GAAP Reporter | 1

GAAP ReporterJune 2016

2 | GAAP Reporter

Introduction

Dear Reader,

Grant Thornton presents ‘GAAP Reporter’, a quarterly bulletin that summarises significant accounting, auditing and related updates. This publication has been compiled to meet the needs of dynamic Indian businesses and focuses on key developments in India and across the globe.

To access the source of information and complete details you can click the hyperlinked text.

We would be pleased to receive your feedback. Please write to us at gaapreporter@in.gt.com with your comments, questions or suggestions.

This edition covers updates for the quarter ended 30 June 2016 and hot topics. Abbreviations used in the publication are explained at the end of the publication.

Following is the index of updates covered in this bulletin:

India

Implementation of Ind ASs by banks Accounting

Framework for computation of book profit for the purposes of levy of MAT for Ind AS compliant companies Accounting

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

Companies (Accounting Standards) Amendment Rules, 2016 Accounting

Revision to Schedule III of the Companies Act, 2013 in compliance with the Companies (Indian Accounting Standards) Rules, 2015 Accounting

Guidance note on accounting for real estate transactions Accounting

ITFG issues clarification bulletin 2 and clarification bulletin 3 Accounting

FAQs on consolidated financial statements Accounting

FAQ on deemed cost of Property, Plant and Equipment under Ind AS 101, First-time Adoption of Indian Accounting Standards Accounting

Revised formats for financial results and implementation of Ind ASs by listed entities Auditing

CARO, 2016 and Guidance Note on CARO, 2016 Auditing

New and revised Standards on Auditing Auditing

Format of Statutory Auditors’ Certificate to be submitted by NBFCs Auditing

Constitution of the NCLT and NCLAT and notification of related provisions of the Companies Act, 2013 Other

Companies (Appointment and Remuneration of Managerial Personnel) Amendment Rules, 2016 Other

Companies (Acceptance of Deposits) Amendment Rules, 2016 Other

Real Estate (Regulation and Development) Act, 2016 – Certain sections notified Other

Clarification regarding applicability of Ind ASs to disclosures in offer documents under SEBI (ICDR) Regulations, 2009 Other

The Insolvency and Bankruptcy Code, 2016 Other

Notification of provisions of the Companies Act, 2013 relating to ‘Special Courts’ Other

Companies (Corporate Social Responsibility Policy) Amendment Rules, 2016 Other

Companies (Removal of Difficulties) Orders, 2016 Other

GAAP Reporter | 3

Companies (Share Capital and Debentures) Second Amendment Rules, 2016 Other

Companies (Authorised to Register) Amendment Rules, 2016 Other

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

SEBI amends regulations to include provisions relating to wilful defaulter Other

FAQs on SEBI (Delisting of Equity Shares) Regulations, 2009 Other

Amendment to Guidance Note on SEBI (Prohibition of Insider Trading) Regulations, 2015 Other

Electronic book mechanism for issuance of debt securities on private placement basis Other

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

Circular on IRDA (Preparation of Financial Statements and Auditor’s Report of Insurance Companies) Regulations, 2002 Other

International

Clarifications to IFRS 15, Revenue from Contracts with Customers Accounting

ISAB issues narrow-scope amendments to IFRS 2, Share-based Payment Accounting

America

FASB issues guidance on employee share-based payment accounting Accounting

FASB amends guidance on identifying performance obligations and licensing Accounting

FASB removes certain SEC staff guidance from codification Accounting

FASB issues narrow scope improvements and practical expedients to ASC 606, Revenue from Contracts with Customers Accounting

FASB issues new guidance on measurement and accounting for credit losses Accounting

SEC approves rules on disclosing name of engagement partner and information about participating firms Auditing

Hot Topics

SEBI reporting requirements – Disclosure of the impact of audit qualifications by listed entities

MCA amends existing accounting standards

Decoding Companies (Auditor’s Report) Order, 2016

Revenue recognition in real estate transactions (Ind AS)

4 | GAAP Reporter

India -Accounting Updates

Implementation of Ind ASs by banksRBI has issued a notification on 23 June 2016 on implementation of Ind ASs by banks. This notification provides the following:

• RBI had directed banks to submit Proforma Ind AS Financial Statements (‘Proforma Statements’) to the RBI from the half-year ending 30 September 2016 onwards. The Proforma Statements will be required to be submitted for the half year ending 30 September 2016 latest by 30 November 2016;

• Banks will be guided by the Ind ASs notified by the MCA under the Companies (Indian Accounting Standards) Rules, 2015 and Companies (Indian Accounting Standards) (Amendment) Rules, 2016, as amended from time to time, and report of the Working Group on ‘Implementation of Ind AS by Banks in India’ for preparation of these Proforma Statements;

• The Proforma Statements will include the following:

— Balance Sheet including Statement of Changes in Equity;

— Profit and Loss Account;

— Notes;

— Reconciliations of equity and total comprehensive income in accordance with Ind ASs;

— Significant accounting policies

• The formats prescribed are solely for the preparation and submission of the Proforma Statements to the RBI. The formats for the Ind AS financial statements for the accounting periods beginning on or after 01 April 2018 will be notified separately. RBI does not require the Proforma Statements to be audited;

• Banks may note that Ind AS 109 is not specific in terms of the approach to be followed when measuring expected credit losses (ECL). RBI will finalise the policy on ECL provisioning, taking into account the impairment requirements under Ind AS 109, after due deliberations, and considering various factors;

• Banks which are not in a position to submit both standalone and consolidated Proforma Statements for the half year ending 30 September 2016 have been permitted to submit only standalone Financial Statements. However, such banks will submit both Proforma Ind AS standalone and consolidated Financial Statements in the subsequent periods;

For the purpose of preparation of Proforma Statements for the half year ending 30 September 2016, the notional date of transition to Ind ASs will be the beginning of business as on 01 April 2016. This however, does not change the date of transition for the purpose of preparation of Ind AS financial statements for the accounting periods beginning on or after 01 April 2018, which will be as per the provisions of Ind AS 101, First Time Adoption of Indian Accounting Standards.

Click here for notification.

Framework for computation of book profit for the purposes of levy of MAT for Ind AS compliant companiesThe Committee on MAT-Ind AS, constituted by CBDT, submitted its report on framework for computation of book profit for the purpose of levy of MAT under Section 115JB of the Income-tax Act, 1961 for Ind AS compliant companies in the year of adoption and thereafter.

The report includes the following recommendations:

• No further adjustments are required to be made to the net profits (excluding net Other Comprehensive Income (‘OCI’)) other than those already specified under Section 115JB of the Act;

• Net profit (excluding net OCI) under Ind ASs may include a sizable amount of notional/unrealised gains or losses. In case MCA prescribes any further adjustments to the current year profits (excluding net OCI) for computation of distributable profits, the requirement for any additional adjustments to book profit under Section 115JB may be examined.

• Certain items included in net OCI will be permanently recorded in reserves and hence never be reclassified to the statement of profit and loss account included in the computation of book profits. The report has recommended that such items be included in book profits for MAT purposes at appropriate point of time. Illustrative list of such items along with recommended treatment for MAT is also provided.

• Recommendations on account of impact of first time adoption of Ind ASs have also been made.

This report was issued for public comments and the last date for submission of comments was 10 May 2016.

The recommendations would result in significant outflow of cash through MAT on notional/unrealised gains that are being recorded in the Ind AS books, either in the opening reserve or in subsequent periods.

Click here for press release.

Click here for report.

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Companies (Indian Accounting Standards) (Amendment) Rules, 2016MCA has notified Companies (Indian Accounting Standards) (Amendment) Rules, 2016 (‘Amendment Rules’) on 30 March 2016 to amend Companies (Indian Accounting Standards) Rules, 2015. The Amendment Rules contain the following:

• Roadmap for implementation of Ind ASs by NBFCs;

• Issuance of Ind AS 11, Construction Contracts and Ind AS 18, Revenue and omission of Ind AS 115, Revenue from Contracts with Customers;

• Consequential amendments to other Ind ASs.

The Amendment Rules are effective from 30 March 2016.

Click here for notification.

Companies (Accounting Standards) Amendment Rules, 2016

MCA has notified Companies (Accounting Standards) Amendment Rules, 2016 (‘Amendment Rules’) on 30 March 2016 to amend Companies (Accounting Standards) Rules, 2006. The Amendment Rules replace AS 2, AS 4, AS 10, AS 13, AS 14, AS 21 and AS 29 and omit AS 6 specified in the Companies (Accounting Standards) Rules, 2006.

Click here for notification.

The Amendment Rules are effective from 30 March 2016. The ICAI and MCA have clarified that the Amendment Rules should be used for preparation of financial statements for accounting periods commencing on or after the date of the notification.

Click here for ICAI announcement.

Click here for MCA circular.

Revision to Schedule III of the Companies Act, 2013 in compliance with the Companies (Indian Accounting Standards) Rules, 2015 MCA has notified amendments to Schedule III of the Companies Act, 2013 with respect to financial statements of companies which are required to comply with the Companies (Indian Accounting Standards) Rules, 2015. The existing Schedule III has been divided into two parts:

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

b. Division II - applicable to companies whose financial statements are drawn up in compliance with Ind ASs.

The salient features of Division II are:

• It provides the format of Balance Sheet, Statement of Changes in Equity and Statement of Profit and Loss and sets out the minimum requirements of disclosure on their faces (The Statement of Changes in Equity is a new statement required to be prepared under Ind ASs which is not required under accounting standards specified in the Companies (Accounting Standards) Rules, 2006 (as amended));

• It does not permit companies to present assets and liabilities in the order of liquidity (as provided in Ind AS 1, Presentation of Financial Statements);

• The Statement of Cash Flows should be prepared, where applicable, in accordance with the requirements of Ind AS 7, Statement of Cash flows;

• Disclosure requirements specified in Schedule III is in addition to and not in substitution of the disclosure requirements specified in Ind ASs.

These amendments are effective from 06 April 2016.

Click here for notification.

Guidance note on accounting for real estate transactions ICAI has issued Guidance Note on Accounting for Real Estate Transactions (for entities to whom Ind AS is applicable) (‘Guidance Note’). This Guidance Note recommends the accounting treatment by entities dealing in real estate as sellers or developers. This Guidance Note covers all forms of transactions in real estate and provides guidance on accounting for sale of plots of land, sale of developed plots, transferable development rights and transactions with multiple elements. The Guidance Note requires recognition of revenue using the percentage of completion method in those real estate contracts which are in the nature of construction contracts.

Click here for Guidance Note.

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ITFG issues clarification bulletin 2 and clarification bulletin 3 ITFG, constituted by the ASB of the ICAI, has issued the second and third set of clarifications on various issues related to the applicability/implementation of Ind ASs under the Companies (Indian Accounting Standards) Rules, 2015, which were raised by preparers/users/other stakeholders.

