gstindas edition 3, feb 17

GSTIndAS #Self Learning

GSTIndAS

#Self Learning

This is not just the collection of good thoughts on the subject GSTIndAS, but also an effort to start with a

new of way of learning and we call it Self Learning.

Insights: Team Spirit & Team Work

Budget 2017-Highlights

Latest Provisions under GST

Overview of Model GST Law

Coverage of complex topics under

IndAS

New Topics

3rd Edition, Feb 17

2 | G S T I n d A S

Acknowledgement

First edition of the booklet was issued just after the launch of the group

GSTIndAS.

This issue being the third booklet in the series which includes more updations,

diversified topics and better presentations in terms of quality of content

offerings;

GST & IndAS both reflects something new and thus we call this as

CELEBRATE THE CHANGE.

All beautiful work does start from the scratch and to bring it in perfect shape

much efforts are required, here we extend our heartfelt thanks to

Ms. Nandini Taneja for her selfless service and editing the entire worksheet.

In the designing part a special thank is to be made to Mr. Sharad Dixit for his

excellent contribution in designing the cover and the structure of booklets.

Any product would be wasteful if it doesn’t reach the person for which it is

designed in particular, for this reason a thank is to be made to

Mr. Prateek Mohan Sharma for assisting in this role

A special thank is to be made to those who have came forward for sharing their

knowledge for this good cause.

And last but not the least, the person who is assisting us by not just his active

contribution but also through his guidance being CA Vineet Singhal.

We would like to extend our heartfelt thank to all of you.

CA HIMANSHU RASTOGI

3 | G S T I n d A S

ABOUT GSTIndAS

This country in which we live has given many brilliant minds for which we

don't even need to give any introduction.

We all know that in today's era, everything is linked with money &

education industry is no more an exception.

Coaching institutes, training institutes etc. are not only spoon feeding

monotonic knowledge but also forcing a rigid way of thinking which retards

development creating the atmosphere of fear WHICH NEEDS A CHANGE.

Here comes the role of our ancient scholars, the 'Eklavya' who set a great

example of self-learning, overcoming every difficulty coming on his way of

learning with a desire of becoming an expert in archery, and he did it.

That is what we want to do with this GSTIndAS; a new start to the

beginning that was made by our ancient tutors, start reading the content

and the knowledge is all yours.

We call this concept as Self Learning and this booklet is a part of that

motive.

Thank you,

Happy Learning..!!

With Regards

CA HIMANSHU RASTOGI

4 | G S T I n d A S

INSIDE

Team work & Team Spirit ....................................................................................... 5

Budget Highlights 2017 ................................................................................... 7

Supply under GST ................................................................................................. 14

Payment of Tax in GST .................................................................................. 18

Entire Overview of Revised Model GST Law ............................................................ 27

Other Comprehensive Income wrt IND AS 16 .................................................. 34

IndAS 32, 107 & 109 Financial Instruments ................................................ ...38

Due Diligence .............................................................................................. ...52

5 | G S T I n d A S

TEAM WORK & TEAM SPIRIT

INSPIRATIONAL NANDINI TANEJA

NEW DELHI [email protected]

“Alone we can do so little, together we can do so much!” –

Helen Keller

Together we shall all rise and achieve milestones that no individual can

aspire to attain; with this I have summed up the collective philosophy that our

group believes in.

Team work and Team spirit are indispensible elements in the journey of

success. The strength of the team lies in its members and their collective efforts

to attain the team’s objective. A good team is one where each member

compensates what the other member lacks. Thus, it is the positive thrust that

drives the team forward.

Cricket World Cup 2011, the moment of glory for every Indian was because of

TEAM INDIA playing well all throughout the tournament. No doubt that there

was abundance of brilliance and talent from across the globe, but it was the

team effort that our team displayed which brought us the title of ‘CHAMPIONS!’

Working together in a team teaches us to be patient, more compassionate,

makes us realize our shortcomings and acts as a catalyst in personality

development and character formation. Individual acts bring glory whereas

collective efforts bring greatness! A good leader is one who knows how to work

in a team and how to bring the best out of each team member. Thus, a good

leader is in all probability the best team member.

Team-work is taught from a schooling basis because a child must know how to

work with others and how to take the right decisions. This is one of the most

vital soft skills that you can ever teach a child. This will later help in their

future lives when they play for a basketball team or attend a group discussion

in an interview for their dream job. Teamwork helps us to enhance the skills

hidden within us. It makes sure that we are involved with everyone and hold

everyone together in a tight knot.

mailto:[email protected]

6 | G S T I n d A S

Very often we come across team players who are ready to work in hand in hand

with others. Such people have this special skill to motivate and encourage their

fellow mates, and bring the shy ones forward.

We are proud to be a part of a team that believes in working and growing

together. Each member compensates and compliments the attributes of

the others. We are hopeful that together as a team we will achieve the

goals that we have set. We believe in the ideology of LEARNING,

TEACHING & SHARING. As a cohesive force our team will reach great

heights.

This third edition of the series is a collective effort of all team members

who have provided valuable inputs. We are overwhelmed with the

response that we received from all our readers and are privileged to

acknowledge the reach that our efforts have attained in such a short span

of time.

BUDGET 2017

SIGNIFICANT HIGHLIGHTS CA DIWAKAR JHA

GHAZIABAD [email protected]

Making India Globally Viable……

A BASIC QUESTION:

Let’s suppose in a section it is written that this section is applicable from

01/04/2012, then what does it mean?

The answer is that this section is applicable from assessment year: 2012-13 and

not from previous year: 2012-13, as lawmakers never talk in terms of previous

year, they always talk in terms of assessment year.

INCOME TAX RATES: In the case of every individual (being less than age of 60 years) or Hindu

undivided family or every association of persons or body of individuals, or every artificial juridical person, the rates of income tax are as follows:

For individuals who are age of 60 years or more but less than 80 years, the rates are as follows:

The reason for dropping tax rate from 10% to 5% is to ensure more compliance regarding return filing, as the finance minister termed the nation as non-

compliant nation, which is true in every term. Due to this rate drop, the people

will get encouraged to file the return and ultimately the tax bracket will get broader.

Total Income Tax Rate

Upto Rs. 250000/- NIL

Rs. 250001 to Rs. 500000/- 5%

Rs. 500001 to Rs. 1000000/- 20%

Above Rs. 1000000/- 30%

Total Income Tax Rate

Upto Rs. 300000/- NIL

Rs. 300001 to Rs. 500000/- 5%

Rs. 500001 to Rs. 1000000/- 20%

Above Rs. 1000000/- 30%


8 | G S T I n d A S

RATIONALIZATION OF REBATE U/S 87A: In view of proposed rationalization of tax rates for individuals in the income slab

of Rs. 2,50,000 to Rs. 5,00,000, section 87A is amended to reduce the maximum

amount of rebate available under this section from existing Rs. 5,000 to Rs. 2,500. It is also proposed to provide that this rebate shall be available to only

resident individuals whose total income does not exceed Rs. 3,50,000.

The reason for this amendment is to meet out a part of shortfall in revenue collection by the Government due to lowering of income tax rates of various

assessees.

LOWERING TAX RATES FOR MICRO, SMALL & MEDIUM ENTERPRISES: The income tax rate of corporate assessees having turnover upto Rs. 50 crores has been dropped from 30% to 25%. This move is welcomed by the corporate sector with open arms. The effect of this amendment will be as follows:

96% of the total companies registered in India will get benefit due to this

amendment.

It will provide Micro, Small & Medium Enterprises a level playing field with

foreign companies as the cost of goods and services supplied will be lower.

India’s corporate tax rate (i.e. 34.608%) is much higher than average @ 18%

of the rest of the world, so it’s a step towards bridging that gap and

bringing India on the same level with that of world.

SURCHARGES: The amount of income tax shall be increased by surcharge in the case of every

individual or Hindu undivided family or every association of persons or body of

individuals, whether incorporated or not by following rates: Where total income exceeds Rs. 50,00,000 but does not exceed Rs. 1 crore :

Surcharge @ 10% of tax

Where total income exceeds Rs. 1 crore : Surcharge @ 15% of tax All the remaining rates of surcharge have been kept same. The reason for the increase in surcharge rate as aforementioned is to recover more amount from the people of richer category so as to compensate the revenue losses on account of drops in income tax rates.

INCENTIVE FOR INVESTMENT IN IMMOVABLE PROPERTY:

The existing provision of the Act provide for concessional rate of tax and also indexation of capital gains arising from transfer of long term capital asset. With a view to promote the real-estate sector and to make it more attractive for investment, it is proposed to amend section 2(42A) of the Act so as to reduce the period of holding from the existing 36 months to 24 months in case of immovable property, being land or building or both, to qualify as long term capital asset. SHIFTING BASE YEAR FROM 1981 TO 2001:

9 | G S T I n d A S

In Section 55, the assessee has following 2 options to arrive at cost of acquisition for assets purchased prior to 01/04/1981:

Either to take actual cost as cost of acquisition or

To take fair market value as on 01/04/1981 as cost of acquisition. Due to some practical reasons, the second option is more appealing to the assessees as using this option cost of acquisition generally comes higher, but

then a problem arises that how to calculate the fair market value of the asset as

on 01/04/1981 precisely.

So, to tackle this very problem, there is an amendment in Section 55, so as to

provide that the assessee will have following 2 options to arrive at cost of

acquisition for assets purchased prior to 01/04/2001:

Either to take actual cost as cost of acquisition or

To take fair market value as on 01/04/2001 as cost of acquisition.

On the similar lines as earlier, the cost of improvements incurred prior to 01/04/2001 shall be ignored totally.

EXPANDING THE SCOPE OF LONG TERM BONDS U/S 54EC: The existing provision provides that capital gain to the extent of Rs. 50 lakhs

arising from the transfer of a long-term capital asset shall be exempt if the assessee invests the whole or any part of capital gains in certain specified bonds,

within the specified time. Currently, investment in bond issued by the National

Highway Authority of India or by the Rural Electrification Corporation Limited is eligible for exemption under this section.

In order to widen the scope of the section which may raise fund by issue of bonds

eligible for exemption under section 54EC, it is proposed to amend section 54EC so as to provide that investment in any bond redeemable after three years

which has been notified by the Government in this behalf.

The reason for this amendment is to promote investment in the notified long term bonds.

