Ind AS Transition Facilitation Group (ITFG) issues Clarifications Bulletin 4

Ind AS Transition Facilitation Group (ITFG) issues

With Indian Accounting Standards (Ind AS) being applicable to large corporates from 1 April 2016, the Institute of Chartered Accountants of India (ICAI) on 11 January 2016 announced the formation of the Ind AS Transition Facilitation Group (ITFG) in order to provide clarifications on issues arising due to applicability and/or implementation of Ind AS under the Companies (Indian Accounting Standards) Rules, 2015 (Rules 2015).

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Background

With Indian Accounting Standards (Ind AS) being applicable to large corporates from 1 April 2016, the Institute of Chartered Accountants of India (ICAI) on 11 January 2016 announced the formation of the Ind AS Transition Facilitation Group (ITFG) in order to provide clarifications on issues arising due to applicability and/or implementation of Ind AS under the Companies (Indian Accounting Standards) Rules, 2015 (Rules 2015).

Earlier this year, the ITFG issued three bulletins to provide guidance on issues relating to the application of Ind AS.

New development

The ITFG held its fourth meeting on 19 August 2016, and issued its bulletin (Bulletin 4) to provide clarifications on four issues relating to the application of Ind AS, as considered in its meeting.

This issue of IFRS Notes provides an overview of the issues considered in Bulletin 4.

Overview of the clarifications

The ITFG considered and provided following responses to Ind AS implementation issues: 

Inclusion of excise duty or other taxes in revenue

The ITFG has clarified the following issues relating to inclusion or exclusion of taxes from revenue

1.  Excise duty: Under the current Indian GAAP as per AS 9, Revenue Recognition, excise duty included in the turnover is presented as reduction from the gross turnover on the face of the statement of profit or loss.

Paragraph 8 of Ind AS 18, Revenue states that ‘Revenue includes only the gross inflows of economic benefits received and receivable by the entity on its own account. Amounts collected on behalf of third parties such as sales taxes, goods and services taxes and value added taxes are not economic benefits which flow to the entity and do not result in increases in equity. Therefore, they are excluded from revenue.’

Further, Division II of Schedule III to the Companies Act, 2013 (2013 Act) requires a separate disclosure in the notes relating to revenue from operations for ‘sale of products (including excise duty)’. The format specified in Division II is in compliance with Ind AS notified under Rules 2015 and is mandatorily applicable to companies implementing Ind AS.

The ITFG considers excise duty to be a liability of the manufacturer, which forms part of the cost of production, irrespective of whether the goods are sold or not. The recovery of excise duty flows to the entity on its own account and should be included in the amount of revenue. Accordingly, the ITFG has recommended a consistent approach and clarified that revenue should be presented as a gross amount including excise duty in the statement of profit and loss prepared under Ind AS. The excise duty payable should be reflected as an expense.

2.  Sales tax: Where an entity receives revenue from a customer inclusive of service tax, the ITFG has clarified that paragraph 8 of Ind AS 18 provides that amounts collected on behalf of third parties such as sales taxes, goods and services taxes and value added taxes are not economic benefits which flow to the entity and should be excluded from revenue. Since, service tax represents the amount collected on behalf of a third party i.e. the government, it should not be included in revenue. Accordingly, revenue should be recognised net of service tax collected.

Applicability of the Ind AS road map

The following issues relating to the applicability of Ind AS road map have been clarified in this bulletin

1. Negative net worth and Ind AS implementation date: As per the Ind AS roadmap, Ind AS is applicable to listed and unlisted companies from FY 2016-17, only if their net worth is INR500 crore or more. If a company (whether listed or unlisted) has negative net worth, then Ind AS is not applicable to such company from the Financial Year (FY) 2016-17.

However, Ind AS would be applicable from FY 2017-18 to all listed companies with net worth less than INR500 crore and to unlisted companies with net worth of INR250 crore or more but less than INR500 core. Accordingly, Ind AS would be applicable to a listed company from FY 2017-18 irrespective of its negative net worth.

2. Date of transition: The date of transition to Ind AS should be determined as per the requirements of Ind AS 101, First-time Adoption of Indian Accounting Standards and the Ind AS road map. A company covered in Phase I of the Ind AS road map is mandatorily required to prepare its financial statements as per Ind AS for the year ended 31 March 2017 with comparatives for the period ending 31 March 2016. The date of transition for such a company is 1 April 2015 and it is not permitted to voluntarily select a transition date prior to 1 April 2015.  Accordingly, a company, that wishes to present comparative information for two years when presenting its first Ind AS financial statements for the period ending 31 March 2017, would not be allowed to select 1 April 2014 as the date of transition and present two years’ comparatives.  The date of transition for such a company would mandatorily be 1 April 2015 and it would therefore, only be able to present comparative information for the preceding year in its first Ind AS financial statements. 

Our comments

The clarification bulletins issued by the ITFG are expected to assist companies transitioning to Ind AS by resolving diversity in practice and enabling a more consistent interpretation of Ind AS requirements.

The ITFG has reiterated the position on presentation of revenues and excise duty under Ind AS and it is consistent with the requirements of Schedule III of the 2013 Act.  However, the Securities and Exchange Board of India has permitted listed companies to continue using the existing format for disclosure of quarterly financial results (as per circular date 27 November 2015), which presents excise duty as a reduction from gross turnover, while
presenting their Ind AS quarterly financial results upto 31 December 2016.  Therefore, diversity in presentation of revenues and excise duty is expected to continue at least till the third quarter i.e. quarter ending 31 December 2016.

Companies transitioning to Ind AS should consider the interpretations provided by the ITFG in their implementation efforts.

To access the text of the ITFG Bulletin 4, please click here.

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

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