The clarification bulletin 2 includes clarifications on application of the option to continue policy of amortisation of balance of Foreign Currency Monetary Item Translation Difference Account as per AS 11, The Effects of Changes in Foreign Exchange Rates, applicability of Ind AS to an Indian subsidiary of a foreign company, issues related to PPE, etc.

The clarification bulletin 3 includes clarifications on Ind AS implementation, treatment of capital spares, gain or loss on hedged item in case of cash flow hedge of foreign currency loan when a company opts to avail the option given in paragraph 46/46A of AS 11, revenue based amortisation in case of service concession arrangements in respect of toll roads etc.

Click here for clarification bulletin 2.

Click here for clarification bulletin 3.

FAQs on consolidated financial statementsThe ASB of the ICAI has issued FAQs which have clarified following requirements regarding preparation of consolidated financial statements:

• An LLP or a partnership firm which is a subsidiary of a company is required to be consolidated by the company in accordance with the requirements of applicable ASs. Further if the LLP or the partnership firm is an associate or joint venture of the company, the LLP or the partnership firm is required to be consolidated in accordance with the requirements of applicable ASs.

• When financial statements are prepared in accordance with the Companies (Accounting Standards) Rules, 2006 and a company has no subsidiary but has investments in an associate or a joint venture, the consolidated financial statements are required to be prepared for its associate and joint venture in accordance with the applicable ASs.

Click here for FAQs.

FAQ on deemed cost of Property, Plant and Equipment under Ind AS 101, First-time Adoption of Indian Accounting StandardsThe ASB of the ICAI has issued FAQ on deemed cost of PPE under Ind AS 101, First-time Adoption of Indian Accounting Standards. This FAQ provides following clarifications:

• Ind AS 101 provides an option to continue with the carrying values of PPE measured as per the previous GAAP (i.e. deemed cost on the date of transition to Ind AS). Any accumulated depreciation and provision for impairment under previous GAAP have no relevance as would be the case if fair value were to be taken as deemed cost. Accordingly, provision for impairment provided before the date of transition as per previous GAAP cannot be reversed in later years.

• Information regarding gross block of assets, accumulated depreciation and provision for impairment under previous GAAP can be disclosed by way of note forming part of the financial statements. The information can be disclosed only as additional disclosures and the same cannot be considered for subsequent recognition and/or measurement purposes.

Click here for FAQ.

GAAP Reporter | 7

India – Auditing updates

Revised formats for financial results and implementation of Ind ASs by listed entitiesSEBI has issued a circular on revised formats for financial results and implementation of Ind ASs by listed entities. The circular provides various relaxations to the listed entities to which Companies (Indian Accounting Standards) Rules, 2015 (‘Ind AS Rules’) are applicable from the accounting periods beginning on or after 01 April 2016. The relaxations pertain to timelines for submitting financial results, comparative periods to be presented and requirement of audit/limited review of comparative figures during the first year of Ind ASs implementation. The highlights of the circular are as follows:

• Existing formats prescribed in SEBI circular dated 30 November 2015 for quarterly financial results will continue till the period ending 31 December 2016;

• For the periods ended on or after 31 March 2017, the formats for quarterly financial results will be as per the formats prescribed in Schedule III to the Companies Act, 2013. Banking companies and Insurance companies will follow the formats as prescribed under the respective Acts / Regulations;

• Relaxations provided to the listed entities to which Ind AS Rules are applicable from the accounting periods beginning on or after 01 April 2016:

a. For the quarters ended 30 June 2016 and 30 September 2016:

— One month extension has been provided for submitting the financial results;

— Ind AS compliant comparatives for the corresponding quarter and corresponding year-to-date of the previous year are required to be mandatorily submitted. However, limited review or audit of the same is not mandatory;

— Ind AS compliant comparatives for the immediately preceding quarter and previous year ended 31 March 2016 (in case of quarter ended 30 June 2016) and Ind AS compliant comparatives for previous year ended 31 March 2016 (in case of quarter ending 30 September 2016) need not mandatorily be submitted. If the company opts to provide these comparatives, limited review or audit of the same is not mandatory;

b. For the quarter ending 31 December 2016:

The submission of Ind AS compliant financial results for the previous year ended 31 March 2016 as comparative is not mandatory; If the company opts to submit, limited review or audit is mandatory;

c. Listed entity can opt to submit quarterly/year-to-date consolidated financial results in the second quarter instead of the first quarter of the financial year and this option will not be changed during the remaining part of the financial year;

• For listed entities to which Ind AS Rules are applicable in subsequent phases, the relaxations will apply during their corresponding first year of Ind ASs implementation;

• For complying with the requirements Ind AS 101, First-time Adoption of Indian Accounting Standards, a listed entity is required to provide reconciliation of its equity and net profit/loss as follows:

a. For period ending 31 March 2017 - Reconciliation of its equity for the previous year ended 31 March 2016;

b. For period ending 30 September 2016 - The listed entity can submit the reconciliation of its equity for the previous year ended 31 March 2016 but is not mandatory;

c. Reconciliation of its net profit/loss required to be provided only for the corresponding quarter of the previous year;

• If the period for which the comparative information has been provided is shorter or longer than the normal 12-month period (where the entity historically has a year-end other than 31 March), the listed entity is required to disclose a suitable note that the comparative amounts are not entirely comparable.

This circular is effective from 5 July 2016 and contents of the circular dated 30 November 2015 stand modified to the extent stated under this circular.

Click here for circular.

8 | GAAP Reporter

CARO, 2016 and Guidance Note on CARO, 2016MCA has notified CARO, 2016 (‘Order’) on 29 March 2016, which is applicable for reporting in auditor’s report for the audit of financial statements of the companies, to which the Order applies, for the financial years commencing on or after 01 April 2015. The Order does not apply to the auditor’s report on consolidated financial statements. The Order supersedes CARO, 2015, except as respects things done or omitted to be done before such supersession.

The AASB of the ICAI has issued ‘Guidance Note on the Companies (Auditor’s Report) Order, 2016’ (‘Guidance Note’). This Guidance Note supersedes the earlier Statement of CARO, 2003 issued by the ICAI. The purpose of this Guidance Note is to enable the auditors to comply with the reporting requirements of the order.

Click here for the Order.

Click here for Guidance Note.

New and revised Standards on Auditing The ICAI has issued new/revised SAs.

New SA: SA 701 - Communicating key audit matters in the independent auditor’s report.

This SA deals with the auditor’s responsibility to communicate key audit matters (KAMs) in the auditor’s report. KAMs are the matters which have been communicated with those charged with governance and which auditor understands to be of most significance in the audit of financial statements.

Revised SAs

1. SA 700 (Revised) - Forming an opinion and reporting on financial statements

2. SA 705 (Revised) - Modifications to the opinion in the independent auditor’s report

3. SA 706 (Revised) - Emphasis of matter paragraphs and other matter paragraphs in the independent auditor’s report

4. SA 260 (Revised) - Communication with those charged with governance

5. SA 570 (Revised) - Going concern

The main changes made in SA 700 (Revised), 705 (Revised) and 706 (Revised) relate to auditor’s report and guidance for reporting which include the following:

• Change in format of auditor’s report - The first section of the auditor’s report to include auditor’s opinion, followed by basis of opinion, going concern, KAMs and so on and so forth;

• Detailed auditor’s responsibility section;

• Detailed guidance on adverse opinion and disclaimer of opinion;

• Consequential changes in these standards resulting from amendments to SA 570 and new SA 701.

SA 260 (Revised): Limited amendments have been made to the required auditor communications with those charged with governance as were necessary in light of new SA 701 and circumstances that affect the form and content of the auditor’s report.

SA 570 (Revised): The revised SA provides that when events or conditions have been identified that may cast significant doubt on the entity’s ability to continue as a going concern, but the auditor concludes that no material uncertainty exists, the auditor is required to evaluate whether, in view of the requirements of the applicable financial reporting framework, the financial statements provide adequate disclosure about events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern.

Further, if the auditor concludes that use of going concern basis of accounting is appropriate, but material uncertainty exists and adequate disclosures have been made in the financial statements, the auditor is required to include a separate section under the heading ‘Material Uncertainty Related to Going Concern’ in the auditor’s report. This section will draw attention to the relevant note in the financial statements and state that auditor’s opinion is not modified in respect of the matter.

These new/revised SAs are effective for audits of financial statements for periods beginning on or after 01 April 2017.

Click here for ICAI announcement.

Format of Statutory Auditors’ Certificate to be submitted by NBFCsNon-Banking Financial (Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007 require all NBFCs to submit a certificate from their Statutory Auditors every year to the effect that they continue to engage in the business of NBFI requiring it to hold a certificate of registration under Section 45-IA of the RBI Act.

RBI has issued a format of Statutory Auditors’ Certificate on 23 June 2016 to ensure consistency in the manner in which the information is received from the auditors.

Click here for notification.

GAAP Reporter | 9

Constitution of the NCLT and NCLAT and notification of related provisions of the Companies Act, 2013Central Government has constituted NCLT and NCLAT with effect from 01 June 2016.

Click here for notification.

Further, all the matters or proceedings or cases pending before CLB stand transferred to the NCLT on 01 June 2016.

Click here for notification.

Further, certain sections of the Companies Act, 2013 are effective from 01 June 2016, which primarily relate to powers and functions of NCLT and NCLAT including power of Tribunal to call AGM/call meetings of members etc., punishment for default in complying with provisions of Sections 96 to 98 and complying with any directions of the Tribunal, re-opening of accounts on court’s or Tribunal’s orders, voluntary revision of financial statements or board’s report, investigation into company’s affairs in other cases, protection of employees during investigation, freezing of assets of company on inquiry and investigation, application to Tribunal for relief in cases of oppression etc., class action, compounding of certain offences, dissolution of CLB and consequential provisions, etc.

Central Government has also constituted 11 benches of the NCLT located at 10 cities in India specifying their territorial jurisdiction.

Click here for notification.

Companies (Appointment and Remuneration of Managerial Personnel) Amendment Rules, 2016 MCA has issued Companies (Appointment and Remuneration of Managerial Personnel) Amendment Rules, 2016 (‘Amendment Rules’) on 30 June 2016, which have made following amendments:

• A company is required to file a return of appointment of MD, WTD or Manager only and need not file a return of appointment of CEO, CS and CFO. Further, the Form MR-1, Return of appointment of managerial personnel, also requires certification by either a chartered accountant or a cost accountant or company secretary in whole-time practice.

• The disclosures relating to relationship between increase in remuneration and performance of the company, comparison of remuneration with performance of the company, variation in market capitalisation and price earnings ratio compared to previous year etc. are no longer required in Board’s report of listed companies.