INSERTION OF NEW SECTION 50CA:

Under the existing provisions of the Act, income chargeable under the head

“Capital Gains” is computed by taking into the account the amount of the full

value of consideration received or accrued on transfer of a capital asset. In order to ensure that the full value of consideration is not understated, the Act also

contained provisions for deeming of stamp duty value as full value of

consideration for transfer of immovable property in certain cases.

In order to rationalize the provisions relating to deeming of full value of

consideration for computation of income under the head “Capital Gains”, it is

proposed to insert a new section 50CA to provide that where consideration for transfer of a share of a company (other than quoted share) is less than the fair

market value (FMV) of such share, the FMV shall be deemed to be the full value

10 | G S T I n d A S

of consideration for the purposes of computing income under the head “Capital Gains”. In short, the crux is as follows:

Section is applicable on sale of unquoted shares where sales consideration

is less than FMV,

FMV shall be deemed as full value of consideration for the purpose of

calculating capital gains.

MEASURES TO ENSURE TIMELY RETURNS (INSERTION OF

SECTION 234F): In order to ensure that return is filed within due date, it is proposed to insert a

new section 234F in the Act to provide that a fee for delay in furnishing of return shall be levied for assessment year 2018-19 and onwards where the return is not

filed within the due dates specified for filing of return u/s 139(1). The proposed

fee structure is as follows:

A fee of five thousand rupees shall be payable, if the return is furnished

after the due date but on or before the 31st day of December of the

assessment year;

A fee of ten thousand rupees shall be payable in other cases.

However, in a case where the total income does not exceed five lakh rupees, it is

proposed that the fee amount shall not exceed one thousand rupees.

The fee as aforementioned is to be deposited prior to return filing and

consequentially section 140A is to be amended. The reason for insertion of this section is to ensure timely returns and to distress

department from last day hassles.

CONVERSION OF PREFERENCE SHARES INTO EQUITY

SHARES: In order to provide tax neutrality to the conversion of preference share of a

company into equity share of that company, section 47 has been amended to

provide that the conversion of preference share of a company into equity share

shall not be regarded as transfer.

Consequential amendments are also proposed in section 49 and section 2(42A) in

respect of cost of acquisition and period of holding.

The reason for this amendment is that the startup investors prefer to invest in

convertible preference shares in initial stages to be assured about returns, later

on they convert into equity, but at present this conversion gets taxed and hence

the investors get demoralized to invest in start ups, which ultimately becomes

the reason for failure of the start ups. Now when the conversion will not be

considered as transfer, the investors will get motivated to invest in convertible

preference shares first and then convert those into equity shares.


ENABLING OF FILING OF FORM 15G/15H FOR COMMISSION

PAYMENTS SPECIFIED UNDER SECTION 194D: Section 194D of the Act provides for TDS @ 5% for payments in nature of

insurance commission beyond a threshold limit of Rs. 15,000 per year. Further,

section 197A provides that tax shall not be deducted; if the recipient of certain payments furnishes a self-declaration in Form 15G/15H declaring that tax on his

estimated total income of relevant previous year will be nil.

In order to reduce compliance burden in the case of individuals and HUFs, it is

proposed to amend section 197A so as to make them eligible for filing self-

declaration in Form 15G/15H for non-deduction of tax at source in respect of insurance commission referred to in section 194D.

RESTRICTION ON CASH TRANSACTIONS: In order to achieve the mission of the Government to move towards a less cash economy to reduce generation and circulation of black money, it is proposed to

insert section 269ST in the Act to provide that no person shall receive an

amount of three lakh rupees or more-

In aggregate from a person in a day;

In respect of a single transaction; or

In respect of transactions relating to one event or occasion from a person,

otherwise than by an account payee cheque or account payee bank draft or use of

electronic clearing system through a bank account.

The restriction shall not apply to Government, any banking company, post office

savings bank or co-operative bank.

With insertion of section 271DA in the Act to provide for levy of penalty on a

person who receives a sum in contravention of the provisions of the section 269ST. The penalty is proposed to be 100% of the amount received.

MEASURES TO DISCOURAGE CASH PAYMENTS: Existing provision of section 40A(3) disallows any expenditure in respect of which payment or aggregate of payments made to a person in a day, otherwise than by

account payee cheque drawn on a bank or account payee bank draft, exceeds

twenty thousand rupees, shall not be allowed as a deduction.

Further, section 40A(3A) also provides for deeming payments as profits if

expenditure is incurred in a particular year but the payment is made in subsequent year of a sum exceeding twenty thousand rupees otherwise than by

account payee cheque drawn on a bank or a account payee bank draft.

In order to disincentivize cash transactions, it is proposed


to replace Rs. 20,000 by Rs. 10,000 in both the sub-sections

aforementioned and

to expand the specified mode of payment and include the use of

electronic clearing system through a bank account as an acceptable

mode.

DISCOURAGING CASH DONATIONS: Under section 80G, deduction is not allowed in respect of donation made of

any sum exceeding Rs. 10,000, if it is paid in cash.

In order to provide cash less economy and transparency, section 80G is amended to replace Rs. 10,000 by Rs. 2,000.

So, now donation made in excess of Rs. 2,000 in cash will not be allowed as

deduction.

MEASURES FOR PROMOTING DIGITAL PAYMENTS IN CASE OF

SMALL UNORGANIZED BUSINESSES: The provisions of section 44AD provide for presumptive income in case of eligible

assessees carrying out eligible businesses. Under this scheme, assessee engaged

in eligible business having total turnover or gross receipts upto Rs. 2 crores rupees in a previous year, a sum equal to or more than 8% of total turnover or

gross receipts, as declared by assessee is deemed to be profits and gains from

business or profession.

In order to promote digital transactions and to encourage small unorganized

business to accept digital payments, section 44AD is amended to reduce the

existing rate of 8% to 6% in respect of amount of total turnover or gross receipts received through banking channels. For remaining turnover or receipts

the existing rate of 8% shall continue to apply.

PENALTY FOR FURNISHING INCORRECT INFORMATION IN

STATUTORY REPORT OR CERTIFICATE: In order to ensure that the person furnishing report or certificate undertakes due diligence before making such certification, a new section 271J is inserted so as to

provide that if an accountant or a merchant banker or a registered valuer,

furnishes incorrect information in a report or certificate under any provisions of the Act or rules made thereunder, the Assessing Officer or the Commissioner

(Appeals) may direct him to pay a sum by way of penalty of ten thousand

rupees for each report or certificate by way of penalty.

No penalty shall be imposed if reasonable causes were there.

This section is applicable retrospectively w.e.f. 01/04/2017.


RESTRICTION ON SET-OFF OF LOSS UNDER THE HEAD “HOUSE

PROPERTY”: Section 71 of the Act relates to set off of loss from one head against income from

another. In line with the international best practices and to collect revenue upfront, it is proposed to insert sub-section (3A) in the said section to provide

that set-off of loss under the head “Income from House Property” against any

other of income shall be restricted to two lakh rupees for any assessment year. However, the unabsorbed loss shall be allowed to be carried forward for set off in

subsequent years in accordance with the existing provisions of the Act.

EXEMPTION U/S 10(38): At present, the income arising from a transfer of long term capital asset, being

listed equity share or unit of equity oriented mutual fund, is exempt from tax if

transaction of sale is undertaken on or after 01/10/2014 and securities transaction tax (STT) is charged on the transaction.

The misuse of this section was noticed as certain unaccounted income was

declared as exempt by entering into sham transactions. With a view to prevent

this abuse, it is proposed to amend section 10(38) to provide that exemption under this section for income arising on transfer of equity share shall be available

only if acquisition of share is chargeable to STT.

However this condition is not applicable in genuine cases like acquisition of shares in IPO, FPO, bonus or right issue by listed company etc.

EXTENDING PERIOD FOR CLAIMING DEDUCTION BY START-

UPS: An eligible startup shall be allowed deduction @ 100% of profits and gains

derived from eligible business for 3 consecutive assessment years out of 7

assessment years (instead of 5 assessment years as of now) The amendment is made due to the fact that start-ups may take time to derive profit out of their business, and extending the option period will benefit them.


SUPPLY UNDER GOODS & SERVICES TAX MOHIT GUPTA

NEW DELHI

[email protected]

INTRODUCTION: GST or Goods and Services Tax is a domestic trade tax that will be levied in the

form of a value added tax on all goods and services.

In harmony with current tax practices followed throughout the world, concept of

‘consumption based taxation’ would usher in GST in India. Simultaneously, more

than dozen major taxes under present indirect taxation like Central Excise,

Service Tax, and VAT etc. would be subsumed under ambit of GST resulting in an

altogether different taxable event as well.

TAXABLE EVENT: Determination of the taxable event in any tax law is of utmost importance as the

levy of tax is based on occurrence of that event. Charge of tax is created on basis of that event only. Taxable events in some of the present laws are as follows:

S. No. Tax Taxable event

1. Service Tax Provision of Service

2. Excise Duty Manufacture 3. VAT Intra-state sale of goods

4. CST Inter-state sale of goods

As it is apparent from above discussion that every law has its own taxable event.

Due to dozens of indirect tax laws in the country, dozens of different taxable

events are present today which is a very hectic task for a business enterprise. The

concept of ‘Supply’ is bedrock of the anticipated GST architecture and also an

altogether different concept from present regime. Thus, the continuous watch and

compliance required for keeping track of various tax trigger points in present

regime would vanish in GST. Consequently, the term ‘supply’ shall be utmost

important under GST regime.

SUPPLY - MODEL GST LAW: Section 3 of the Revised Model GST Law provides the definition of term ‘Supply’.

Despite being the first and most important step under GST regime, the Model

GST Law has chosen to define supply in an inclusive manner instead of an

exhaustive manner! Thus, it might result in ambiguity regarding term ‘supply’

and its complete scope. It is paramount here to note that the term ‘includes’ is


generally used to expand the meaning of a particular word and to clarify position

of some litigative items.

Section 3(1) of Model GST Law contains the definition of supply. It defines supply

as:

3(1) Supply includes—

(a) All forms of supply of goods and/or services such as sale, transfer, barter,

exchange, license, rental, lease or disposal made or agreed to be made for a

consideration by a person in the course or furtherance of business,

(b) Importation of services, for a consideration whether or not in the course or

furtherance of business, and

(c) A supply specified in Schedule I, made or agreed to be made without a

consideration.

From the above definition it can be seen that the term ‘supply’ basically includes

all variants of term sale and provision of service etc. Also, import of all services

whether for commercial or personal purpose have been included in the term

‘supply’.

