEBI notification SEBI/ LAD-NRO/GN/2016-17/008 dated 8 July 2016


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Ind AS Transition Facilitation Group (ITFG) issues clarifications - Bulletin 3

With the Indian Accounting Standards (Ind AS) becoming applicable to large corporates from 1 April 2016, the Institute of Chartered Accountants of India (ICAI) on 11 January 2016 announced the formation of the Ind AS Transition Facilitation Group (ITFG) in order to provide certain clarifications on issues arising due to applicability and/or implementation of Ind AS under

the Companies (Indian Accounting Standards) Rules, 2015 (Rules 2015).

Earlier this year, the ITFG had its first and second meeting and issued its first and second bulletin to provide guidance on issues relating to the application of Ind AS.

The ITFG held its third and fourth meeting on 23 May 2016 and 22 June

2016, respectively, and issued its third bulletin (Bulletin 3) on 2 July 2016 to provide clarifications on 14 issues in relation to the application of Ind AS, as considered in its meetings.

Please refer to KPMG in India’s IFRS Notes dated 13 July 2016 that provides an overview of the issues discussed at the ITFG.

RBI permits writing of options against contracted exposures by Indian residents

BackgroundThe RBI prescribes permitted products and operational guidelines for Over the Counter (OTC) foreign exchange derivative contracts that can be transacted by various categories of persons resident in India, for hedging different categories of foreign exchange exposures. Such derivatives include foreign exchange forward contracts, foreign currency-INR options, cross currency options and cross currency swaps.

Under the present regulatory framework, outlined in RBI’s Comprehensive Guidelines on OTC Foreign Exchange Derivatives and Overseas Hedging of Commodity Price and Freight Risks (A.P (DIR Series) circular no. 32 dated 28 December 2010), writing of options by users (Indian resident entities) on a stand-alone basis is not permitted. The users could currently enter into option strategies of simultaneous buying and selling of plain vanilla European options, provided there is no net receipt of premium.

New developmentWith the view to encourage participation in the OTC currency options market and improve its liquidity, RBI through its Circular-RBI/2015-16/431 (the RBI Circular), issued on 23 June 2016, has permitted resident exporters and importers of goods and services to write (sell) standalone plain vanilla European call or put option contracts against their contracted exposure, i.e. covered call or covered put respectively, to any AD Category-I bank in India subject to the prescribed operational guidelines, terms and conditions.

Some of the salient features of the RBI Circular are as follows:

1. Participants: The guidelines in the RBI circular will be applicable to the following participants:

a. Market makers - AD Category-I banks in India who have RBI’s approval to run cross currency and foreign currency-Indian rupee option books.

b. Users - Listed companies and their subsidiaries/joint ventures/associates having common treasury and consolidated balance sheet or unlisted companies with a minimum net worth of INR200 crore, if these companies provide appropriate disclosures in the financial statements as prescribed by the Institute of Chartered Accountants of India (ICAI).

2. Permitted options: Covered options (either as a single FCY-INR option or as separate options for the FCY-USD and USD-INR legs) may be written (sold) by resident exporter or importers against their underlying contracted exposures arising out of their exports or imports, respectively. However, the use of covered option shall not be considered as a hedging strategy.

3. Underlying: Covered options may be written against either a portion or the full value of the underlying.

4. Structure derivative product: The covered option being a combination of an underlying cash instrument and a generic derivative product, should be treated as a structured derivative product.

5. Approvals: AD Category-I banks may enter into covered options with their exporter or importer constituents only after obtaining specific approval in this regard from their competent authority, i.e. their Board, Risk Committee, etc.

6. Capital and provisioning requirements: AD Category-I banks shall treat the exposures against which a covered option has been written as an ‘unhedged exposure’ and accordingly apply the guidelines on Capital and Provisioning Requirements for Exposures to entities with Unhedged Foreign Currency Exposure.

7. Period: Covered option contracts may be written for a maximum maturity period of 12 months.

Similar amendments have been made in the Foreign Exchange Management (Foreign Exchange Derivative Contracts) Regulations, 2000.

Please refer to the KPMG in India’s First Notes dated 29 June 2016 which provides an overview of the RBI circular.

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The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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


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

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KPMG in India’s IFRS instituteVisit KPMG in India’s IFRS institute - a web-based platform, which seeks to act as a wide-ranging site for information and updates on IFRS implementation in India.The website provides information and resources to help board and audit committee members, executives, management, stakeholders and government representatives gain insight and access to thought leadership publications that are based on the evolving global financial reporting framework.

The MCA amends certain provisions in deposits rules

20 July 2016

Background

The Companies Act, 2013 (2013 Act) and the Companies (Acceptance of Deposits) Rules, 2014 (the Rules) prescribe the requirements companies should follow to

accept deposits.

In the past, the Ministry of Corporate Affairs (MCA) has issued various clarifications/amendments to certain provisions of Rules vide its circulars dated 31 March 2015 and 16 September 2016.

New development

Recently, on 29 June 2016, MCA through a notification issued Companies (Acceptance of Deposits) Amendment Rules, 2016 which make certain amendments to the Rules. The amendments have come into force from the date of their publication in the official gazette i.e. from 29 June 2016.

This issue of First Notes summarises the important amendments to the Rules made by MCA.

KPMG in India is pleased to present Voices on Reporting – a monthly series of knowledge

sharing calls to discuss current and emerging issues relating to financial reporting.

In our recent call, on 11 July 2016, we covered following topics:

1. SEBI provides certain relaxation for Ind AS compliant quarterly results

2. The MoF announces deferment of ICDS by one year

3. Ind AS implementation issues.

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

IFRS NotesSEBI issues a consultation paper on disclosure of financial information in offer document/placement memorandum and valuation of the units of Infrastructure Investment Trusts

20 July 2016

The Securities and Exchange Board of India (SEBI) issued a consultation paper on

15 June 2016, proposing continuous financial disclosures and other continuous disclosures

to be made by Infrastructure Investment Trusts (InvITs) registered under the SEBI (Infrastructure Investment Trusts) Regulations, 2014 (InvIT Regulations).

Continuing with its recommendations, SEBI on 8 July 2016, issued a consultation paper proposing the following:

• Guidelines for financial disclosures in the offer document/placement memorandum

• Valuation of the units of InvITs.

This issue of IFRS Notes aims to provide an overview of the SEBI consultation paper.

Previous editions are available to download from: www.kpmg.com/in

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