Limits for providing details of employees in receipt of remuneration during the year have changed. The name of every employee in receipt of not less than one crore and two

lakh rupees in a year (if employed throughout the financial year) and eight lakh and fifty thousand rupees per month (if employed for a part of the financial year) is to be disclosed. Earlier the employees in receipt of not less than sixty lakh rupees in a year (if employed throughout the financial year) and five lakh per month (if employed for a part of the financial year) were required to be disclosed. Further, the names of the top ten employees in terms of remuneration drawn are also required to be disclosed in a statement included in the Board’s report.

The Amendment Rules are effective from 30 June 2016.

Click here for notification.

Companies (Acceptance of Deposits) Amendment Rules, 2016MCA has issued Companies (Acceptance of Deposits) Amendment Rules, 2016 (‘Amendment Rules’), amending definition of deposits, terms and conditions of acceptance of deposits by companies, form and particulars of advertisements or circulars to invite deposits, deposit insurance and adding disclosures in the financial statements.

Following amounts received will not be considered as deposit:

• Amount raised by issue of non-convertible debenture not constituting a charge on the assets of the company and listed on recognised stock exchange;

• Amount received by way of subscription in respect of a chit under the Chit Fund Act, 1982;

• Amount received by the company under any collective investment scheme in compliance with regulations framed by the SEBI;

• Amount received by a startup company of INR 25 Lakhs or more, by way of a convertible note (convertible into equity shares or repayable within a period not exceeding five years from the date of issue) in single tranche, from a person;

• Amount received by a company from AIFs, Domestic VCFs and MFs registered with the SEBI in accordance with regulations made by it.

Limit of acceptance of deposits from members has been increased from 25% to 35% of the aggregate of paid-up share capital, free reserves and securities premium account. Such limit for private companies is 100% of the aggregate of the paid-up share capital, free reserves and securities premium account.

An eligible company is required to obtain credit rating for deposits accepted by it at least once in a year.

India – Other updates

10 | GAAP Reporter

The companies may accept deposits without deposit insurance contract till 31 March 2017 (earlier it was 31 March 2016) or till the availability of a deposit insurance product, whichever is earlier.

Private companies are required to disclose in their financial statement, by way of notes, money received from the directors or relatives of directors. All other companies are required to disclose money received from the directors.

The Amendment Rules are effective from 29 June 2016.

Click here for notification.

Real Estate (Regulation and Development) Act, 2016 – Certain sections notifiedThe following provisions of the Real Estate (Regulation and Development) Act, 2016 are effective from 01 May 2016:

1. Section 2: Definitions;

2. Sections 20 to 39: Provisions in respect of the Real Estate Regulatory Authority;

3. Sections 41 to 58: Provisions in respect of Central Advisory Council and the Real Estate Appellate Tribunal;

4. Sections 71 and 72: Provisions in respect of power to adjudicate;

5. Section 73 to 78: Provisions in respect of finance, accounts, audits and reports;

6. Sections 81 to 92: Miscellaneous provisions.

Click here for notification.

Clarification regarding applicability of Ind-ASs to disclosures in offer documents under SEBI (ICDR) Regulations, 2009 SEBI has issued a circular on 31 March 2016 to align the disclosure requirements for financial information in the offer document as specified under SEBI (ICDR) Regulations, 2009 with the requirements of Ind ASs specified under MCA roadmap on implementation of Ind AS. The circular contains following clarifications:

• Relevant accounting framework applicable for disclosure of financial information in the offer document for issuer companies to which Ind ASs are applicable in phase 1 (i.e. beginning from FY 2016-17) and phase 2 (i.e. beginning from FY 2017-18) of MCA Roadmap;

• Issuer companies that fall within Phase 1 and that file an offer document between 01 April 2017 and 31 March 2018 are required by SEBI circular to present financial information in accordance with Ind ASs for the three financial years immediately preceding the date of filing;

• Disclosure of interim period to be made in line with the accounting policies followed for latest financial year;

• The issuer company may voluntarily choose to present all five year periods using Ind AS framework instead of accounting standards otherwise applicable for such period(s);

• The issuer company should disclose the fact that the financial information has been disclosed as per Ind ASs and also explain the difference between Ind AS and the previously applicable accounting standards, and the impact of transition to Ind ASs.

This circular is applicable for all the companies which are required to disclose the financial information in accordance with Ind ASs as per MCA roadmap and whose offer document is filed with the SEBI on or after 01 April 2016.

Click here for circular.

The Insolvency and Bankruptcy Code, 2016 The Insolvency and Bankruptcy Code, 2016 (‘the Code’) consolidates and amends the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner. The Code seeks to establish an Insolvency and Bankruptcy Board of India.

In relation to the insolvency, liquidation, voluntary liquidation or bankruptcy, as the case may be, the provisions of the Code apply to companies incorporated under the Companies Act, 2013 or under any previous company law, or any other companies governed by any special Act; LLPs; other bodies incorporated under any law and specified by the Central Government; and partnership firms and individuals.

The Code received the assent of the President on 28 May 2016 and will be effective from such date as the Central Government may appoint.

Click here for the Code.

Notification of provisions of the Companies Act, 2013 relating to ‘Special Courts’ The following provisions of the Companies Act, 2013 relating to ‘Special Courts’ are effective from 18 May 2016:

1. Section 2(29)(iv): ‘Courts’ to include ‘Special Courts’ established under Section 435 of the Companies Act, 2013;

2. Section 435 to 438: Provisions related to establishment of Special Court, triable offences, appeal and revision, application of Code of Criminal Procedure, 1973 to proceedings before Special Court; and

3. Section 440: Transitional provisions.

Click here for notification.

GAAP Reporter | 11

Companies (Corporate Social Responsibility Policy) Amendment Rules, 2016 MCA has issued Companies (Corporate Social Responsibility Policy) Amendment Rules, 2016 (‘Amendment Rules’). The Amendment Rules state that the Board of Directors of a company may decide to undertake its CSR activities through a company established under Section 8 of the Companies Act, 2013 or a registered trust or a registered society:

• established by the company either singly or along with any other company, or

• established by the Central Government or State Government or any entity established under an Act of Parliament or a state legislature

Earlier, a company could undertake its CSR activities through a company, trust or society mentioned above established by the company or its holding or subsidiary or associate company.

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

These Amendment Rules are effective from 23 May 2016.

Click here for notification.

Companies (Removal of Difficulties) Orders, 2016MCA has issued the following Orders on 29 March 2016:

The Companies (Removal of Difficulties) Order, 2016 which provides that till the constitution of NFRA, the Central Government may hold consultation as required under Section 143(11) of the Companies Act, 2013 with the Committee comprising of Joint Secretary or equivalent in the MCA and representatives of ICAI, industry chambers, NACAS and Comptroller and Auditor-General.

The Order is deemed to be effective from 10 April 2015.

The Companies (Removal of Difficulties) Second Order, 2016 which provides that till the constitution of NFRA, the Central Government may prescribe standards of accounting (under Section 133 of the Companies Act, 2013) as recommended by the ICAI in consultation with and after examination of the recommendations made by NACAS.

The Order is deemed to be effective from 01 April 2015.

Click here for the Companies (Removal of Difficulties) Order, 2016.

Click here for the Companies (Removal of Difficulties) Second Order, 2016.

Further, MCA has issued the Companies (Removal of Difficulties) Third Order, 2016 (‘Order’) on 30 June 2016 providing clarification on the rotation norms for appointment of auditor.

In accordance with Section 139(2) of the Companies Act, 2013, listed companies or prescribed class of companies can appoint or re-appoint either an individual as auditor for not more than one term of five consecutive years or an audit firm as auditor for not more than two terms of five consecutive years.

Where a company exists on or before the commencement of the Act and is required to comply with provisions of Section 139(2), the third proviso to Section 139(2) requires the company to comply with the requirements of such sub-section within three years from the date of commencement of the Act i.e. 01 April 2014.

An auditor is appointed at an AGM and holds office from the conclusion of that meeting till the conclusion of sixth annual general meeting.

There was a lack of clarity as to whether appointment of another auditor at the first AGM after 31 March 2017 would be considered as sufficient compliance with the rotation norms because the existing auditor would still be serving as an auditor till the conclusion of first AGM after 31 March 2017.

The Order clarifies that every company existing on or before the commencement of the Act which is required to comply with the provisions of Section 139(2) is required to comply with rotation norms within a period which will not be later than the date of the first AGM of the company held, within the period specified under Section 96(1) of the Act, after three years from the date of commencement of the Act.

The Order is deemed to be effective from 01 April 2014.

Click here for the Companies (Removal of Difficulties) Third Order, 2016.

12 | GAAP Reporter

Companies (Share Capital and Debentures) Second Amendment Rules, 2016MCA has issued Companies (Share Capital and Debentures) Second Amendment Rules, 2016 (‘Amendment Rules’).

Currently, as per the existing provisions, the offer for buy-back should remain open for a period of not less than fifteen days and not exceeding thirty days from the date of dispatch of the letter of offer. However, the Amendment Rules provide that if all members of a company agree, the offer for buy-back may remain open for a period of less than fifteen days.

The Amendment Rules are effective from 29 March 2016.

Click here for notification.

Companies (Authorised to Register) Amendment Rules, 2016MCA has issued the Companies (Authorised to Register) Amendment Rules, 2016 (‘Amendment Rules’). These Amendment Rules have made following changes:

• ‘Firm’ as defined in Section 4 of the Indian Partnership Act, 1932 also included in the Companies (Authorised to Register) Rules, 2014 and consequent changes made in form URC-1, Application by a company for registration under section 366 (conversion from firm into company, and LLP into company), which includes conversion from firm into company, in addition to conversion of LLP into company in existing URC-1.

• Following documents are also required to be attached along with new form URC-1:

— An undertaking that the proposed directors will comply with the requirements of Indian Stamp Act, 1899, as applicable;

— A statement of assets and liabilities of the LLP or the firm, duly certified by a chartered accountant in practice made as on a date not earlier than thirty days of the filing of Form No. URC-1;

— A copy of latest income tax return of the LLP or firm.

These Amendment Rules are effective from 31 May 2016.

Click here for notification.

SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2016 SEBI has issued SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2016 (‘Amendment Regulations’) on 25 May 2016. The Amendment Regulations are effective from 01 April 2016. The following Regulations have been amended:

Regulation 33 - Financial results and Regulation 52 - Financial results

Regulation 33 deals with financial results of a listed entity which has listed its specified securities (‘specified securities’ means ‘equity shares’ and ‘convertible securities’ as defined under regulation 2(1)(zj) of the SEBI (ICDR) Regulations, 2009) and Regulation 52 deals with financial results of a listed entity which has listed its non-convertible debt securities or non-convertible redeemable preference shares or both.