Some transactions have been kept outside the scope of term ‘supply’ as per

Section 3(3) like services by Employees, Court, Foreign Diplomatic Mission, in

relation to funeral etc. Also some services of government have been exempted.

SUPPLY WITHOUT CONSIDERATION: In present law, whether it is Service Tax or VAT, a particular transaction is

taxable only when there is some consideration against a sale/service. However, in

GST there is a concept of ‘Supply without Consideration’ which is entirely new to

Indian indirect taxation system. As given in Section 3(1) (c) above, a supply given

in Schedule I would be treated as a supply even if it is done without

consideration. Schedule I is reproduced below:

1. Permanent transfer/disposal of business assets where input tax credit has

been availed on such assets.

2. Supply of goods or services between related persons, or between distinct

persons as specified in section 10, when made in the course or furtherance of

business.

3. Supply of goods—

a. by a principal to his agent where the agent undertakes to supply such

goods on behalf of the principal, or

b. by an agent to his principal where the agent undertakes to receive

such goods on behalf of the principal.

4. Importation of services by a taxable person from a related person or from any

of his other establishments outside India, in the course or furtherance of

business.


One clause which is going to have a very major impact is point no. 2 under which

all supplies between related parties and supplies between different departments

of a business (in different states) would be taxed in GST even if without

consideration. Other clauses are also going to have major impact on some

particular businesses.

It is going to pose a challenge to recognize all these transactions since even

consideration is not required in these transactions to attract chargeability under

GST. Other major issue is of valuation as valuation principles would have to be

specified in the law.

SPECIAL TYPES OF SUPPLY: Multi-tier rate structure has been proposed in GST. Due to multiple rates, a

problem arises when 2 or more goods/services are supplied together which

attracts different rates of tax. GST Law also has provisions regarding this matter.

It defines two special kinds of supply – ‘composite supply’ and ‘mixed supply’

under Section 2 as:

(27) “composite supply” means a supply made by a taxable person to a recipient

comprising two or more supplies of goods or services, or any combination thereof,

which are naturally bundled and supplied in conjunction with each other in the

ordinary course of business, one of which is a principal supply;

Illustration: Where goods are packed and transported with insurance, the supply of

goods, packing materials, transport and insurance is a composite supply and

supply of goods is the principal supply.

(66) “mixed supply” means two or more individual supplies of goods or services, or

any combination thereof, made in conjunction with each other by a taxable person

for a single price where such supply does not constitute a composite supply;

Illustration: A supply of a package consisting of canned foods, sweets, chocolates,

cakes, dry fruits, aerated drink and fruit juices when supplied for a single price is a

mixed supply. Each of these items can be supplied separately and is not dependent

on any other. It shall not be a mixed supply if these items are supplied separately.

The treatment of these transactions would be done as per Section 3(5) as under:

3(5) (a) a composite supply comprising two or more supplies, one of which is a

principal supply, shall be treated as a supply of such principal supply;

(b) a mixed supply comprising two or more supplies shall be treated as supply of

that particular supply which attracts the highest rate of tax.

MISCELLANEOUS: The line of differentiation between ‘goods’ and ‘services’ is getting blurred and distinction

is almost impossible in certain transactions. Their different classification is also

necessary in GST because of different provisions of goods and services in some places.

Some specific transactions are given in Schedule II which are deemed as ‘supply of


goods’ or ‘supply of services’. Traditionally litigative transactions like works contract,

transfer of right to use any goods, construction etc. have been categorized as ‘supply of

service’ and thus ending litigation in these areas. From close perusal it can be seen that

all transactions which are treated as ‘supply of service’ in Schedule II are closely based

on transactions given in Section 66E of Finance Act, 1994 also known as list of ‘deemed

service’ under Service Tax law.

CONCLUSION: The term supply is basic concept under GST law on which various other provisions like

time of supply, place of supply, type of supply are defined in the Model GST Law. Thus,

determination of scope of supply is not only important for defining taxable event but also

it forms the basis for various other provisions under the GST Law. Further, Supply is

going to be altogether a new concept in the indirect taxation, far away from manufacture,

provision of service or sale. This concept will change the citus of taxation from ‘origin’ to

‘destination’. In short, this new taxable event would bring a very huge and drastic change

in the indirect taxation system of India.


PAYMENT OF TAX UNDER GOODS & SERVICES TAX HIMADRI MANIAR

AHEMDABAD

[email protected]

INTRODUCTION:

Goods & Service tax is introduced to remove the partialities, infirmities and

problems of current indirect taxation system. In the current indirect tax

structure, the primary issue is cascading effect of taxes which increases

distribution and production cost of goods and services. GST plans to remove such

inequity in the system by introducing electronic ledger system.

On the Common portal for GST, Electronic Tax Liability Register, Electronic Cash

Ledger and Electronic Credit Ledger will be maintained.

Electronic Tax Liability Register records all the liabilities of a taxable person

under the GST Act. Electronic Cash Ledger operates like an e-wallet where the

cash payments are stored to discharge tax and other liabilities. Similarly,

Electronic Credit Ledger records input tax credit of taxes paid (CGST, SGST &

IGST) which can be utilized against our tax liability.

CHAPTER- IX PAYMENT OF TAX:

Chapter- IX of the Revised Draft Model GST law containing section 44, 45 and 46

of deals with Payment of Tax in GST.

Section 44: Payment of tax, interest, penalty and other amounts

(A) Electronic Tax Liability Register

All liabilities of a taxable person under this Act shall be recorded and

maintained in an Electronic Tax Liability Register maintained in Form

GST PMT-1 on the Common Portal.


The Electronic Tax Liability Register of a registered taxable person shall

be debited by:

The amount payable towards tax, interest, late fee or any other

amount payable

as per the return filed by the said person;

as determined by a proper officer in pursuance of any

proceeding under the Act.

The amount of tax and interest payable as a result of mismatch

under section 29 or section 29A or section 43C; or

Any amount of interest that may accrue from time to time.

At the time of payment of every liability by a registered taxable person,

the Electronic Tax Liability Register shall be credited.

(B) Electronic Cash Ledger

The Electronic Cash Ledger is equivalent to the concept of e-wallet and

Paytm wallet. In Paytm, the amount is deposited in Paytm wallet

through online transfer, after which Paytm cash can be utilized for

many purposes.

Similarly, through approved methods, amount is deposited in the wallet

which is reflected in the Electronic Cash Ledger. Such amount can be

then utilized to pay any liability incurred under the GST Act.

Such Electronic Cash Ledger shall be maintained in Form GST PMT-3

for each registered taxable person on the Common Portal.


Every deposit made towards tax, interest, penalty, fee or any other

amount by a taxable person shall be made by following modes only.

OTC means

OTC payment is allowed through authorized banks only for deposit up

to Rs. 10,000/- per challan per tax period.

The above restriction of OTC payment is not applicable to deposit made

by:

Internet Banking

Debit/ Credit Card

NEFT/ RTGS

Over the Counter payment (OTC)

OTC includes

Cash

Demand Draft

Cheque


Government Departments or any person notified by Board/

Commissioner;

Proper officer authorized to recover outstanding dues from any

person, whether registered or not, including recovery made

through attachment or sale of movable or immovable properties;

Proper officer authorized for the amounts collected during any

investigation or enforcement activity or any ad hocdeposit.

The process to deposit amount in Electronic Cash Ledger is as follows:


The date of credit to the account of the appropriate Government in the

authorized bank shall be deemed to be the date of deposit in the

electronic cash ledger.

Where a taxable person has claimed refund of any amount from the

electronic cash ledger, the said amount shall be debited to the electronic

cash ledger.

The amount available in the electronic cash ledger may be used for

making any payment towards tax, interest, penalty, fees or any

other amount payable under the provisions of the Act.

(C) Electronic Credit Ledger

The input tax credit as self-assessed in the return of a taxable person

shall be credited to his electronic credit ledger which shall be

maintained digitally in Form GST PMT-2 on the Common Portal.

Form GST

PMT-4

• A registered taxable person, or any other person onhis behalf, shall generate a challan in FORM GSTPMT-4 on the Common Portal and enter the details ofthe amount to be deposited. Such challan shall bevalid for 15 days only.

Mandate+

Challan

• For NEFT or RTGS mode of payment from any bank, themandate form shall be generated along with the challan andthe same shall be submitted to the bank from where thepayment is to be made. Mandate shall be valid for 15 daysfrom date of challan generation.

CIN

• On successful credit of the amount to the concernedgovernment A/c, a Challan Identification Number (CIN) will begenerated by the collecting Bank and the same shall beindicated in the challan.

CIN Failure

• If the bank A/c is debited but no CIN is generated, then thesaid person may represent electronically in FORM GST PMT-6 through the Common Portal to the Bank or electronicgateway.

ECL

• On receipt of CIN from the authorized Bank, the said amountshall be credited to the electronic cash ledger of the registeredtaxable person.


The electronic credit ledger shall be

Credited- By every claim of input tax credit under the Act.

Debited- By the extent of discharge of any liability under the Act

and by the refund claimed from any unutilized amount in the

ledger.

If the refund filed for unutilized credit available in the ledger is rejected,

either fully or partly, the amount debited to the extent of rejection, shall

be re-credited to the electronic credit ledger by the proper officer by an

order made in Form GST PMT-2A.

The amount available in the electronic credit ledger may be used for

making any payment towards output tax payable under the provisions of


the Act. It means that any penalty, interest, fees or any other amount due

cannot be paid using credit available in electronic credit ledger.

A unique identification number shall be generated at the Common Portal

for each debit or credit to the electronic cash or credit ledger.

The unique identification number relating to discharge of any liability shall

be indicated in the corresponding entry in the electronic tax liability

register.

(D) Utilization of Input Tax Credit

Credit Available IGST CGST SGST

Credit Utilization sequence

IGST CGST SGST CGST IGST IGST

SGST SGST CGST

Cross utilization of SGST & CGST credit is not allowed as both are

different taxes.

IGST can be utilized to pay all the tax liabilities as it is amalgamation of

CGST and SGST.

IGST can be 1st utilized against IGST only. If any credit still remains,

then it can be utilized to pay CGST and then SGST.

(E) Duty Liability Discharge Order

Every taxable person shall discharge his tax and other dues under

this Act or the rules made there under in the following order:

I. Self-assessed tax, and other dues related to returns of

previous tax periods;

II. Self-assessed tax, and other dues related to return of current

tax period;

III. Any other amount payable under the Act or the rules made

there under including the demand determined under section

66 or 67.

