Ind AS Transition Facilitation Group (ITFG) issues Clarifications Bulletin 6

Ind AS Transition Facilitation Group

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 (Ind AS Rules, 2015).

1000

Also on KPMG.com

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 (Ind AS Rules, 2015).

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

New development

The ITFG held its sixth meeting and issued its bulletin (Bulletin 6) on 29 November 2016 to provide clarifications on four issues in relation to the application of Ind AS, as considered in its meeting.

Overview of the clarification in ITFG’s Bulletin 6

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

  • Period for calculation of net worth for applicability of Ind AS: As per Rule 4(2) of the Ind AS Rules, 2015, net worth for determining the applicability of Ind AS should be calculated in accordance with the stand-alone financial statements of the company as on 31 March 2014 or the first audited financial statements for an accounting period which ends after that date. However, net worth for companies which were not in existence as on 31 March 2014 should be calculated on the basis of the first audited financial statements ending after that date, in respect of which it meets the threshold specified for Ind AS applicability.

The ITFG considered a situation where a company meets the net worth criteria on 31 March 2014 but the net worth falls below the specified threshold on later reporting dates. Based on the above guidance, ITFG has clarified that the net worth of a company should be calculated in accordance with the stand-alone financial statements of the company as on 31 March 2014. Once a company meets the net worth threshold criteria it is then required to comply with the Ind AS road map, irrespective of the fact that its net worth falls below the criteria specified at a later date.

The ITFG in its Bulletin 3 issued on 2 July 2016 provided guidance with respect to the listing criteria for Ind AS applicability. In Bulletin 3 ITFG stated that if a company ceases to meet the listing criteria in the Ind AS road map, immediately before the mandatory Ind AS application date, then it would not be required to comply with Ind AS even if it met the criteria on a prior date. However, ITFG has clarified in Bulletin 6 that this guidance (given in Bulletin 3) applies only to the listing criteria and not the net worth criteria

  • Associate companies covered under Section 8 of the Companies Act, 2013 (2013 Act): As per Rule 4(1)(ii) of the Ind AS Rules, 2015, the following companies are required to comply with Ind AS from accounting periods beginning on or after 1 April 2016 (FY2016-17) with comparatives for the period ending 31 March 2016:
    • whose equity or debt securities are listed or are in the process of being listed on any stock exchange in India or outside India and having net worth of INR500 crore or more
    • other than those covered in (a) above and having net worth of INR500 crore or more
    • holding, subsidiary, joint venture or associate companies of companies covered under (a) or (b) above, as the case may be.

The ITFG considered a situation where an associate of a company covered under Phase I (Ind AS applicable from FY2016-17) of the Ind AS road map is a charitable organisation registered under Section 8 of the 2013 Act. In accordance with the above guidance, ITFG clarified that Section 8 companies are also required to comply with the provisions of the 2013 Act unless any exemption is specifically provided. Additionally, Section 8 companies are not exempt from the requirements of Sections 133 and 129 of the 2013 Act. Therefore, such an associate company (covered under Section 8) is also required to comply with Ind AS from FY2016-17 onwards.

  • Date of applicability of Ind AS for an unlisted NBFC1 and its subsidiary: As per Rule 4(1)(iv)(b) of Ind AS Rules, 2015, NBFCs with net worth less than INR500 crore are required to apply Ind AS from 1 April 2019. Further, the holding, subsidiary, joint venture or associate company of such an NBFC, other than those covered by the corporate Ind AS road map are also required to apply Ind AS from 1 April 2019 onwards.

 NBFC and group companies with different Ind AS adoption dates  

The ITFG considered a scenario where a subsidiary of an NBFC falling within Phase II of the corporate road map, is required to comply with Ind AS from 1 April 2017 onwards, but the NBFC parent is required to implement Ind AS from 1 April 2019 onwards. In this context, the ITFG clarified that in accordance with the explanation to Rule 4(1)(iv) the subsidiary would be required to provide relevant financial statement data in accordance with:  

  • NBFC parent’s accounting policies: for preparation of consolidated financial statements under the Companies (Accounting Standards) Rules, 2006, and
  • Ind AS in its individual financial statements: from the accounting period commencing 1 April 2017 onwards

This requirement is illustrated in the table below (onthe basis that the NBFC parent falls within Phase II of the NBFC road map):

NBFC parent with subsidiary within Ind AS road map (Phase II)