The key changes include that

• instead of submission of Form A (for audit report with unmodified opinion), listed entities are required to submit a declaration that the audit report is unmodified, to stock exchange while publishing the annual audited financial results.

• instead of submission of Form B (for audit report with modified opinion), listed entities are required to submit ‘Statement on Impact of Audit Qualifications’.

Further, SEBI has issued circular on ‘Disclosure of the Impact of Audit Qualifications by the Listed Entities’ under Regulation 33 and Regulation 52 on 27 May 2016, which is applicable for all the annual audited standalone/ consolidated financial results submitted by the listed entities for the period ended on or after 31 March 2016. The circular includes the following:

• Format for ‘Statement on Impact of Audit Qualifications’ (for audit report with modified opinion) to be filed with the stock exchanges is given in Annexure I to the circular. The management of the listed entity has the option to explain its views on the audit qualifications.

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

Click here for SEBI circular.

NSE and BSE have also issued circulars on 01 June 2016 to provide operational details for implementing the amendments brought in by the Amendment Regulations and the aforementioned circular, which are as follows:

GAAP Reporter | 13

• In case of audit reports with unmodified opinion(s) for the period ended 31 March 2016

— Listed entities that have already submitted Form A: Considered as sufficient compliance with the aforesaid amendments.

— Listed entities that have not submitted Form A: A declaration that the audit report is unmodified is to be submitted within 30 days from the date of these circulars.

• In case of audit reports with modified opinion(s) for the period ended 31 March 2016: The listed entities (irrespective of having submitted Form B or not for the period ended 31 March 2016) would be required to submit the ‘Statement on Impact of Audit Qualifications’ within 60 days from the date of these circular in the format provided in the aforesaid SEBI circular.

• For all the subsequent annual filings of audited financial results, submission of Form A / Form B is dispensed with. Therefore, all listed entities should submit either declaration or ‘Statement on Impact of Audit Qualifications’, in the prescribed format.

Click here for NSE circular.

Click here for BSE circular.

Regulation 34 - Annual report and Regulation 53 - Annual report

The annual report should also contain ‘Statement on impact of audit qualifications’.

Further, because of removal of Form B, consequential amendments have been made in Regulation 95 which deals with review of Form B and accompanying annual audit report by stock exchange(s) and Schedule IV ‘Disclosures in Financial Results’, and Schedule VIII, ‘Manner of Reviewing Form B accompanying Annual Audited Results’ has been deleted.

Click here for notification on Amendment Regulations.

SEBI amends regulations to include provisions relating to wilful defaulterSEBI has issued four Amendment Regulations in May 2016 to include the provisions of wilful defaulter in the originally issued Regulations. All the Amendment Regulations define wilful defaulter and contain consequential amendments, and are effective from 25 May 2016. The Amendment Regulations are given below:

a. SEBI (Substantial Acquisition of Shares and Takeovers) (Second Amendment) Regulations, 2016

A wilful defaulter should not make a public announcement of an open offer for acquiring shares or enter into any transaction that would attract obligation to make a public announcement of an open offer for acquiring shares.

Click here for notification.

b. SEBI (Issue of Capital and Disclosure Requirements) (Third Amendment) Regulations, 2016

• If the issuer or any of its promoters or directors is a wilful defaulter, it cannot make a public issue of equity securities;

• If the issuer or any of its promoters or directors is a wilful defaulter or it is in default of payment of interest or repayment of principal amount in respect of debt instruments issued by it to the public for a period of more than six months, it cannot make a public issue of convertible debt instruments

• Disclosures pertaining to wilful defaulters.

Click here for notification.

c. SEBI (Issue and Listing of Debt Securities) (Amendment) Regulations, 2016

• An issuer cannot make any public issue of debt securities if, as on the date of filing of draft offer document or final offer document:

— the issuer or the person in control of the issuer or its promoter or its director is restrained or prohibited or debarred by the SEBI from accessing the securities market or dealing in securities; or

— the issuer or any of its promoters or directors is a wilful defaulter or it is in default of payment of interest or repayment of principal amount in respect of debt securities issued by it to the public for a period of more than six months.

• Disclosures pertaining to wilful default.

Click here for notification.

d. SEBI (Intermediaries) (Amendment) Regulations, 2016

The Amendment Regulations have added that ‘absence of categorisation as a wilful defaulter’ is an additional criteria for determining whether an applicant or the intermediary is ‘fit and proper person’. This criterion, along with other criteria mentioned in the Regulations, is not an exhaustive list and SEBI may take into account any considerations as it deems fit.

Click here for notification.

FAQs on SEBI (Delisting of Equity Shares) Regulations, 2009 SEBI has issued updated FAQs on SEBI (Delisting of Equity Shares) Regulations, 2009 (‘Regulations’) on 21 April 2016.

Regulation 27(3)(d) states that delisting of equity shares may be made by the promoter of a small company if at least ninety per cent of such public shareholders give their positive consent in writing to the proposal for delisting.

The FAQs have clarified that such promoter would be considered to have complied with the condition specified under Regulation 27(3)(d) if the public shareholders,

14 | GAAP Reporter

irrespective of their numbers, holding 90% or more of the public shareholding give their positive consent in writing to the proposal for delisting.

Click here for FAQs.

Amendment to Guidance Note on SEBI (Prohibition of Insider Trading) Regulations, 2015 SEBI has amended ‘Guidance Note on SEBI (Prohibition of Insider Trading) Regulations, 2015’ (‘Guidance Note’) in view of the amendments to SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 which provided for exit opportunity to dissenting shareholders in terms of Sections 13 and 27 of the Companies Act, 2013, with effect from 17 February 2016. Therefore, the Guidance Note has been amended to clarify that exit offer is also exempted from the restriction on contra trade under the Regulations. The Guidance Note has been amended with effect from 17 February 2016.

Click here for press release.

Click here for amended Guidance Note.

Electronic book mechanism for issuance of debt securities on private placement basis SEBI has issued circular on 21 April 2016 laying down the framework for private placement of debt securities through electronic book mechanism. As per the framework, electronic book mechanism will be provided by recognised stock exchange(s) only after obtaining prior approval from SEBI. To begin with, this electronic book mechanism would be mandatory for all private placements of debt securities in primary market with an issue size of INR 500 crores and above, inclusive of green shoe option, if any.

Electronic book mechanism will be optional for the issues below INR 500 crores, however the issuer should disclose the coupon, yield, amount raised, number of investors and category of investors to the electronic book provider and/or to the information repository for corporate debt market, in the format as specified by the Board.

The circular is effective from 01 July 2016.

Click here for circular.

SEBI (Listing Obligations and Disclosure Requirements) (Second Amendment) Regulations, 2016SEBI has issued SEBI (Listing Obligations and Disclosure Requirements) (Second Amendment) Regulations, 2016 (‘Amendment Regulations’).

he Amendment Regulations require top 500 listed entities (basis market capitalisation calculated as on 31 March of every financial year) to formulate and disclose their dividend distribution policies in the annual reports and on their websites.

Such policy should include the circumstances under which their shareholders may or may not expect dividend, policy as to how the retained earnings will be utilised, parameters that will be adopted with regard to various classes of shares, the financial parameters and internal and external factors that would be considered while declaring dividends.

Further, when the company proposes to declare dividend on the basis of parameters in addition to parameters stated above or proposes to change such additional parameters or the dividend distribution policy contained in any of the parameters, this fact along with the rationale will be required to be disclosed.

The listed entities other than top five hundred listed entities based on market capitalisation may disclose their dividend distribution policies on a voluntary basis in their annual reports and on their websites.

The Amendment Regulations are effective from 08 July 2016.

Click here for Amendment Regulations.

Circular on IRDA (Preparation of Financial Statements and Auditor’s Report of Insurance Companies) Regulations, 2002 The provisions of Sections 10 and 11 of the Insurance Act, 1938 have been modified vide the Insurance Laws (Amendment) Act, 2015. These amendments have necessitated changes to the IRDA (Preparation of Financial Statements and Auditor’s Report of Insurance Companies) Regulations 2002 (‘IRDA Regulations, 2002’). Given that the MCA has issued a press release which provides that insurance sector has to move to Ind ASs from the financial year 2018-19 with one year comparatives, the IRDAI has kept the draft IRDAI (Preparation of Financial Statements and Auditor’s Report of Insurance Companies) Regulations, 2015 in abeyance and directs all insurers to continue to comply with IRDA Regulations, 2002 and the circulars/ guidelines issued thereunder, with certain modifications with respect to:

• Segregation of policyholders’ and shareholders’ funds by the insurers carrying on general insurance, health insurance and reinsurance business;

• Recoupment of the deficit;

• Unearned premium reserve;

• Accounting of the branch office of reinsurer.

This circular is effective from 01 April 2016.

Click here for circular.

GAAP Reporter | 15

International – Accounting updates

Clarifications to IFRS 15, Revenue from Contracts with Customers IASB has issued amendments to IFRS 15 ‘Revenue from Contracts with Customers’ clarifying how to:

• identify a performance obligation (the promise to transfer a good or a service to a customer) in a contract;

• determine whether a company is a principal (the provider of a good or service) or an agent (responsible for arranging for the good or service to be provided); and

• determine whether the revenue from granting a licence should be recognised at a point in time or over time.

The amendments also include two additional reliefs to reduce cost and complexity for a company when it first applies the new standard. These amendments will be effective from 01 January 2018.

Click here for more details.

ISAB issues narrow-scope amendments to IFRS 2, Share-based PaymentIASB has issued amendments to IFRS 2 ‘Share-based Payment’ clarifying how to account for certain types of share-based payment transactions.

The amendments provide requirements on the accounting for:

• the effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments;

• share-based payment transactions with a net settlement feature for withholding tax obligations; and

• a modification to the terms and conditions of a share-based payment that changes the classification of the transaction from cash-settled to equity-settled.

The amendments are applicable for annual periods beginning on or after 01 January 2018. Earlier application is also permitted.

Click here for more details.

16 | GAAP Reporter

America - Accounting updates

FASB issues guidance on employee share-based payment accountingFASB has issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based award transactions.

The ASU has simplified several aspects of the accounting for share-based payment award transactions, including the following:

• Accounting for income taxes

• Presentation on the Statement of Cash Flows of

— excess tax benefits

— employee taxes paid when an employer withholds shares for tax-withholding purposes

• forfeitures

• minimum statutory tax withholding requirements

• for non-public entities

— practical expedients to estimate the expected term for all awards with service or performance conditions that meet certain conditions

— measuring liability-classified awards at intrinsic value.

Effective periods

• For public business entities: Effective for annual periods beginning after 15 December 2016, and interim periods within those annual periods.

• For all other entities: Effective for annual periods beginning after 15 December 2017, and interim periods within annual periods beginning after 15 December 2018.