It is assumed under this Act that any person who is liable to pay tax

has passed on the entire tax incidence to the recipient of goods

and/or services.

• Tax payable under GST Act. It doesnot include interest, fee and penalty.

Tax Dues

• Interest, penalty, fee or any otheramount payable under the Act.

Other Dues


SECTION 45: INTEREST ON DELAYED PAYMENT OF TAX

Every person liable to pay tax in accordance with the provisions of the Act

or rules made there under,

who fails to pay the tax or any part thereof

to the account of the Central or a State Government

within the period prescribed, shall on his own,

for the period for which the tax or any part thereof remains unpaid,

pay interest at such rate as may be notified,

on the recommendation of the Council, by the Central or a State

Government. Interest is also payable if a taxable person

makes an undue or excess claim of input tax credit; or

makes an undue or excess reduction in output tax liability. The interest shall be calculated from the first day on whichsuch tax was due

to be paid.

SECTION 46: TAX DEDUCTION AT SOURCE:

Deductor:

(a) A department or establishment of the Central or State

Government; (b) Local authority;

(c) Governmental agencies;

(d) Persons notified by Central or State Government on recommendation of Council.

Deductee: Supplier of taxable goods and/or services notified by the

Central or a State Government on the recommendations of the GST Council.

Transaction Value: Total value of such supply under a contract, exceeds Rs.5

lakh.

TDS Rate: 1% of from the payment made or credited to the supplier

excluding the tax indicated in the invoice.

Payment period: Within 10 days after the end of the month in which deduction is made.

Interest on late

payment of TDS

If the Deductor fails to pay TDS to appropriate

government account, then he shall be liable to interest as per Section 45(1) along with the amount of TDS.

Issuance of certificate

Deductor shall furnish to the deductee a certificate

mentioning therein the contract value, rate of deduction, amount deducted, amount paid to the appropriate

Government

Time limit to issue certificate

Within 5 days of crediting the amount so deducted to the

appropriate Government,


Penalty for late or

non-issuance of certificate

Rs. 100/- per day after expiry of 5 days until the failure is

rectified limited to maximum Rs. 5000/-

Credit of TDS The TDS deducted and deposited to government will be

reflected in electronic cash ledger of the deductee.


OVERVIEW OF ENTIRE REVISED MODEL GST LAW NOV 2016 VERSION UNDER GOODS & SERVICES TAX VANSHAJ AGGARWAL

NEW DELHI

[email protected]

Indirect taxes in India have driven businesses to restructure and model their supply

chain and systems owing to multiplicity of taxes and costs involved. With hopes that

the Goods and Services Tax (GST) will see the light of the day, the way India does

business will change forever

Total tax collection in India (direct & indirect), currently stands at Rs 14.6 lakh crore,

of which almost 34 per cent comprises indirect taxes, with Rs 2.8 lakh crore coming

from excise and Rs 2.1 lakh crore from service tax. With the implementation of the

GST, the entire indirect tax system in India is expected to evolve.

The tax revenue mix can change as per the economic condition of the country. In

developing countries, indirect taxes comprise a higher share of total taxes; in

developed countries, their contribution is significantly lower

NEED OF GST: 1. Tax Cascading: Tax cascading occurs under both Centre and State taxes.

The most significant contributing factor to tax cascading is the partial

coverage by Central and State taxes.

2. Lack of Uniformity and Rates: Present VAT structure across the States

lacks uniformity, which is not restricted only to the rates of tax, but also extends to procedures and, sometimes, to the definitions, computation and

exemptions.

3. Interpretational Issues: Another problem arises in respect of

interpretation of various provisions and determining the category of the commodities. We find a significant number of litigation surrounding this

issue only. To decide whether an activity is sale or works contract; sale or

service, is not free from doubt in many cases.

4. Complexity in determining the nature of transaction –Sale vs.

Service: The distinctions between goods and services found in the Indian

Constitution have become more complex. Today, goods, services, and other

types of supplies are being packaged as composite bundles and offered for sale to consumers under a variety of supply-chain arrangements. Under

the current division of taxation powers in the Constitution, neither the

Centre nor the States can apply the tax to such bundles in a seamless manner.

5. Complexities in Administration: Compounding the structural or design

deficiencies of each of the taxes is the poor or archaic infrastructure for

their administration. Taxpayer services, which are a lynchpin of a successful self-assessment system, are virtually nonexistent or grossly

inadequate under both Central and State administrations.


BACKGROUND OF GST: Period Milestones

June 2016 Draft law passed

August – September 2016

The Constitution Amendment Bill was passed and states approved it

September 2016 Formation of GST Council

January 2017 Passage of IGST, CGST and SGST law

January – June 2017

GSTN infrastructure – testing and training

July 2017 Implementation of GST

RATES OF GST AS PROPOSED: Rates Items

0% Essential Foods, Medicines, Services

5% Precious Metals, Common use items

12% Standard rate for services and goods (other than those covered under 18% rate)

18% Standard rate for services and goods

28% Demerit goods, additional cess to be imposed on luxury

goods

PROPOSED GST MODEL: 1. Dual GST: Dual GST signifies that GST will be levied by both the centre

and states, on supply of goods and services. Under the constitution, presently the taxing powers are split between the centre and states. Under

GST, the power to tax on supply of all goods and services will be vested in

the hands of both the centre and the states. Considering the dual taxation power to tax transaction under GST, the structure is referred to as dual

GST.

2. Subsuming almost all indirect taxes: GST should subsume all major

indirect taxes levied by the Central Government i.e. central excise, customs and service tax and majority of taxes levied by the State Government i.e.

VAT, luxury tax, entertainment tax, etc. The following taxes are subsumed

within GST:

Centre Taxes State Taxes

Excise Duty State VAT/Sales Tax

Additional duties of Excise Central Sales Tax

Excise Duty levied under Medicinal

and Toiletries Preparation Act

Entertainment Tax (not levied by

local bodies)

Additional duties of custom (CVD &

SAD)

Luxury Tax

Service Tax Entry Tax


Surcharges and cesses on central

taxes

Surcharges and cesses on state

taxes

3. IGST: Under this model the Centre would levy the IGST which would be

approximately CGST plus SGST on all inter-state transactions of taxable goods & services and imports. Inter-state seller would pay IGST on value

addition after adjusting IGST, CGST and SGST on purchases. The

exporting state would transfer to the state the credit of SGST used on payment of IGST.

4. Credit Scheme: GST will be levied on supply of goods and services and the

dealer will be allowed credit for the GST paid on purchases. The credit

would be seamless except that the credit of CGST paid will not be allowed for set-off against SGST payable and vice-versa.

IMPORTANT POINTS ABOUT GST: Registration: There is no concept of centralized registration in GST, a supplier having branches in different states will have to take separate registration in those

states. There is a concept of business vertical wise registration within state.

Returns: In GST, separate returns are to be filed for:

Inward supplies

Outward supplies

Consolidated return of outward and inward supplies

ISD return

Annual return

Return by non-resident taxpayers TDS return

Return for composition scheme dealers

First return

Final return

So, we can notice an increase in compliance work as from 2 returns in service tax law to minimum of 37 returns are to be filed in GST era.

Input Tax Credit: The suppliers are allowed to take credit for the taxes paid on

inward supplies if these are related to business activities. No input tax credit is allowed for the inward supplies which are used in exempted supplies, but credit

is available if zero-rated supplies are made.

Accounts and records: The accounts and records are to be maintained for 60 months from the last date of filing of annual return at the registered principal

place of business. Accounts and records can be kept and maintained in electronic

form. In case of multiple states, related records to be maintained at concerned premises as there in no concept of centralized accounting in GST.

Refunds: The time limit for refund is two years from relevant date. There is a

provision stating that80% of the refund will be sanctioned provisionally and

transferred to assessee online and the remaining 20% is subject to verification of documents by officer.

Invoice/Debit Note/Credit Note: The details and particulars are same as in

Service Tax laws. Debit Note/ Credit Note is to be issued before 30th September of following year or date of filing of annual return whichever is earlier. Details of

Debit Note/ Credit Note is to be shown in return.


Audits: Three types of audits are mentioned in GST Act, which are as follows:

Special Audits

Departmental Audits

CAG Audits

Departmental audit is to be taken at assessees’ premises. Time limit for audit is 3

months plus extension of 3 months in certain cases. The audit report is mandatorily to be forwarded to assessee.

Assessments: The following types of assessments are prescribed in GST:

Self Assessments

Provisional Assessments

Best Judgment Assessments

Summary Assessments

Time limits for these assessments are yet not prescribed.

Time of supply: In GST the time of supply will be the invoice date (last date on which invoice was to be issued) or payment dates whichever is earlier. It is same

as in service tax law as of now.

Value of supply: Value will take same as the transaction value (transaction between non-related parties and price is the sole consideration. Reimbursement

of expenses incurred in the course of sale of goods or provision of services are

taxable.

COMPARISON OF GST AND SERVICE TAX: A brief comparison of prior service tax with the proposed GST law can be drawn

under various domain including Revenue consideration, valuation and more which are discussed:

Particulars GST Service Tax

Revenue

Exports Exempt Exempt

Domestic Chargeable to CGST and SGST or IGST

Chargeable to Service tax , Swachh Bharat Cess (SBC), and

Krishi Kalyan Cess (KKC)

Domestic Procurement

of

Services

CGST , IGST and SGST will be Creditable

VAT – Cost CST – Cost / Refundable

Entry Tax / Octroi / LBT - Cost

Payments Monthly Monthly / Quarterly

Imports IGST – Creditable Service Tax (paid under RCM) –

Creditable,

SBC – Not Creditable KKC – Creditable & utilize

against KKC liability only

Valuation At transaction value -Concept of Pure Agent

-Taxability of reimbursements are always doubtful

-Separate Valuation Rules are

prescribed.


Exemptions No Exemption Many exemptions

IMPACT AREA UNDER GST:

Greater Compliances – 37 Returns, 36 refund applications

Change with Technology – Data recording, processing, MIS reports etc.

Cenvat Credit – Inter-adjustment of credits are allowed

Other impact: o Costing – Tax on branch transfer, State taxes on services.

o Contractual clauses – Restructuring of tax clauses, revision of

contract pricing o Taxation – Transition aspects, multiple returns

o IT – Invoicing & accounting, Integration with GST

o Supply chain – Sourcing, inventory, distribution & management

o Pricing – Review of margins, decision on pass of benefits etc. o Others – Working capital/cash flow analysis, location analysis,

business operating models.