Financial year   NBFC parent Subsidiary/associate/joint venture
Stand-alone
Consoli-dated
Stand-alone
For Consoli-dation
2017-18 Indian GAAP Indian GAAP Ind AS Indian GAAP
2018-19 Indian
GAAP
Indian GAAP Ind AS Indian GAAP
2019-20 Ind AS Ind AS Ind AS Ind AS

In situations where a parent entity that falls within the corporate Ind AS road map has an NBFC subsidiary, associate or joint venture, the NBFC would be required to provide relevant financial statement data in accordance with the Ind AS policies followed by the parent for consolidation purposes. This requirement is illustrated below (assuming that the parent entity falls within Phase I of the corporate road map and the NBFC falls within Phase I of the NBFC road map):

NBFC subsidiary with parent entity within Ind AS road map (Phase I)

Financial year

NBFC subsidiary/associate/ joint venture Parent company
Stand-alone For Consoli-dation Stand-alone Consoli-dated
2016-17
Indian GAAP Ind AS Ind AS Ind AS
2017-18 Indian GAAP Ind AS Ind AS Ind AS
2018-19 Ind AS Ind AS Ind AS Ind AS

1Non-Banking Financial Company

  • Inclusion of capital reserve for computation of net worth: As per Section 2(57) of the 2013 Act, ‘net worth’ means the aggregate value of the paid-up share capital and all reserves created out of the profits and securities premium account, after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet but does not include the following:
    • Reserves created out of revaluation of assets
    • Write-back of depreciation, and
    • Write-back of amalgamation. 

 The ITFG considered a situation where a company has received a government grant in the nature of promoter’s contribution and included this in the capital reserve. The amount of grant was accounted as per AS 12, Accounting for Government Grants.

 Based on the above definition, the ITFG has clarified that the capital reserve in the nature of promoter’s contribution is a capital contribution by promoters. Further, AS 12 also states that government grants in the nature of promoter’s contribution should be recognised in the shareholders’ funds. Therefore, in this context, the capital reserve should be included in the computation of net worth. However, such an amount should be included only for the purpose of determining Ind AS applicability based on the net worth criteria and should not be applied by analogy for determining net worth under other provisions of the 2013 Act.

Our comments

The ITFG clarifications continue to provide resolutions to the practical challenges faced by companies while complying with the requirements of Ind AS. Here are some aspects that companies transitioning to Ind AS should consider further:

  • Net worth and listing criteria: The ITFG clarified that the net worth criteria if met once would make it mandatory for a company to comply with Ind AS requirements even if the net worth subsequently falls below the threshold specified in the Ind AS road map.  

However, as specified in ITFG’s Bulletin 3 companies that fall within Phase II of the corporate road map only because they are listed (but do not meet the net worth threshold criteria) would not be required to apply Ind AS if they become unlisted prior to the mandatory Ind AS applicability date. For example, a listed entity with a net worth below INR250 crore as on 31 March 2014 would fall within Phase II of the corporate road map by virtue of being listed. If this entity were no longer listed as on 31 March 2017 (immediately before the mandatory applicability date of 1 April 2017), it would not be required to implement Ind AS. ITFG’s current Bulletin 6 clarifies that this guidance may not be applied by analogy to companies that fall within the Ind AS road map as they meet the net worth criteria.

  • Section 8 companies: ITFG’s clarification on companies registered under Section 8 of the 2013 Act indicates that such companies are not exempt from the requirements of the 2013 Act, (including the Ind AS road map). Consequently, all Section 8 companies that are covered in the Ind AS road map, either as they meet the specified criteria individually, or are subsidiary, associate or joint venture companies of an entity that is covered by the road map, would be required to apply Ind AS.
  • NBFCs: The clarification relating to NBFCs reiterates that financial statements data may have to be prepared under Ind AS and AS by a corporate subsidiary, associate or joint venture of an NBFC, for consolidation purposes. Where the NBFC has a corporate parent that is required to apply Ind AS, the NBFC will have to prepare dual financial information. This will entail significant additional efforts by such group companies.

To access the text of the ITFG’s Bulletin 6, please click here.

Ind AS

© 2017 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.

Connect with us

 

Request for proposal

 

Submit

KPMG’s new-look website

KPMG has launched a state of the art digital platform that enhances your experience and provides improved access to our content and our people, whatever device you are on.