• Earlier application is permitted for any entity in any interim or annual period.

Click here for news release.

Click here for ASU.

FASB amends guidance on identifying performance obligations and licensing FASB has issued ASU 2016-10, Identifying Performance Obligations and Licensing, which amends the new revenue recognition guidance codified in ASC 606, Revenue from Contracts with Customers, to clarify guidance on identifying performance obligations and accounting for licenses of intellectual property.

The amendments are expected to reduce the cost and complexity of applying the guidance on identifying promised goods or services. The amendments will also improve the guidance on assessing the criterion that the promises are separately identifiable to evaluate whether promised goods and services are distinct.

The amendments are also intended to improve the operability and understandability of the licensing implementation guidance.

Further, the ASU also provides additional implementation guidance and examples.

For public business entities: Effective for fiscal years beginning after 15 December 2017, and interim periods within those fiscal years. Earlier application is permitted only as of annual reporting periods beginning after 15 December 2016, including interim periods within those fiscal years.

For all other entities: Effective for fiscal years beginning after 15 December 2018, and interim periods within fiscal years beginning after 15 December 2019. Earlier application is permitted for annual reporting period beginning after 15 December 2016 as specified in this ASU.

Click here for ASU.

GAAP Reporter | 17

FASB removes certain SEC staff guidance from codificationFASB has issued ASU 2016-11, Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting, which removes the following SEC staff observer comments from ASC 605, Revenue Recognition, and ASC 932, Extractive Activities - Oil and Gas, upon an entity’s adoption of ASC 606, Revenue from Contracts with Customers:

• Revenue and expense recognition for freight services in process

• Accounting for shipping and handling fees and costs

• Accounting for consideration given by a vendor to a customer (including a reseller of the vendor’s products)

• Accounting for gas balancing arrangements

Further, the ASU removes the SEC Staff Announcement in relation to ‘Determining the Nature of a Host Contract Related to a Hybrid Instrument Issued in the Form of a Share’ upon ASU 2014-16, Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or to Equity, becoming effective.

Click here for ASU.

FASB issues narrow scope improvements and practical expedients to ASC 606, Revenue from Contracts with CustomersFASB has issued ASU 2016-12, Narrow-Scope Improvements and Practical Expedients, to address issues related to assessing collectability, presentation of sales taxes and other similar taxes collected, non-cash consideration, and completed contracts and contract modifications at transition. The amendments in ASU 2016-12 also provide a practical expedient for contract modifications when entities transition to the new guidance and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers.

For public business entities: Effective for fiscal years beginning after 15 December 2017, and interim periods within those fiscal years. Earlier application is permitted only as of annual reporting periods beginning after 15 December 2016, including interim periods within those fiscal years.

For all other entities: Effective for fiscal years beginning after 15 December 2018, and interim periods within fiscal years beginning after 15 December 2019. Earlier application is permitted for annual reporting period beginning after 15 December 2016 as specified in this ASU.

Click here for ASU.

FASB issues new guidance on measurement and accounting for credit lossesFASB has issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which adds a new topic, ASC 326, Financial Instruments–Credit Losses, to the codification. The new guidance is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit (for example, undrawn lines of credit) held by a reporting entity at each reporting date.

For public business entities that are SEC filers: The amendments in this update are effective for fiscal years beginning after 15 December 2019, including interim periods within those fiscal years.

For all other public business entities: The amendments in this update are effective for fiscal years beginning after 15 December 2020, including interim periods within those fiscal years.

For all other entities including not-for-profit entities and employee benefit plans within the scope of Topics 960 through 965 on plan accounting: The amendments in this update are effective for fiscal years beginning after 15 December 2020, and interim periods within fiscal years beginning after 15 December 2021.

Earlier application is permitted as of the fiscal years beginning after 15 December 2018, including interim periods within those fiscal years.

An entity will apply the amendments in this update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective.

Click here for news release.Click here for ASU.

18 | GAAP Reporter

SEC approves rules on disclosing name of engagement partner and information about participating firmsSEC has approved the PCAOB’s previously adopted new rules requiring audit firms to disclose the name of the audit engagement partner and the information about other audit firms that participated in an issuer audit engagement.

Auditors will be required to file a new PCAOB form AP, Auditor Reporting of Certain Audit Participants:

• disclosing name of the engagement partner

• if the work of other accounting firms that took part in the audit constituted

— 5 percent or more of the total audit hours, then their names, locations and extent of participation need to be disclosed

— less than 5 percent individually of the total audit hours, then the number and aggregate extent of participation of all such other accounting firms need to be disclosed.

Click here for news release.

America - Auditing updates

GAAP Reporter | 19

SEBI reporting requirements – Disclosure of the impact of audit qualifications by listed entitiesSEBI has issued SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2016 (‘Amendment Regulations’) on 25 May 2016, effective 01 April 2016 which includes following significant amendments:

Removal of requirement of submission of Form A and Form B

• Regulation 33 provides a framework for preparation, authentication and submission of financial results by a listed entity which has listed its specified securities (‘equity shares’ and ‘convertible securities’). Similarly, where an entity has listed its non-convertible debt securities or non-convertible redeemable preference shares or both, Regulation 52 provides a framework for preparation, authentication and submission of financial results by such listed entity.

• Along with audited financial results for the financial year and the audit report, a listed entity was required to submit either Form A (for audit report with unmodified opinion) or Form B (for audit report with modified opinion).

• The Amendment Regulations have removed the requirement to submit Form A/Form B.

• A listed entity is required to submit annual audited financial results for the financial year, within sixty days from the end of the financial year along with the audit report.

This requirement is applicable for both annual audited standalone financial results and annual audited consolidated financial results.

• The Statement on Impact of Audit Qualifications (‘Statement’) will now be reviewed only by the stock exchange. The significant change is that earlier in case of modified opinion, the review was required to be done by both the stock exchange(s) and QARRC (a committee constituted by SEBI comprising of representatives from the ICAI, stock exchange(s), MCA etc.).

Reinstating the requirement of submission of the Statement with annual report

• In addition to audited financial statements, the annual report should contain the Statement, if applicable. Earlier, a company was not required to include Form A or Form B in the annual report; a company was required to submit these forms only with audited standalone financial results for the financial year and the audit report. However, in erstwhile Listing Agreement, a company was required to submit Form A / Form B with annual report only but not with financial results for the financial year and the audit report.

Management’s views/explanations if auditor has expressed a modified opinion

• If auditor has issued a modified opinion, the management has the option to explain its views on the audit qualifications and the same is required to be included in the Statement.

• Where the impact of the qualification is not quantifiable

Hot topics

Does the Audit report contain modified opinion?

Yes No

Submit Statement on Impact of Audit Qualifications along with audit report

No need to submit Form B

Furnish a declaration to that effect to the stock exchange(s) while publishing the annual audited financial results

No need to submit Form A

The management should make an estimate If the management is unable to make an estimate, it should provide the reasons

The auditor should review in both the above cases and report accordingly. This will also form part of the Statement.

Similar amendments have been made in Schedule IV, Disclosures in Financial Results, applicable for the quarterly / annual financial results.

20 | GAAP Reporter

The Amendment Regulations have also removed Schedule VIII, which provided review mechanism and dealt with

• review of Form B by stock exchanges(s) and QARRC, and the opinion of FRRB of the ICAI if the cases are referred by QARRC

• the requirements to rectify modified opinion and/or submit the revised pro-forma financial results by the company at the direction of SEBI.

The existing requirements of making adjustment in the books of accounts of the subsequent year have been dispensed with.

SEBI has also issued a circular on ‘Disclosure of the Impact of Audit Qualifications by the Listed Entities’ on 27 May 2016, applicable for all the annual audited financial results submitted for the period ended on or after 31 March 2016.

• The circular provides a format for Statement on Impact of Audit Qualifications (for audit reports with modified opinion) to be filed with stock exchanges.

• The circular clarifies that the cumulative impact of all the audit qualifications is to be given in the Statement while submitting the annual audited financial results to the stock exchanges. This will ensure that the information is available to the investors, without delay, enabling them to take well informed investment decisions.

Since the Amendment Regulations were issued on 25 May 2016 and the circular was issued on 27 May 2016 with retrospective applicability, there arose some implementation challenges for the entities which had already submitted the financial results to the stock exchange(s). To ease the challenges, NSE and BSE issued circulars on 01 June 2016 on operational details for implementing the amendments. The circulars have clarified as below:

Audit reports with unmodified opinion(s) for the period ended 31 March 2016

Audit reports with modified opinion(s) for the period ended 31 March 2016

The listed entities would be required to submit the Statement within 60 days from the date of these circulars in the specified format (irrespective of having submitted Form B or not for the period ended 31 March 2016).

If a listed entity has already

submitted Form A

If a listed entity has not submitted

Form A

Considered as sufficient compliance with the amendments made by the Amendment Regulations and SEBI circular

A declaration that the audit report is unmodified is to be submitted within 30 days from the date of circulars issued by NSE and BSE.

Submission of Form A / Form B is not required for all the subsequent annual filings of audited financial results. Therefore, all listed entities should submit either declaration that the audit opinion is unmodified or the Statement where audit opinion is modified.

The Statement is more detailed statement than Form B. The Statement requires both audited figures (as reported before adjusting for qualifications) and adjusted figures (after adjusting for qualifications) of turnover / total income, total expenditure, net profit / (loss), earnings per share, total assets, total liabilities, net worth and any other financial item(s) as felt appropriate by the management to be disclosed. These

disclosures were not required in Form B. The Statement also requires disclosure for details of each audit qualification with the impact and management’s view. As stated earlier, if the impact is not quantified by the auditor, management’s estimation is to be provided and where management fails to provide the estimation, reason for the same should be given.

Concluding remarks

SEBI has clarified that the listed companies have to give cumulative impact of all the audit qualifications in a separate format along with financial results, for which the listed companies are required to complete the audit of financial statements. Therefore, matters like significant non-compliances with laws & regulations or accounting standards etc. which gave rise to the qualifications come at the right time along with explanations and justification by management. In case of audit report with modified opinion, the additional disclosure requirements along with view of management and auditor’s comments thereon will also provide a brief yet comprehensive view on the impact the qualifications can have.

GAAP Reporter | 21

AS 2 (Revised): Valuation of Inventories

Classification of machinery spares, stand-by equipment and servicing equipment

Under AS 2, machinery spares are capitalised only if these can be used in connection with an item of fixed asset and if use is expected to be irregular. AS 10 further states that stand-by equipment and servicing equipment are normally capitalised.

Under AS 2 (Revised), spare parts, servicing equipment and standby equipment which meet the definition of PPE as given in AS 10 (Revised), Property, Plant and Equipment, should be accounted for in accordance with AS 10. AS 10 (Revised) also contains similar provisions for spare parts, servicing equipment and standby equipment.