GEARING UP FOR THE GST:

Initial efforts

Revision of chart of accounts

Updation of master data.

Configuration/re-configuration of accounting software.

Going Forward

Accounting and books as per new law.

Reconciliations and report generation between entities and verticals,

between inward and outward supply.


ROADMAP FOR GST, HOW GST TO BE IMPLEMENTED?

WHY THE BUSINESS PROCESSES NEEDS TO BE CHANGE? 1. Three Taxes - CGST, SGST, IGST – Inter-adjustment not allowed between

CGST and SGST.

2. Multiple Registration / Business Vertical wise Registration . 3. Branch-wise Accounting.

4. Registration wise credit not available – CGST and SGST of different states

are not allowed to adjust against each other.

5. Procurement Policies – Goods and Services – Taking care into availability of credit.

6. Need to distinguish between B2B and B2C transactions in software for

better compliances.

TRANSITIONAL PROVISION:

Areas Provisions

Underlying Stock Allowed to be carry forward in GST

Cenvat Credit Allowed as CGST

Registration Provisional RC issued. It is valid for

six months. Validity can be extended on the recommendation of GST

Council.

VAT Credit Allowed as SGST

Un availed CENVAT /VAT on Capital Goods

Allowed as CGST / SGST in GST laws

Unclaimed duties / taxes by

unregistered person

Allowed as CGST / SGST within one

year from date of Invoice. These input supplies should be used in providing

output supplies under GST law


Pending Refund Claims Amount must be refunded in

accordance with the provisions of repealing

Act

Pending Demands/Litigations Decided in accordance with the provisions of repealing act

FRESH CONCEPTS INTRODUCED IN GST: Anti Profiteering – Benefits of tax exemptions or lower rates must be pass on to

the consumer. Prices should be reduce to that extent

Compliance Rating – Every assessee assign a GST compliance rating on the

basis of his compliance record.

Matching of Input Tax Credit – In GST Era, first outward return is filed & then

inward return is filed. Credit is available only if the taxes are paid and reflected

by supplier in its outward return.

E-Commerce For effective control and better tax collection, e-commerce

operators have to collect 1% tax on net supplies.

Supply – In GST era, sale of services and goods are known as supply of services

and goods.

Information Return – Certain assessee have to file return for specific

information with the government.

ISSUES AND CONCERNS IN GST: Including other issues, major concern in a broader sense can be categorized as

under: 1. No area based exemption

2. Higher Tax Rates

3. Tax on Branch Transfers

4. Reduction in Threshold Limits 5. Multiple Registrations

6. Robust Accounting – State-wise

7. Higher Taxes – No concept of tax exemption forms 8. Contracts and Agreements – Have to undergone a change

9. Up gradation of Software.

10. Supplies without consideration attracts GST


OTHER COMPREHENSIVE INCOME WRT INDAS 16 UNDER INDIAN ACCOUNTING STANDARDS CA VINEET SINGHAL

NEW DELHI [email protected]

(Recommendation: Read with IndAS 16 as shared in Edition-II by YASH

PRIYADARSHI: WWW.Slideshare.net/GSTIndAS )

Other comprehensive income comprises items of income and expenses (including

reclassification adjustments) that are not recognized in profit or loss as required

or permitted by other IndAS.

The components of other comprehensive income include:

(a) changes in revaluation surplus (see IndAS 16 Property, Plant and

Equipment and IndAS 38) Intangible Assets);

Lets Discuss Significance of OCI in IndAS 16 Property, Plant & Equipment (1st part

of Line Item of OCI), in a simple find tool search “OCI” has been used at 8 instances

in IndAS 16

IND AS 16

MEASUREMENT AFTER RECOGNITION (PARAGRAPH 29): An entity shall choose either the cost model in paragraph 30 or the revaluation

model in paragraph 31 as its accounting policy and shall apply that policy to

an entire class of property, plant and equipment

IndAS 16 gives an option for following Cost Model or Revaluation Model for a class

of asset

REVALUATION MODEL (PARAGRAPH 31):

After recognition as an asset, an item of property, plant and equipment whose fair

value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated

depreciation and subsequent accumulated impairment losses. Revaluations shall

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 end

of the reporting period

PARAGRAPH 39: If an asset’s carrying amount is increased as a result of a revaluation, the

increase shall be recognised in other comprehensive income and accumulated in

equity under the heading of revaluation surplus. However, the increase shall be

http://www.slideshare.net/GSTIndAS


recognized in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss

Upward Revaluation

Increase will be recognized in OCI, subject to previous revaluation decreases

through P/L .

PARAGRAPH 40: If an asset’s carrying amount is decreased as a result of a revaluation, the

decrease shall be recognised in profit or loss. However, the decrease shall be recognised in other comprehensive income to the extent of any credit balance

existing in the revaluation surplus in respect of that asset. The decrease

recognised in other comprehensive income reduces the amount accumulated in

equity under the heading of revaluation surplus.

Downward Revaluation

Decrease will be recognized in P/L, subject to previous revaluation increases

through OCI.

APPENDIX A

CHANGES IN EXISTING DECOMMISSIONING, RESTORATION

AND SIMILAR LIABILITIES:

Under Ind AS 16, the cost of an item of property, plant and equipment includes

the initial estimate of the costs of dismantling/removing the item and restoring

the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a

particular period for purposes other than to produce inventories during that

period. Ind AS 37 contains requirements on how to measure decommissioning,

restoration and similar liabilities.

Decommissioning cost is to be estimated and valued while valuing the asset, (Refer

Example 1)

ISSUE:

This Appendix addresses how the effect of the following events that change the measurement of an existing decommissioning, restoration or similar liability

should be accounted for:

a) a change in the estimated outflow of resources embodying economic

benefits (e.g. cash flows) required to settle the obligation b) a change in the current market-based discount rate as defined in

paragraph 47 of Ind AS 37 (this includes changes in the time value of

money and the risks specific to the liability); and


c) an increase that reflects the passage of time (also referred to as the unwinding of the discount)

Three cases are mentioned above

Change in cost of decommission

Change in discounting rate

Unwinding of discount-periodic unwinding of discount is charged to P&l as

finance cost(the discount that is already applied to present value decrease

with passage of time)

Extract from IndAS text

Accounting Principles, Para 6

If the related asset is measured using the revaluation model:

(a) changes in the liability alter the revaluation surplus or deficit previously

recognized on that asset, so that:

(i) a decrease in the liability shall (subject to (b)) be recognized in other

comprehensive income and increase the revaluation surplus within equity,

except that it shall be recognised in profit or loss to the extent that it

reverses a revaluation deficit on the asset that was previously recognised in

profit or loss;

Point (b) taken up with point (i) for better understanding

(b) In the event that a decrease in the liability exceeds the carrying amount

that would have been recognized had the asset been carried under the cost

model, the excess shall be recognized immediately in profit or loss

A decrease in liability will generally be recognized in OCI, subject to any previous

decrease in value of asset through P/L

However, OCI can only take up amount limited to changes over and above had

asset been valued at cost

Difference will be taken to P/L

(Refer example 2)


(ii) an increase in the liability shall be recognized in profit or loss, except that it

shall be recognized in other comprehensive income and reduce the revaluation

surplus within equity to the extent of any credit balance existing in the

revaluation surplus in respect of that asset.

An increase in liability will generally be recognized in P/L , subject to any previous

increase in value of asset through OCI

(b). Already taken up above


(c) a change in the liability is an indication that the asset may have to be revalued

in order to ensure that the carrying amount does not differ materially from that

which would be determined using fair value at the end of the reporting period.

Any such revaluation shall be taken into account in determining the amounts to

be recognized in profit or loss or in other comprehensive income under (a). If a

revaluation is necessary, all assets of that class shall be revalued

If Fair value of the asset and the carrying amount are likely to differ materially,

then also, Change in liability will be taken to P/L or OCI as already discussed

(d) Ind AS 1 requires disclosure in the statement of profit and loss of each

component of other comprehensive income or expense. In complying with this

requirement, the change in the revaluation surplus arising from a change in the

liability shall be separately identified and disclosed as such.

Entry to OCI due to change in decommissioning has to be shown separately in OCI


DISCLOSURE:

The financial statements shall disclose, for each class of property, plant and

equipment:

(iv) Increase or decrease resulting from revaluations under Paragraphs 31, 39 and

40 and from impairment losses recognised or reversed in other comprehensive

income in accordance with Ind AS 36;

Disclosure should be made for recognition or reversal of revaluation through OCI

Example 1

Consider an example of a mine. One will have to dig the mine deep enough so that

the mine is ready for production and ore can be extracted. Further Digging will also

take place as the ore is continuously extracted. Whilst in the first case, the site

restoration obligation will be capitalized as PPE, in the latter case the site

restoration obligation will form part of the cost of producing inventories

Example 2

Let us assume that an asset’s revalued amount is INR 1000 and there is reduction

in the liability related to this asset by INR 600, if the entity would have followed the

cost model, the carrying value of the asset (after deprecation) would have been only

INR 400, In this case , the entity will adjust 400 towards reduction of liability from

the revaluation surplus and the remaining 200 will be recognized as income in P &

L.


INDAS 32, 107,109-FINANCIAL INSTRUMENTS PRESENTATIONS, RECOGNITION & DISCLOSURES ITTI JAIN

NEW DELHI

[email protected]

STANDARDS DEALING WITH FINANCIAL INSTRUMENTS UNDER

IND AS: Under Ind AS, 3 Standards deal with accounting for financial instruments.

Ind AS 32 Financial Instruments: Presentation deals with the presentation

and classification of financial instruments as financial liabilities or equity and set out the requirements regarding offset of financial assets and

financial liabilities in the balance sheet.

Ind AS 107 Financial Instruments: Disclosures sets out the disclosures

required in respect of financial instruments.

Ind AS 109 Financial Instruments contains guidance on the recognition ,

derecognition, classification and measurement of financial instruments ,

including impairment and hedge accounting

At the outset, it may noted that fair value of financial instruments should be determined in accordance with the principles in Ind AS 113 Fair Value Measurement.

MEANING OF FINANCIAL INSTRUMENTS: Financial instruments are contracts that give rise to financial assets for one party

and financial liabilities or equity instruments to another party.

POINT TO BE NOTED There must be a contract (written/oral).

There must be financial asset with corresponding financial lab. / Equity

instruments. Trade receivables and payables, bank loans and overdrafts, issued debts, equity

and preference shares, investments in securities (e.g. Shares and bonds), and

various derivatives are just some of the examples of financial instruments.

WHAT IS FINANCIAL ASSETS? Are “Assets” which qualify any of the following:-

Cash

Investment in equity Instruments “Contractual” Rights to receive cash/other financial assets from another

entity e.g. Trade debtor, bills receivables or invest, in convertible

debentures. “Contractual” Right to receive cash/other financial asset in potentially

favourable conditions e.g. Derivatives (forward, options, and swaps).

Contracts which will be/ may be settled in company's own shares, which is non-derivative and variable number of shares will be received.


WHAT ARE FINANCIAL LIABILITIES? Are “Liabilities” which qualify any of the following:-

“Contractual” obligation- to deliver cash/other financial assets from

another entity e.g. Trade creditor, bills payable, Redeemable debentures.

“Contractual” obligation- to deliver cash/other financial asset in potentially favourable conditions e.g. Derivatives.

Contracts obligation- to be settled in company's own equity shares, which

is non-derivative and variable number of shares to be issued Derivatives of own shares.

CLASSIFICATION OF FINANICIAL INSTRUMENTS PRIMARY FINANCIAL INSTRUMENTS e.g. are Receivable , Payables DERIVATIVE FINAINCIAL INSTRUMENTS e.g. are forward, future, options,

interest rate/ currency swaps etc.

Non Financial Instruments are prepaid expenses, inventory, property, plant and

equipment, intangible assets, advance given/ received goods and services,

deferred revenue, warranty obligations, income taxes, and operating leases, gold.

Equity Instruments: any contract that evidences a residual interest in the

entity's assets after deducting all liabilities. Eg. Non-Puttable shares,

Warrants/Written call option that allow the holder to purchase a fixed number of non - puttable ordinary shares for a fixed amount of cash / another financial

asset.

CONDITIONS FOR EQUITY INSTRUMENTS:

IINNSSTTRRUUMMEENNTTSS CCLLAASSSSIIFFIICCAATTIIOONN

Puttable Instruments /

instruments imposing obligation to deliver pro data share in Net Asset

only on Liquidation

[see next point]

If instrument specific and issuer

specific condition are met, classified as equity instrument. If not

satisfied, it is classified as financial

liability

Preference Shares that provides for

redemption on specific date option

of the holder

Financial Liability, since the Issuer

has obligation to transfer Financial

asset to the holder.

Preference Share that provides for

redemption at the option of Issuer/ Non -Redeemable Pref. Share

Classification is based on other

rights that attach to then, and substance of contractual

arrangements.


Cumulative / Non cumulative Pref.

shares, the distributions of the Issuers

Equity Instruments

Q1) What is Puttable / Pro data?

1. A Puttable Financial Instrument includes a contractual obligation for the

issuer to repurchase / redeem that instrument in cash/ another financial asset on exercise of the put.

2. Pro-data share = Entity’s Net Asset on liquidation x No. of units held by holder

Total Number of Units

Q2) What is instrument specific condition for equity instruments?

1. Holder is entitled for a pro-data share of the entity's Net Asset on Liquidation,

2. Puttable Instrument is subordinate to all other classes of Instrument, i.e.- a. It has no priority over other claims to the assets on liquidation and,

b. Does not require to be converted to another Instruments before it is in the

Subordinate class 3. All Instruments in the class have identical features.

Q3) What are issuer specific conditions for equity instruments?

Issuer must have no other Financial Instrument/ Contract that has-

(a)Total cash flows substantially based on-

-Profit/loss, -Change in the recognized Net Asset

-change in the Fair Value of the recognized and unrecognized Net Asset of the

entity (excluding any effects of such Instruments)

(b) The entity of substantially restricting / fixing the residual return to the puttable instrument holders.

Note. If the entity cannot carry out the above tests, the puttable instruments are

classified as financial liability.

CLASSIFICATION OF FINANCIAL ASSETS: Financial Assets measured at Amortised Cost, Financial Assets measured at Fair value Through Profit or Loss(FVTPL)

Financial Assets measured at Fair value Through Other Comprehensive

Income (FVTOCI)

CLASSIFICATION OF FINANCIAL LIABILITY: Fair value Through Profit or Loss(FVTPL)

Amortised Cost

CLASSIFICATION OF FINANCIAL DERIVATIVES:


As Financial Assets would be measured at Fair value Through Profit or Loss (FVTPL) only.

CRITERIA FOR CLASSIFICATION: Entity shall classify Financial Assets depending upon the following criteria and

options elected by it – Entity’s Business Model (BM) for managing the Financial Assets, and

Contractual Cash Flow Characteristics (CCFC) of the Financial Assets.

Business Model (BM).

Entity assesses whether its Financial Assets meet the conditions on the

basis of Business Model as determined by its Key Managerial Personnel

(KMP). [As defined in Ind AS 24 Related Party Disclosures]

DETERMINATION OF BM:

1. Entity’s Business Model is determined at a level that reflects how groups of

Financial Assets are managed together to achieve a particular business

objective. 2. BM does not depend on Management’s intentions for an Individual

Instrument. So, it is not an Instrument– by–Instrument Approach to

classification, and should be determined on a higher level of aggregation. 3. It refers to how an Entity manages its Financial Assets in order to generate

Cash Flows, i.e. it determines whether Cash Flows will result from

collecting Contractual Cash Flows, selling Financial Assets or both. This

assessment is not performed on the basis of scenarios that the Entity does not reasonably expect to occur, such as so called Worst / Stress Case

Scenarios.

4. Example: If an Entity expects that it will sell a particular Portfolio of Financial Asset only in a Stress Case Scenario, that scenario would not

affect the Entity‘s Assessment of BM for those Assets if the Entity

reasonably expects that such a scenario will not occur. 5. If Cash Flows are realized in a way that is different from the Entity’s

expectations at the date of assessment of BM, it is not (a) Prior Period

Error, or (b) change the classification of the remaining Financial Assets held in that BM. Example: Entity sells more or fewer Financial Assets than

it expected when it classified the Assets.

6. However, when an Entity assesses BM for newly originated / purchased

Fin. Assets, it must consider information about how CF were realised in the past, along with all other relevant information

7. BM is a matter of fact and not merely an assertion. Entity will need to use

judgment when it assesses its BM for managing Financial Assets and that assessment is not determined by a single factor or activity. Instead, the

Entity must consider all relevant evidence that is available at the date of

the assessment. Such relevant evidence includes, but is not limited to:


How the Performance of BM and Financial Assets held within that BM are evaluated and reported to the Entity‘s KMP,

Risks that affect its performance & the way in which those risks are managed,

and

How Managers of the Business are compensated (Example: Whether the Compensation is based on the Fair Value of the Assets managed or on the

Contractual Cash Flows collected).

BUSINESS MODEL TYPES:

1. Hold to collect Contractual Cash Flows (CCF), 2. Hold to collect Contractual Cash Flows (CCF) and Selling Financial Assets,

3. Other Business Models.

Contractual Cash Flow Characteristic (CCFC) Test

1. Entity should classify Financial Assets on the basis of CCFC, if it is held within a BM whose objective is –

a. To hold the Assets to collect CCF, or

b. Achieved by both collecting CCF and selling Financial Assets. 2. To do so, an Entity has to determine whether the Asset‘s Contractual Cash

Flows are Solely Payments of Principal and Interest (SPPI) on the Principal

Amount outstanding. 3. CCF that is SPPI on the principal amount outstanding is consistent with a

Basic Lending Arrangement. In such arrangement, consideration for the

Time Value of Money and Credit Risk are typically the most significant

elements of interest. Solely Payment of Principal and Interest (SPPI)

If there are repayments of Principal, Interest consists of consideration for –

a) Time Value of Money, b) Credit Risk associated with the Principal amount outstanding during a

particular period of time, and

c) For other Basic Lending Risks and Costs, d) As well as a Profit Margin.

CLASSIFICATION OF DEBT INSTRUMENTS (FINANCIAL ASSETS):

SSiittuuaattiioonn CCllaassssiiffiiccaattiioonn

1. If Conditions of CCFC Test is fulfilled, BM

test will be applied –

Amortised Cost

(a)Held to collect Contractual Cash Flows FVTOCI (with Recycling)

(b)Results in collecting CCF and selling

Financial Assets

FVTPL


(c)If above conditions are not satisfied or

FVTPL Option is selected

FVTPL

2. If conditions of CCFC Test is not fulfilled FVTPL

CLASSIFICATION OF EQUITY (FINANCIAL ASSETS):

Situation (CCFC Test will not

apply)

Classification

1. If it is held for trading FVTPL

2. If it is not held for trading and

FVTOCI Option is selected

FVTOCI (with Recycling)

3. If it is not held for trading and

FVTOCI Option is not selected

FVTPL

INITIAL RECOGNITION:

AAsssseettss // LLiiaabbiilliittiieess TTiimmee ooff IInniittiiaall RReeccooggnniittiioonn

Receivables / Payables When the Entity becomes a party to

the Contract and has a legal right to

receive or a legal obligation to pay cash.

Firm Commitment to Buy / Sell

Goods / Service

When one of parties has performed,

e.g. Entity that places order

recognizes the Liability only when the Goods are shipped / delivered

Forward Contract Commitment Date, Not on the

Settlement Date

Option Contracts When the Holder / Writer becomes a

Party to the Contract.

Planned Future Transactions Not Assets / Liabilities, since Entity

has not become a Party to it


Regular Way Purchase or Sale Trade Date / Settlement Date

Accounting.

• Trade Date Accounting

1. Timing: Date in which an Entity commits itself to purchase / sell an Asset. 2. Recognition:

a. Buyers’ Book: Asset to be Received & Liability to pay.

b. Sellers’ Book: Gain / Loss on Disposal & Receivable.

3. De-recognition: Asset on Trade Date Note: Interest accrues on Asset & corresponding Liability only on the

Settlement Date when title passes.

• Settlement Date Accounting 1. Timing: Date in which an Asset is delivered to / by an Entity.

2. Recognition: (a) Buyers’ Book: Asset on the day it is received.

(b) Sellers’ Book: Gain / Loss from the Buyer for Payment.