AS 2 (Revised) has changed the basis of recognition and measurement of spare parts, stand-by equipment and servicing equipment.

AS 4 (Revised) - Contingencies and Events Occurring After the Balance Sheet Date

AS 4 requires that the amount of dividend proposed or declared by the enterprise after the balance sheet date in respect of the period covered by the financial statements but before approval of the financial statements should be adjusted in the financial statements.

Under AS 4 (Revised), the dividends declared after the balance sheet date but before the financial statements are approved for issue are not recognised as a liability at the balance sheet date because no obligation exists at that time unless a statute requires otherwise. A disclosure will be made in the notes to the financial statements.

The revised standard is aligned with Ind AS 10 / IAS 10.

Schedule III to the Companies Act, 2013 also does not require dividend proposed/declared after the balance sheet date to be treated as an adjusting event.

AS 13 (Revised): Accounting for Investments

Investment properties

Under AS 13, investment properties should be accounted for as long term investments, carried at cost; however provision for diminution to be made to recognise a decline, other than temporary, in the value of the investment.

AS 13 (Revised) requires an investment property to be accounted for in accordance with cost model as prescribed in AS 10 (Revised).

Accordingly, the depreciation, component accounting and other related requirements of AS 10 (Revised) will apply to investment properties. Also, investment properties cannot be revalued/fair valued under revised standard.

AS 14 (Revised): Accounting for Amalgamations

Definition of amalgamation

The definition of amalgamation has been amended in AS 14 (Revised) to include merger also.

Amalgamation Adjustment Reserve – Presentation in financial statements

Under AS 14 (Revised), the Amalgamation Adjustment Reserve has to be presented as a separate line item in the balance sheet, unlike AS 14 where it can be shown under ‘miscellaneous expenditure’ or other similar category in the balance sheet. This was named as Amalgamation Adjustment Account in AS 14.

The Amendment Rules have brought in significant changes in AS 10 and few changes in other ASs. The purpose of this hot topic is to highlight the key changes brought in by the Amendment Rules.

MCA amends existing accounting standardsMCA has issued the Companies (Accounting Standards) Amendment Rules, 2016 (‘Amendment Rules’) vide notification dated 30 March 2016, which amend seven ASs and omit one AS specified under the Companies (Accounting Standards) Rules, 2006. The ASs which have been amended are:

AS 2 – Valuation of Inventories

AS 4 – Contingencies and Events Occurring After the Balance Sheet Date

AS 10 – Accounting for Fixed Assets

AS 13 – Accounting for Investments

AS 14 – Accounting for Amalgamations

AS 21 – Consolidated Financial Statements

AS 29 – Provisions, Contingent Liabilities and Contingent Assets

The AS which has been omitted is AS 6 – Depreciation Accounting.

MCA and the ICAI have issued clarification that the amended ASs should be used for preparation of accounts for accounting periods commencing on or after the date of notification i.e. 30 March 2016.

22 | GAAP Reporter

This reserve/account is created in those amalgamations where the requirements of the relevant statute for recording the statutory reserves of the transferor company in the books of the transferee company are to be complied with.

Scheme of amalgamation under the Companies Act – Treatment to be given to the reserves of the transferor company

AS 14 prescribes that where any treatment is prescribed to be given to the reserves of the transferor company after its amalgamation, in the scheme of amalgamation sanctioned under the provisions of the Companies Act, 1956 or any other statute, the same is to be followed. In some cases, such treatment prescribed for the reserves of the transferor company after its amalgamation may be different as compared to the requirements of this Standard that would have been followed had no treatment been prescribed by the scheme. In such cases, AS 14 prescribes certain disclosures in the first financial statements following the amalgamation.

AS 14 (Revised) also contains the same provision as mentioned above. However a footnote has been added in revised standard which states that the paragraph which contains above provisions will not apply to any scheme of amalgamation approved under the Companies Act, 2013.

It may be noted that Chapter XV of the Companies Act 2013, ‘Compromises, Arrangements and Amalgamations’ covering sections 230 to 240 have not been notified till date and the amalgamation schemes are still being approved under the Companies Act, 1956. Therefore, the companies are still required to comply with requirements of AS 14.

It seems that the intention of adding footnote to the aforementioned paragraph is that the schemes to be approved under the Companies Act, 2013 may not approve a scheme proposing a different accounting treatment to reserves.

AS 21 (Revised): Consolidated Financial Statements

Under AS 21, consolidated financial statements were required to be prepared only if companies had one or more subsidiaries. However, under Companies Act, 2013, a company, which has no subsidiary but has one or more associate/joint ventures, is required to prepare consolidated financial statements.

AS 21 (Revised) has been amended to provide that where an entity does not have a subsidiary but has an associate and/or joint venture, then such entity is required to prepare consolidated financial statements in accordance with AS 23 and AS 27 respectively.

The amendment has been made to align it with the provisions of Companies Act, 2013.

AS 29 (Revised): Provisions, Contingent Liabilities and Contingent Assets

Decommissioning, restoration and similar liabilities in case of PPE

AS 29 prohibits discounting of an amount of a provision to its present value.

AS 29 (Revised) also prohibits discounting of an amount of a provision to its present value but with an exception in case of decommissioning, restoration and similar liabilities that are recognised as cost of PPE in accordance with AS 10 (Revised). The revised standard states that the discount rate (or rates) should be a pre-tax rate (or rates) that reflect(s) current market assessments of the time value of money and the risks specific to the liability. The discount rate(s) should not reflect risks for which future cash flow estimates have been adjusted. Periodic unwinding of discount should be recognised in the statement of profit and loss.

The transitional provisions state that all the existing provisions for decommissioning, restoration and similar liabilities should be discounted prospectively with the corresponding adjustment to the related items of PPE.

It may also be noted that AS 10 (Revised) requires inclusion of the initial estimate of the costs of dismantling, removing the item and restoring the site on which it is located, referred to as ‘decommissioning, restoration and similar liabilities’ as an element of cost of PPE which will require discounting now.

AS 10 (Revised): Property, Plant and Equipment

AS 10 (Revised), Property, Plant and Equipment, issued under the Amendment Rules has replaced AS 10, Accounting for Fixed Assets, and AS 6, Depreciation Accounting, specified under the Companies (Accounting Standards) Rules, 2006.

The provisions of revised standard are significantly aligned with the provisions of Ind AS 16, Property, Plant and Equipment.

Some of the key differences between AS 10 (Revised), and AS 10 and AS 6 are given below:

GAAP Reporter | 23

S. No. AS 10 / AS 6 AS 10 (Revised)

1 Component accounting

AS 10 only recommends but does not mandate compo-nent accounting.

AS 10 (Revised) mandates component accounting.

It may be noted that the Companies Act, 2013 also mandates component accounting from the financial year commencing on or after 01 April 2015.

2 Unit of measure

AS 10 does not provide any guidance on unit of measure. AS 10 (Revised) introduces the concept of the unit of measure for recog-nition, i.e., what constitutes an item of PPE. It clarifies that, judgment is required in applying the recognition criteria to specific circumstances of an enterprise and to determine unit of measure.

Though there were diverse practices being followed earlier and arguments were being made to capitalise enabling assets under AS 10, the revised standard has clarified the matter. Therefore, if a company can demon-strate that the project under construction and enabling assets are one ‘unit of measure’, the company can capitalise the expenditure incurred on the enabling asset as the cost of the project.

Also, ITFG of ICAI in its bulletin 2 has clarified through an example that capitalisation of expenditure incurred on construction of assets on land not owned by a company would depend on facts and circumstances of each case, particularly, considering the principle stated in Ind AS 16 that such an expenditure should be necessary for making the item of PPE capable of operating in the manner intended by the management.

3 Elements of cost – decommissioning, restoration and similar liabilities

AS 10 does not have any provision related to decommissioning, restoration and similar liabilities. AS 29 requires upfront provision to be created for asset retirement/site restoration obligation.

AS 10 (Revised) requires that • if a company has decommissioning, restoration and similar liabilities the

obligation for which is incurred either when the item is acquired or as a consequence of having used the item during a particular period

• then the initial estimate of such liabilities will form part of cost of the PPE.

AS 29 (Revised) further requires that such estimate has to be discounted and gives additional guidance on the discount rate.

4 Capitalisation of cost of major repairs/cost of a replacement

Under AS 10, if the expenditure incurred for major repairs / overhaul expenditure increases the future benefits from the existing asset beyond its previously assessed standard of performance, the expenditure is included in the gross book value, else the expenditure is charged to the Statement of Profit and Loss.

AS 10 (Revised) specifies that expenditure incurred for major repairs/overhaul expenditure can be capitalised as replacement cost, if they satisfy the recognition criteria given in the revised standard.The Guidance Note on Accounting for Depreciation in Companies in the Context of Schedule II to the Companies Act, 2013 clarifies component accounting requires a company to identify and depreciate significant components with different useful lives separately. Companies will capitalise these costs as a separate component of the asset and decapitalise the carrying amount of previously recognised component. When it is not practicable to determine the carrying amount of the replaced part, the cost of the replacement may be used as an indication of what the cost of the replaced part was at the time it was acquired or constructed.

24 | GAAP Reporter

S. No. AS 10 / AS 6 AS 10 (Revised)

5 Revaluation

AS 10 permits revaluation of fixed assets. Also:• It does not require the adoption of fair value

basis for assets measured at a revalued amount.

• The regularity / frequency of revaluation is not given.

• It permits selection of assets to be revalued within a class of assets for revaluation, which is to be done on systematic basis.

AS 10 (Revised) gives option to the company, for measurement after recognition, to choose either the cost model or the revaluation model. The following points are to be noted:• Under revaluation model, the PPE is to be revalued at fair value at the date of

revaluation.• The regularity/frequency of revaluation is given and the revised standard clarifies

that the revaluations should be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the balance sheet date.

The revised standard only permits the revaluation of the entire class of PPE to which that asset belongs.The revaluation model needs to be applied prospectively. In case an entity does not adopt the revaluation model as its accounting policy but the carrying amount of item of PPE reflects any previous revaluation, then it should adjust the amount outstanding in the revaluation reserve against the carrying amount of that item. However, carrying amount of such item cannot be less than residual value and any excess of the amount outstanding as revaluation reserve over the carrying amount of that item should be adjusted in revenue reserves.

6 Cost of item of PPE in case of deferred payment and interest element

Only in case of hire purchase, AS 10 requires assets to be recorded at cash value. If assets are recorded at cash value, the difference between the total payment and cash value is to be recorded as interest.

Under AS 10 (Revised), an entity is required to bifurcate the total payment into cash price equivalent and interest in all cases, if payment is deferred beyond normal credit terms, unless such interest is capitalised under AS 16, Borrowing Costs.