3. De-recognition: Asset on the day in which it is delivered. Note: Change in Fair Value of Asset from Trade to Settlement Date shall be

accounted in the same way as it accounts for Acquired Asset.

• Measurement (Not apply for Trade Receivables) Entity shall measure a Financial Asset / Liability (except FVTPL) at its Fair

Value plus / minus Transaction Costs directly attributable to its acquisition /

issue. Hence, Transaction Costs are – a. Fin. Instr. measured at FVTPL: Charged to P&L, i.e. not added to Fair

Value at Initial Recognition,

b. Fin. Assets at FVTOCI / Amortized Cost: Added to Initial Recognition Amount,

c. Fin. Liab. At mortised Cost: Deducted from Amount of Liability

originally recognized.

Note: Transaction Costs on Disposal / Transfer are not included in

measurement of all Categories of Financial Assets / Liabilities. They are

charged to Profit and Loss.

WHAT IS FAIR VALUE? (a) Best evidence of the Fair Value of a Financial Instrument at initial recognition is normally the Transaction Price i.e. Fair Value of Consideration given/ received.

(b) If –

• Fair Value differs from the Transaction Price, and • Fair Value is evidenced by a Quoted Price in an

Active market for an identical Asset / Liability or

Based on a Valuation technique that uses only data

From observable markets.

Difference between Fair

Value at initial

recognition and the

Transaction Price is

recognized as a Gain/

Loss


(c) In all other cases, Fair Value is adjusted to defer the difference between the Fair Value at initial recognition and the Transaction Price i.e. Transaction Price is

treated as Fair Value.

MEASUREMENT OF FINANCIAL ASSET: • Financial Asset (Debt Instrument only) shall be measured at Amortized

Cost, if –

• It is held within a BM whose objective is to hold it to collect Contractual Cash Flows

(CCF),

• Contractual terms give rise on specified dates to Cash Flows that are SPPI on Principal outstanding

Financial Asset (Debt & Equity) shall be measured at FVTOCI, if –

• It is held within a BM whose objective is achieved by both collecting

CCF & selling Fin. Assets, and • Contractual terms give rise on specified dates to Cash Flows that are

SPPI on Principal outstanding

• Financial Asset shall be measured at FVTPL if it is not measured at above. (Residuary Category)

MEASUREMENT OF FINANCIAL LIABILITY: An Entity shall classify all Financial Liabilities as subsequently measured at Amortized Cost, except Financial Guarantee Contracts, Commitments to provide

Loan at a below Market Interest Rate, Contingent Consideration recognized by an

Acquirer in a Business Combination

OPTION TO FVTPL (FINANCIAL ASSETS): Entity may, at initial recognition, irrevocably designate a Financial Asset as measured at FVTPL, if doing so eliminates or significantly reduces Measurement

/ Recognition Inconsistency (called Accounting Miss–match) that would otherwise

arise from measuring them / recognizing their Gains & Losses on different basis.

OPTION TO FVTPL (FINANCIAL LIABILITIES): Entity may, at initial recognition, irrevocably designate a Financial Liability as

measured at FVTPL, if – a) It eliminates or significantly reduces Measurement / Recognition

Inconsistency (referred as Accounting Mismatch) that would otherwise arise

from measuring them / recognizing their Gains & Losses on different basis.

b) Group of Financial Assets / Liabilities is managed and its performance is evaluated on a Fair Value basis, in accordance with a documented Risk

Management or Investment Strategy and information about the group is

provided internally on that basis to the entity’s Key Management Personnel.


RECLASSIFICATION: Only when an Entity changes it’s BM for managing Fin. Assets, it shall re–classify all affected Fin. Assets prospectively. Such changes are determined by Entity’s

Senior Management as a result of external / internal changes and must be

significant to its operation and demonstrable to external parties. BM Change will occur only when it either begins or ceases to perform an activity that is

significant to its operations.

CHANGE IN BM: The following are considered as a change in Business Model –

1. Acquisition / Disposal / Termination of a Business Line.

2. Entity has Commercial Loans Portfolio which it holds to sell in Short Term. It acquires a Company having a BM that holds Loans to collect Contractual

Cash Flows. Commercial Loans Portfolio is no longer for sale. It is now

managed together with the acquired loans and all are held to collect CCF. 3. Financial Services Firm decides to shut down its Retail Mortgage Business.

It no longer accepts new business and it is actively marketing its Mortgage

Loan Portfolio for sale.

NOT A CHANGE IN BM: The following are not considered as a change in Business Model –

1. Change in intention related to particular Fin. Assets, even in case of significant change in market,

2. Temporary disappearance of a particular market for Financial Assets,

3. Transfer of Financial Assets between parts of the Entity with different BM.

DISCLOSURES – RECLASSIFICATION: 1. Date of Reclassification,

2. Detailed explanation of change in BM and a qualitative description of its effect on Fin. Statements,

3. Amount re–classified into and out of each category.

DERECONGITION: 1. Entity shall derecognize a Financial Asset only when the Contractual rights

to the Cash Flows from the Financial Asset expire.

2. Entity shall derecognize a Financial Liability only when it is extinguished, i.e. when the obligation specified in the contract is discharged or cancelled

or expires.

3. On Derecognition, Amount recognized in P&L A/c = Carrying Amount on De–recognition – [Consideration received + New Asset Obtained – New

Liability Assumed]


EXCHANGE/MODIFICATION EXCHANGE: Exchange between Existing Borrower and Lender of Debt Instruments with substantially different terms or substantial modification of the terms of an

existing Financial Liability shall be accounted for as an extinguishment of

Original Financial Liability and recognition of New Financial Liability.

IMPAIRMENT: Entity shall recognize a Loss Allowance for expected Credit Losses on –

a) Financial Asset that is measured at Amortized Cost or FVTOCI, b) Lease Receivable,

c) Contract Asset,

d) Loan Commitment, e) Financial Guarantee Contract to which the impairment requirements apply.

EMBEDDED DERIVATIVE: a) Component of a Hybrid Contract that also includes a Non–Derivative

Host, with the effect that some of the Cash Flows of the Combined

Instrument vary in a way similar to a Stand–Alone Derivative.

b) However, a Derivative that is attached to a Financial Instrument but is contractually transferred independently of that Instrument, or has

a different counterparty is not an Embedded Derivative but a

Separate Fin. Instrument. Examples

Contract Host Contract Embedded

Derivative

Leases with

Contingent Rent

Annual Lease Rental

Payments

Contingent Rent

Forex Construction

Contracts

Construction

Contract

Changes in Foreign

Exchange Rate

ACCOUNTING OF EMBEDDED DERIVATIVE SITUATION:

SSiittuuaattiioonn TTrreeaattmmeenntt

(a) Host Contract is an Asset within the scope of this AS

Apply Classification & Measurement Rules to the entire

Hybrid Contract

(b) Host Contract is not an Asset,

Contract will give rise to Standalone Derivative if

separated, & Not closely related

Split the contract and account

for Embedded Derivative separately


to Host Contract

(c) Any one of the conditions not satisfied

No need of segregating the Contract & accounting separately

TREASURY SHARES (OWN EQUITY INSTRUMENT): • Entity‘s own Equity Instrument are not recognized as Fin. Asset regardless of

the reason for which they are re–acquired. If an Entity re–acquires its own

Equity, they shall be deducted from Equity. • No Gain / Loss shall be recognized in Profit / Loss on the purchase, sale,

issue or cancellation.

• Treasury Shares may be acquired and held by Entity / other Members of the Group. Consideration paid or received shall be recognized directly in Equity.

• Exception: When an Entity holds its own Equity on behalf of others, there is

an agency relationship. They are not included in Balance Sheet. Example: Bank holding its own Equity on behalf of Client.

TREATMENT: • Amount of Treasury Shares held is disclosed separately in Balance Sheet /

Notes as per Ind AS 1.

• Entity should provide disclosure as per Ind AS 24, if it re–acquires its own

Equity from Related Parties.

INTEREST, DIVIDENDS, LOSSES AND GAINS:

IItteemmss TTrreeaattmmeenntt:: RReeccooggnniizzeedd

1. Interest, Dividends, Losses and Gains relating to a

Financial Instrument or a component that is Financial

Liability

In Profit & Loss A/c

2. Distributions to holders of Equity Instrument Directly in Equity

3.Transaction Costs of an Equity Transaction As deduction from Equity

4. Income Tax relating to distributions to holders and

Transaction Costs of an Equity Transaction As deduction from Equity


DEFAULTS & BREACHES: For Loans Payable recognized at the end of the Reporting Period, an Entity shall disclose –

• Details of any defaults during the period of Principal, Interest, Sinking Fund,

or Redemption terms, • Carrying Amount of the Loans Payable in default at the end of the Reporting

period, and

• Whether the default was remedied, or the terms of the Loans payable were re–negotiated before the Financial Statements were approved for issue.

OFFSETTING FINANCIAL ASSET AND LIABILITY: Financial Asset and Liability shall be offset and the Net Amount presented only when an Entity –

(a) Has a legally enforceable right to set off the recognized amounts currently, and

(b)Intends to settle on Net bases, or to realize the Asset and settle the Liability simultaneously.

OBJECTIVE OF HEDGE ACCOUNTING: To represent in the Financial Statements, the effect of an Entity’s Risk Management Activities to manage Exposures arising from particular risks that

could affect Profit or Loss or Other Comprehensive Income. Entity’s Risk

Management Activities use Financial Instruments to manage Exposures.

IDENTIFYING AND DESIGNATING HEDGED ITEM: Hedged Item can be a single item or a group of items of the following –

(a) Recognized Asset / Liability, (b) Unrecognized Firm Commitment,

(c) Forecast Transaction, and

(d) Net Investment in a Foreign Operation.

CONDITIONS FOR HEDGED ITEM: • Hedged Item must be reliably measurable.

• If a Hedged Item is a Forecast Transaction, it must be highly probable

DESIGNATION OF HEDGING INSTRUMENT:

HHeeddggiinngg IInnssttrruummeenntt CCoonnddiittiioonn

(a) Derivative measured at FVTPL It cannot be designated for some Written

Options.


(b) Non–Derivative Financial Asset /

Liability measured at FVTPL Non–Derivative Financial Liability for

which the amount of change in Fair Value attributable to changes in its

Credit risk is presented in Other

Comprehensive Income cannot be designated.

CONDITIONS FOR HEDGING INSTRUMENT: • Only Contracts with Party external to Reporting Entity can be designated as a

Hedging Instrument. • Foreign Currency Risk Component of Investment in an Equity Instrument

measured at FVTOCI cannot be designated as a Hedging Instrument for Hedge

of Foreign Currency Risk.

QUALIFYING CRITERIA FOR HEDGE ACCOUNTING: 1. Hedging relationship consists only of Eligible Hedging Instruments and

Eligible Hedged Items. 2. At the inception of Hedging relationship, there is a formal designation and

documentation of Hedging relationship and the Entity’s Risk Management

Objective and Hedging Strategy. 3. It meets all of the following Hedge Effectiveness requirements –

• There is an economic relationship between the Hedged Item and the

Hedging Instrument, • Effect of Credit Risk does not dominate the value changes that result from

that economic relationship,

• Hedge Ratio = Ratio resulting from the Quantity of Hedged Item and Hedging Instrument.

TYPES OF HEDGING RELATIONSHIP: a. Fair Value Hedge: Hedge of the exposure to changes in Fair Value of

Hedged Item attributable to a particular risk and could affect Profit or Loss.

b. Cash Flow Hedge: Hedge of the exposure to variability in Cash Flows of

Hedged Item attributable to a particular risk and could affect Profit or Loss. c. Hedge of Net Investment in a Foreign Operations, including a Hedge of a

Monetary Item.

FAIR VALUE HEDGE ACCOUNTING:

GGaaiinn // LLoossss oonn AAccccoouunntteedd iinn

(a) Hedging Instrument OCI, if the Hedging Instrument hedges

an Equity Instrument measured at

FVTOCI. Otherwise in P&L.


(b) Hedged Item being a Financial

Asset measured at FVTOCI Profit and Loss (P&L)

(c) Hedged Item being Equity

Instrument measured at FVTOCI Other Comprehensive Income (OCI)

(d) Hedged Item being

Unrecognized Firm Commitment Cumulative change its Fair Value is

recognized as an asset or liability with

a corresponding gain or loss recognized in P&L

CASH FLOW HEDGE ACCOUNTING: 1. Separate Cash Flow Hedge Reserve A/c is adjusted to the lower of the

following a. Cumulative Gain / Loss on the Hedging Instrument from inception of the

Hedge,

b. Cumulative Change in Fair Value of the Hedged Item from inception of the Hedge.

2. Portion of Gain / Loss on the Hedging Instrument that is determined to be an

effective Hedge shall be recognized in Other Comprehensive Income. 3. Remaining Gain / Loss is hedge ineffectiveness that shall be recognized in

profit or loss.

HEDGE OF NET INVESTMENT IN FOREIGN OPERATIONS:

IItteemmss RReeccooggnniizzeedd

Portion of Gain / Loss on Hedging Instrument that is determined

to be an Effective Hedge In OCI

Ineffective Portion In P&L

DISCLOSURES: Entity shall apply Disclosure requirements for those Risk Exposures that an

Entity hedges and for which it elects to apply Hedge Accounting. Hedge

Accounting Disclosures shall provide information about – a. Entity’s Risk Management Strategy and how it is applied to manage risk,

b. How Entity’s hedging activities may affect the amount, timing &

uncertainty of its future Cash Flows, c. Effect that Hedge Accounting has had on Balance Sheet, P&L and

Statement of Changes in Equity.


DUE DILIGENCE LET’S MAKE THINGS BETTER, BRIGHT & CLEAR TUSHAR GUPTA

NEW DELHI

[email protected]

Due Diligence – Let’s make things Better, Bright & Clear

Since! You would heard many definitions on Due Diligence like it is an art to

carry investigation, collecting information and stuff like that. Let me explain you

in simple words. When we seek a bride/groom for ourselves or children or brothers/sisters, we

evaluate the other party. Like to his whereabouts & other aspects. That’s

nothing but due diligence. We analyse on different features... Similarly when you want to invest in a company, you will be diligent that is the investment

feasible. Is it profitable?? You will be worried until you make a profitable

investment. You will Google about the company for hours. You will contact your

expert friends. And after long investigation, You Will Invest!! And Yes! That’s what called Due Diligence.

Due Diligence involves investigative process

that identifies hidden strength and weaknesses in a business transaction,

which helps in evaluation of business

transaction. Due diligence is used to evaluate a business

opportunity. The term due diligence

describes a general duty to exercise care in any transaction. As such, it spans

investigation into all relevant aspects of the

past, present and predictable future of the

business of a target company. Objective of Due Diligence & Why do we

conduct due diligence?


1. To protect frauds and misrepresentations because dealings are not always straight forward and obvious.

2. To conduct a SWOT analysis to identify the strength and uncover threats and

weaknesses.

3. Bridge the gap between existing and expecting. 4. To take smooth/ accurate action or decision.

5. To enhance the confidence of Stakeholders.

6. To forecast the future performance of an organization by analyzing the potential risks and threats.

7. To ascertain the appropriate purchase price & and the method of payment.

8. To evaluate the condition of the physical plant and equipment; as well as other tangible and intangible Assets. To help in identifying liabilities, negotiate a

lower price; avoid lawsuits and costly mistakes and top of all to make good

business and financial decisions.

FINANCIAL DUE DILIGENCE: A quotation of Kautailya quoted by Honourable Finance Minister in his budget

speech that, “A King shall be diligent in foreseeing the possibilities of calamities, try to avert them before they arise, overcome those which

happen, remove obstructions to economic activity and prevent the loss of

revenue to the state...” Investor needs to be the same King. As Finance being the backbone of any

individual or organisation whether investing or taking over any business,

financial due diligence is a must go step. It provides peace of mind to both

corporate and financial buyers by analyzing and validating all the financial, commercial, operational and strategic assumption being made.

Establishing financial due diligence involves analysing the ratios, analysing the

trends of previous years for profits and only after evaluating these financial factors, decisions can be taken.

It includes review of accounting policies, review of accounting policies, review of

internal audit procedures, quality & sustainability of earnings and cash flow, condition and value of assets, potential undisclosed liabilities, tax implications of

deal structures, examination of information systems to establish the reliability of

financial information, internal control systems etc& matter that might increase the risk of the investment.

Example: While acquiring a business or investing in any company, financial due

diligence should be taken regarding the following items appearing in Balance

Sheet: Verifying that Assets are not over-stated

Analysing that depreciation is not over charged

Analysing the transactions in Bank Accounts Identifying the availability of cash as stated in Financials

Identifying that current liabilities are not under stated.

Gross Margins and EBITDA analysis. Review of Internal Control and MIS systems

Management & Employees and their Relationship.


CRUCIAL FACTORS TO BE CONSIDERED WHILE CONDUCTING

DUE DILIGENCE: Be prepared with:

1. A detailed listing of the exact due diligence steps to follow 2. A checklist of everything to complete in each due diligence area

3. Specific due diligence tasks that need to be completed

4. All of the materials you need from the seller before you start 5. Allow yourself time and Internet Research

6. Information from vendors and customers

PROCESS OF CONDUCTING DUE DILIGENCE: Planning

o Study Scope and Core areas o Appointment of the team w.r.t. their Skills and expertise

o Clear and definite mandate

o Defining the time schedules- how to deal with challenges within agreed time frame with available resources

o Timely communication of information requirements (Due Diligence

Checklist) Data Collection

o Research for data could be either qualitative or quantitative

o One on one interviews with management from the target company

o Data room and access to the room o Sources: Internet, Competitors, Industry associations, Regulatory

organizations and databases which will include searches of public

registers, Customers, Vendors etc. Data Analysis

o Understanding everything you can about the company

o It should be done keeping in mind the objectives of Due Diligence o The analysis of due diligence findings is generally a weighing of a

variety of factors in order to determine whether team should give a

positive recommendation. Preparation of Due Diligence Report

o A summary of the scope of the review

o A list of all the information disclosed by investigations

o An analysis of the documentation and information revealed o An executive summary which outlines the legal issues identified and

advises on the legal implications of proceeding with the transaction

(Risks and Liabilities) o Highlight the material issues arising from the due diligence review

and advice on the factors influencing the price to be paid

HOW TO GO ABOUT IT? While conducting my first due diligence, I was not ease. I was not sure whether

due diligence is Audit or Forensic Audit. Then gradually I Understood by practice


and experience, Due Diligence lies somewhat between Financial Audit and Forensic Audit. You should not stuck while conducting one, here is what to do

and how to do?

1. Overview – Why selling?

2. Studying the Market Capitalization of the Company 3. Revenue, Profit and Margin Trends are analyzed via Common Size Analysis

4. Detailed Competitors and Industries Research reports are studied and

compared 5. Valuation Multiples helps us to built insights over financials and

projections

6. Management and Share Ownership, background check and changes 7. Examination of Balance Sheet

8. Stock Price History (if any)

9. Expectations & Risks

CONCLUSION: In Today’s era, parking money at the right place is the major decision. And therefore before relying on any company what we need is due diligence. Due

Diligence is conducted to know whether the company we are investing in or

acquiring thereon is fulfilling the necessary compliances and to know that whether the decision would be feasible.

Obviously there is the temptation to sit back and smile.... But there’s so much at

stake, we have to do our due diligence.


KNOW MORE ABOUT US:

How this content is generated is a great example of what can be done through

what we do, we have decided to re-ignite the young brain and energetic youth of

this country and inspire them to do something on their own,

This is just a beginning to the great start that we all need,

To know more about GSTIndAS,

Contact:

Prateek Mohan Sharma - 9811435863

Be in touch (Facebook): https://www.facebook.com/GSTIndAS Mail us at: [email protected]

Read all previous edition online: http://www.slideshare.net/GSTIndAS

With Regards CA HIMANSHU RASTOGI

[email protected]

9958853024

Disclaimer:

This publication has been carefully prepared, but should be seen as general guidance only. You should

not act or refrain from acting, based upon the information contained in this presentation, without

obtaining specific professional advice. Please contact the persons listed in the publication to discuss

these matters in the context of your particular circumstances. GSTIndAS nor the related person make

any representation or warranty, expressed or implied, as to the accuracy, reasonableness or

completeness of the information contained in the publication. All such parties and entities expressly

disclaim any and all liability for or based on or relating to any information contained herein, or error,

or omissions from this publication or any loss incurred as a result of acting on information in this

presentation, or for any decision based on it.

PRICE—000/-

FB.COM/GSTINDAS

https://www.facebook.com/GSTIndAS


http://www.slideshare.net/GSTIndAS

gstindas edition 3, feb 17

Education