7 Determination of residual value and useful life

AS 6 states that if residual value is considered as insignificant, it is normally regarded as nil and if the residual value is likely to be significant, it is estimated at the time of acquisition/installation, or at the time of subsequent revaluation of the asset.AS 6 also clarifies that the useful lives of major depreciable assets or classes of depreciable assets may be reviewed periodically.

AS 10 (Revised) states that the residual value and the useful life of an asset should be reviewed at least at each financial year-end and if expectations differ from previous estimates, the change(s) should be accounted for as a change in an accounting estimate in accordance with AS 5.While applying the provisions of the revised standard, a company should also consider the provisions of the Companies Act, 2013 in respect of the residual value and useful life (i.e. providing justification in the financial statements duly supported by technical advice, in case where a different residual value/useful life than specified in Schedule II is taken).

8 Change in method of depreciation

AS 6 lays down that a change in method of depreciation is to be treated as a change in accounting policy and applied retrospectively.

AS 10 (Revised) states that a change in method of depreciation should be accounted for as a change in an accounting estimate in accordance with AS 5 and applied prospectively.

9 Biological assets

AS 10 does not apply to biological assets related to agricultural activity. There is no separate standard on agricultural accounting.

AS 10 (Revised) also does not apply to biological assets related to agricultural activity, except bearer plants and livestock. For bearer plants, it states that such plants should be accounted for in the same way as self-constructed items of PPE before they are ready for intended use. A separate AS will be prepared for agriculture which will cover accounting for livestock. Pending issuance of such standard, accounting for livestock (which meets the definition of PPE) will be in accordance with AS 10 (Revised).

The overall objective of the amendments is to align the requirements of ASs with the provisions of Companies Act, 2013 and with Ind ASs, especially, for companies that will not adopt Ind ASs. However, there are differences between the transitional provisions for adoption of new ASs and transitional provisions specified in Ind AS 101, First-time Adoption of Indian Accounting Standards. Therefore, the amendments may pose significant challenges for companies covered in Phase II of the Ind AS road map since such companies would require complying with the amended standards for accounting periods commencing on or after 30 March 2016 and will again have to make adjustments while preparing comparatives for the financial statements prepared in accordance with Ind ASs.

Concluding remarks

GAAP Reporter | 25

This hot topic focuses on key changes in CARO 2016 and the related Guidance Note issued by ICAI.

Journey of CARO

Decoding Companies (Auditor’s Report) Order, 2016

Introduction

Section 143(11) of the Companies Act, 2013 provides that in case of specified companies the auditor’s report should include a statement on certain prescribed matters. The reporting requirements were prescribed by MCA under Companies (Auditor’s Report) Order, 2015 (‘CARO 2015’) which had superseded the erstwhile Companies (Auditor’s Report) Order, 2003 (‘CARO’). CARO 2015 contained 12 clauses as against 22 clauses in erstwhile CARO.

On 29 March 2016, MCA issued Companies (Auditor’s Report) Order, 2016 (‘CARO 2016’) which supersedes CARO 2015. CARO 2016 is applicable for the financial years commencing on or after 01 April 2015. The ICAI has also issued a Guidance Note on CARO 2016 (‘Guidance Note’) which supersedes the Statement on CARO 2003 earlier issued by the ICAI.

● 22 Clauses● Not applicable to CFS● Focus on prudence check● Statement on CARO 2003 by ICAI

CARO 2015

CARO 2003 CARO 2016

● 12 Clauses● Applicable to CFS- causing hardships● Prudence check with less stringent reporting● Guidance on reporting under CARO 2015 read with Statement on CARO 2003 by ICAI

● 16 Clauses● Applicability to CFS relaxed● Focus on compliance check● Guidance note on CARO 2016 by ICAI

Key features of CARO 2016

CARO 2016 comprises of 16 clauses as against 12 clauses in CARO 2015: CARO 2016 has added certain new clauses, amended certain existing clauses and omitted some of the clauses of CARO 2015. The changes in CARO 2016 are discussed in subsequent paragraphs.

Applicability of CARO 2016: CARO 2016 has relaxed thresholds with respect to private companies. However, applicability of CARO 2016 has been extended to those private companies which are subsidiary or holding company of a public company.

26 | GAAP Reporter

Criteria CARO 2015 (INR) CARO 2016 (INR)

Paid up capital and reserves and surplus Not more than 50 Lakh Not more than 1 Crore

Loan outstanding/Total borrowings from banks

or financial institutions

Not more than 25 Lakh Not more than 1 Crore

Turnover/Total revenue as per Schedule III Not more than 5 Crore Not more than 10 Crore

Consolidated financial statements: CARO 2016 does not apply to auditor’s report on consolidated financial statements. This is a major relief and a welcome move by MCA, as consolidating the component’s report under CARO 2015 was causing undue hardships to companies as well as the auditors.

Key changes in clauses under CARO 2016

As stated earlier, under the CARO 2016 some of the reporting requirements have been added, some have been modified and some have been completely wiped out. These changes are explained below:

A. New clauses The additions are mainly with respect to checking the compliances with specific clauses of the Companies Act, 2013. This is not a new requirement. The professional standards also require auditors to check the compliance with the laws and regulations. All non-compliances having a material impact on the financial statements and not adequately reflected in the financial statements have to be reported by the auditor in the main audit report. For example, if there is a material non-compliance with respect to excess managerial remuneration being paid to a managerial personnel without Central Government’s approval, this will also need to be reported in CARO report along with main report. Some of the new clauses are as below:

I. Payment of managerial remuneration in accordance with the requisite approvals mandated by the provisions of Section 197 read with Schedule V to the Companies Act, 2013 This clause seeks to highlight the instances of non-compliance with Section 197 read with Schedule V to the Companies Act, 2013 with respect to the mandatory approvals provided therein. The auditor is not only required to report the amount involved and nature of party, but also the steps taken to secure the refund of the excess amount paid. Even if the company has recovered any amount during the year, nevertheless, the auditor would report the entire amount of remuneration that has been paid/provided in excess of the prescribed limits. Auditor also needs to refer to the agreements entered by the company for securing the refund of the excess amounts paid and require from management steps taken for recovery in writing.

II. Compliance with Sections 177 and 188 of Companies Act, 2013 in respect of transactions with the related parties and disclosure in the financial statements in accordance with the applicable accounting standardsThe purpose of this clause is to highlight any non-compliance with respect to related party transactions. This seeks to ensure compliance with the Companies Act, 2013 as well as the requirement of relevant ASs in respect thereof. For the purpose of these sections, the meaning of the terms such as ‘arm’s length’, ‘ordinary course of business’ etc. is very subjective and judgemental. For determining whether the transaction is at arm’s length or not, several factors such as benefit for each party, prevalent market practice, economic circumstances, past precedence etc. would be required to be considered. Additionally, auditor may test the transaction based on transfer pricing mechanism in use for the purposes of Income Tax Act, 1961. Similarly, in normal parlance ‘ordinary course of business’ would mean usual transactions and practice of the company/industry.

III. Compliance with Section 42 of the Companies Act, 2013 in case of preferential allotment or private placement of shares or fully or partly convertible debentures during the year and the end use of the funds This reporting requirement aims to confirm as to whether the issue of shares or debentures by way of preferential allotment/private placement is in compliance with the law and to keep a track of use of funds flowing into the company by such issue. This clause will highlight the nature of non-compliance along with the nature of securities and amount involved. Reporting on the end-use of the funds would also cover situations where the company invests the surplus funds temporarily, however, ultimately use such funds for the stated objective. Funds raised in previous period but ultimately utilised during the current period would also be reported. Auditor may report the non-compliance with respect to end use of funds by giving details with respect to nature of securities, purpose for which the funds were raised, amount raised/opening unutilised balance, amount used for other purpose and unutilised balance at balance sheet date.

The change in applicability of CARO 2016 vis-a-vis CARO 2015 with respect to private company (not being a subsidiary or holding company of a public company) has been summarised below:

GAAP Reporter | 27

IV. Compliance with Section 192 of Companies Act, 2013 with respect to non-cash transactions with directors or persons connected with him This clause requires reporting the non-compliances with conditions prescribed under the Companies Act, 2013 respect to non-cash transactions. Further, since Section 192(1) uses the words ‘is to acquire’, the management may be expected to provide details of its intention to enter into such transactions after the date of financial statements under audit.

V. Compliance with Section 185 and 186 of the Companies Act, 2013 in respect of loans, investments, guarantees, and securityThe clause will highlight cases of non-compliances with Section 185 and 186. The auditor will report the nature of non-compliance under Section 185 and the maximum amount outstanding during the year along with amount outstanding as at balance sheet date in respect of the directors and the persons in whom directors are interested (specifying relationship). For Section 186, auditor may report the non-compliance by specifying the nature of non-compliance for example, loan given at rate of interest lower than prescribed, name of party, amount involved and balance as at balance sheet date.

VI. Registration under Section 45-IA of the Reserve Bank of India Act, 1934 (‘RBI Act)

Under this clause the auditor is required to report whether the registration is required under Section 45-IA of the RBI Act. If not obtained, then the auditor is required to highlight the reasons.

VII. In case of Nidhi Company, compliance of Net Owned Funds to Deposits in the ratio and unencumbered term deposits as specified in the Nidhi Rules, 2014This reporting requirement is not completely new and originates from CARO 2003, which was not included in CARO 2015. This clause is applicable only case of Nidhi Companies and seeks to highlight specific non-compliances under the Nidhi Rules 2014. Management would be required to provide the relevant computations for the verification of the auditor.

B. Changes in existing clausesI. Title deed in name of the company: CARO 2016 has

introduced a new requirement with respect to reporting on whether title deeds of immovable properties are held in the name of the company. It is important to note that for the purpose of this sub-clause, the Guidance Note has clarified that since this sub-clause is in continuation of sub-clauses with respect to fixed assets, it is applicable to only those immovable properties which are included under the head fixed assets.

Further, the Guidance Note clarifies that the responsibility for legal determination of the validity of the title deeds will rest with the management and auditor should comply with the SAs to obtain sufficient and appropriate audit evidence. The reporting would highlight cases where the title deeds are not in name of the company and also where there is any dispute with respect to such properties. Where title deeds of immovable property are not held in the name of the company, auditor may report the details with respect to nature of assets (Land/Building), number of cases, whether leasehold or freehold, gross block and net block as at balance sheet date.

II. Reporting on frauds on the company: MCA has modified the requirement with respect to reporting of frauds on the company. While as per the CARO 2015 the auditor was required to report all frauds (including frauds by third party), under CARO 2016 the requirement is limited to frauds by the company’s officers or employees. This is a major change and in line with reporting under Section 143(12). The auditor may consider principles of materiality outlined in the SAs while reporting under this this clause.

Other Changes:III. With respect to grant of loans to parties covered in the

register maintained under section 189, Limited liability Partnerships (LLPs) have now been added in the list of such parties. Further, the auditor needs to additionally state whether the terms and conditions of the grant of such loans are not prejudicial to the company’s interest and whether schedule of repayment/ payment of loan/interest has been stipulated or not. The monetary limit of 1 lakh in case of overdue amounts has been dispensed with. Instead, now all overdue amounts for more than 90 days would be reported and along with the steps taken for its.

IV. For reporting of defaults in repayment of dues, an additional category of ‘government’ dues is added. Further, lender-wise reporting is required to be given.

V. For reporting on end use of funds, moneys raised by way of initial public offer or further public offer have been included.

C. Requirements omittedI. Clause on reporting on adequacy of internal control system

with respect to purchase of inventory, fixed assets and selling of goods and services, and reporting on continuing failure to correct major weakness therein has been omitted. This is a welcome change as under Section 143(3)(i) auditor is required to report on whether the company has adequate internal financial controls system in place and the operating effectiveness of such controls. Section 143(3)(i) is wider in scope, therefore, omission of this clause will avoid duplication.

28 | GAAP Reporter

Concluding remarks:

CARO 2016 is a mixed bag. While some of the duplicate requirements have been omitted, some old requirements from CARO 2003 have been reinstated (for example, reporting in case of Nidhi companies). To ensure that the companies comply with the provisions of the Companies Act, 2013, specific reporting in case of certain sections has been added. In case where the company is subject to a secretarial audit under Section 204 or where the annual return is required to be certified by a company secretary in practice under Section 92 of the Companies Act, 2013, CARO 2016 would provide another check.

To summarise, revised CARO is more specific and stringent than ever before. With specific reporting requirements, the company as well as the auditors would need to gear up in advance to meet these requirements. The CARO 2016 aims to improve the quality of auditor’s report and make the report more useful, meaningful and comprehensive for the stakeholders.

II. Reporting on amounts to be transferred to investor education and protection fund has been omitted in CARO 2016 as the main auditor’s report also deals with such defaults.

III. The requirement of reporting on whether proper records of inventory have been maintained has been done away with.

IV. Reporting on whether accumulated losses are not less than 50% of net-worth, cash losses etc. is no longer required.

V. Reporting on guarantee for loans taken by others from bank or financial institutions, terms and conditions whereof are prejudicial to the interest of the company has also been omitted.

GAAP Reporter | 29

Revenue recognition in real estate transactions (Ind AS)

This hot topic aims to provide an overview of the accounting treatment prescribed in the Guidance Note on Accounting for Real Estate Transactions issued by the ICAI for companies to which Ind AS is applicable.

1. Ind ASs have been notified by MCA and are applicable to companies in a phased manner. Click here for MCA press release.

The term ‘real estate’ refers to land as well as buildings and rights in relation thereto. Entities who undertake such activity are generally referred to by different terms such as ‘real estate developers’, ‘builders’ or ‘property developers’. The accounting and reporting of real estate transactions under Indian GAAP is governed by the ‘Guidance Note on Accounting for Real Estate Transactions (Revised 2012)’ (earlier issued in 2006) by ICAI (‘Guidance Note’). The Guidance Note primarily provides guidance on application of ‘percentage of completion method’and also dealt with the application of the ‘risk and rewards’ model (considering the conditions specified in Ind AS 18, Revenue) for revenue recognition apart from specifying threshold criteria for revenue recognition.

Transition to Ind ASs

MCA had notified the much awaited Ind ASs in February 20151. The roadmap envisages a two-phase implementation.

• All companies, listed and unlisted, with a net-worth over INR 500 crores, together with their holding, subsidiary, joint venture or associate companies are covered in the first phase.

• The second phase will cover all the listed or those in the process of listing and all other unlisted companies with a net worth over INR 250 crores, together with their holding, subsidiary, joint venture or associate companies are covered in the second phase.

While companies falling under the first phase have to follow the new Ind AS from 01 April 2016, other companies under second phase would have to follow the accounting norms from the next financial year—with an option for all of them to apply the Ind AS from 01 April 2015 voluntarily.

MCA has separately notified the Ind AS roadmap for NBFCs. Also, RBI and IRDA have issued a separate roadmap for banks and insurance companies respectively.

Impact of transition to Ind AS on the real estate and construction companies

MCA has initially notified the new revenue standard Ind AS 115, Revenue from Contracts with Customers, ahead of the global roll-out. However, post deferral of IFRS 15 to 2018 internationally, The ICAI in September 2015 proposed deferral of Ind AS 115. MCA vide notification dated 30 March 2016 has omitted Ind AS 115 and notified Ind AS 11, Construction Contracts and Ind AS 18, Revenue.

On convergence of Ind AS with IFRS, MCA has made a carve-out with respect to ‘real estate developers’ that IFRIC 15, Agreements for the Construction of Real Estate, would not be adopted. Accordingly, Ind AS 18, Revenue, does not include IFRIC 15. Instead, it states that for real estate developers, revenue should be accounted for in accordance with the Guidance Note on the subject being issued by the ICAI.

The ICAI on 10 May 2016 issued a Guidance Note on Accounting for Real Estate Transactions (Ind AS Guidance Note). The Ind AS Guidance Note will apply to entities to which Ind AS is applicable. The objective of this Ind AS Guidance Note is to prescribe the accounting treatment by entities dealing in Real Estate as sellers or developers.

The Ind AS Guidance Note covers all forms of transactions in real estate including:

• Sale of plots of land (including lease of land on finance lease under Ind AS 17, Leases) with or without any development

• Development and sale of residential and commercial units, row houses, independent houses, with or without an undivided share in land

• Acquisition, utilisation and transfer of development rights

• Redevelopment of existing buildings and structures

• Joint development agreements for any of the above activities

Ind AS Guidance Note scopes out real estate transactions of the nature covered by Ind AS 16, Property, Plant and Equipment; Ind AS 20, Accounting for Government Grants and Disclosure of Government Assistance; Ind AS 38, Intangible Assets and Ind AS 40, Investment Property.

30 | GAAP Reporter

Accounting for real estate transactions

• The Ind AS Guidance Note primarily provides guidance in the application of:

— Principles of Ind AS 18, Revenue, in respect of transactions of real estate which are in substance similar to delivery of goods; and

— Principles of Ind AS 11, Constructions Contracts, for activities of real estate which have the same economic substance as construction contracts.

• According to the Ind AS Guidance Note, an entity can start recognising revenue on a percentage of completion (POC) basis only when:

a. All critical approvals necessary for the commencement of the project have been obtained;

b. Stage of completion of project reached a reasonable level of development. Reasonable level of development is not achieved if, construction and development cost incurred is less than 25% of the total construction and development cost;

c. Atleast 25% of the saleable project area is secured by contract or agreement with buyers; and

d. 10% of the contract consideration as per the agreements of sale has been realised at the reporting date in respect of each contracts and there are no outstanding defaults of the payment terms in such contracts.

• Project revenues are measured at fair value of the consideration received or receivable.

• When development rights are acquired by way of direct purchase or on development or construction of built- up area, cost of acquisition would be the cost of purchases or amount spent on development or construction of built-up area, respectively. Where development rights are acquired by way of giving up of rights over existing structures or open land, the development rights should be measured in accordance with the principles of exchange of assets enunciated under Ind AS 38, Intangible Assets.

• Revenue from sale of plots of land without any development should be recognised in accordance with principles of Ind AS 18. In case of sale of developed plots, revenue should be recognised in accordance with percentage of completion method (if the development activity is significant and economic substance is similar to construction contracts).

• For contracts with multiple deliverables (e.g. a contract to deliver goods or services in addition to the construction/development of the real estate), the total sales consideration to be split into separate identifiable components including one for the construction and delivery of real estate units based on fair value of each component.

• Ind AS Guidance Note lists down the disclosure requirements for real estate developers including disclosure for project revenue, method to determine project revenue and stage of completion and certain information relating to project in progress at the end of the reporting period etc.

Preparation for Ind AS 115, Revenue from Contracts with Customers

MCA vide notification dated 30 March 2016 has omitted Ind AS 115, Revenue from Contracts with customers, real estate companies will be required to analyse its impact once it is notified by MCA.

One of the most significant changes in Ind AS 115 compared to the current revenue recognition practices of real estate developers in India is that there is no threshold criterion for revenue recognition in Ind AS 115. Ind AS 115 introduces a new principle based approach to determine whether revenue should be recognised over time (similar to POC method) or at a point in time (similar to completed contract type accounting).

The Indian Accounting Standard setters have made a carve-out with respect to the “Real Estate” sector which would be required to specifically apply the Ind AS Guidance Note. There is a need to wait and watch as to whether the Ind AS Guidance Note will continue to apply post notification of Ind AS 115 or ICAI will come out with another Guidance Note. 

Concluding remarks

GAAP Reporter | 31

Abbreviations used in this publication

AASB Auditing and Assurance Standards Board

AGM Annual General Meeting

AIF Alternate Investment Fund

AS Accounting Standard

ASB Accounting Standards Board

ASC Accounting Standards Codification

ASU Accounting Standards Update

BSE Bombay Stock Exchange

CARO Companies (Auditor's Report) Order

CBDT Central Board of Direct Taxes

CEO Chief Executive Officer

CFO Chief Financial Officer

CLB Company Law Board

CS Company Secretary

FAQ Frequently Asked Question

FASB Financial Accounting Standards Board

FY Financial Year

GAAP Generally Accepted Accounting Principles

IAS International Accounting Standard

IASB International Accounting Standards Board

ICAI Institute of Chartered Accountants of India

ICDR Issue of Capital and Disclosure Requirements

IFRS International Financial Reporting Standards

Ind AS Indian Accounting Standard

IRDAI Insurance Regulatory and Development Authority of India

ITFG Ind AS Transition Facilitation Group

LLP Limited Liability Partnership

MAT Minimum Alternate Tax

MCA Ministry of Corporate Affairs

MD Managing Director

MF Mutual Funds

NACAS National Advisory Committee on Accounting Standards

NBFC Non-Banking Financial Company

NBFI Non-Banking Financial Institution

NCLT National Company Law Tribunal

NCLAT National Company Law Appellate Tribunal

NFRA National Financial Reporting Authority

NSE National Stock Exchange

PCAOB Public Company Accounting Oversight Board

PIB Press Information Bureau

PPE Property, Plant and Equipment

RBI Reserve Bank of India

SA Standard on Auditing

SEBI Securities and Exchange Board of India

SEC U.S. Securities and Exchange Commission

VCF Venture Capital Fund

WTD Whole Time Director

32 | GAAP Reporter

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