slide deck - may 2014(pdf, 1.3 mb)

Voices on Reporting 30 May 2014 kpmg.com/in

© 2014 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

1

Voices on Reporting Welcome

Series of knowledge sharing calls

Covering current and emerging reporting issues

Scheduled towards the back end of each month

Look out for our Accounting and Auditing Update and First Notes publications


2

Voices on Reporting Your Speakers

Sai Venkateshwaran Partner and India Head- Accounting Advisory Services

V. Venkataramanan Partner KPMG, India


3

Voices on Reporting Topics for today

Companies Act – Matters for first board and general meetings 1

Treatment of mark to market losses on principal only currency swaps – EAC opinion 2

Deferred tax liability on special reserve created by banks – impact on auditor’s report 3

ICAI’s roadmap for adoption of Ind AS 4


4

Voices on Reporting Meeting of the board of directors

• New requirements such as appointment of independent directors (IDs), independence criteria for IDs etc. have to be considered

• Constitute/reconstitute various committees of the Board e.g. nomination and remuneration committee, CSR committee

• Pre-approval of non audit services for auditors

• New duties of directors to be codified at the meeting

• Approval of related party transactions (RPT) - not in the ordinary course or arm’s length; establishing a framework for RPT

• Appointment and terms of Key Managerial Personnel (KMP)

• Establishment or reconstitution of a vigil mechanism

• Framework for risk management and compliance with laws and regulations


5

Voices on Reporting Approval of the shareholders

• Alteration of Memorandum and Articles of Association

• Appointment of independent directors, determination of the term and remuneration by getting notice of the candidature from any shareholder prior to the AGM

• Restriction on borrowing powers of the company

• Appointment of a managing director, whole-time director or manager

• Approve certain RPT based on transaction thresholds

• Appointment of auditors at Annual General Meeting

• Loans given to a managing or whole-time director pursuant to any scheme.


6

Voices on Reporting Audit committee

• Compliance with the reconstituted charter for audit committees

• Pre-approval of non audit services

• Approval of related party transactions

• Appointment and oversight of internal auditor.


7







8

Voices on Reporting Accounting for principal only currency swaps

Background

• Accounting treatment of foreign currency contracts and derivative contracts is a complex area of accounting

• Expert Advisory Committee (EAC) published an opinion in February 2014 on accounting for principal only currency swaps (POS).

POS in economic terms is similar to a foreign currency forward contract instrument. However, POS typically requires a periodic payment of swap cost (or forward premium) as opposed to a foreign currency forward contract that typically requires a payment/receipt of forward premium only at the settlement of the contract.


9


Background of the query

• An Indian company borrowed a long-term INR loan to fund the capital expenditure for a project • The company also entered into a derivative transaction by way of POS to the extent of the

outstanding INR loan • The purpose of the POS was to synthetically convert the underlying INR loan into a foreign currency

loan • The company would receive a periodic swap (forward premium) payment over the life of the POS • POS was not entered for trading or speculation purpose.


10


Queries addressed by the EAC

• Whether ‘mark to market’ losses on the POS can be treated as exchange differences under Accounting Standard (AS) 11?

• If yes, whether such exchange differences can be accounted for under paragraph 46 and 46A of AS 11?


11


Accounting literature under Indian GAAP

• AS 11 –The Effect of Changes in Foreign Exchange Rates • AS 1 – Disclosure of Accounting Policies • AS 30 – Financial Instruments: Recognition and Measurement • AS 31 – Financial Instruments: Presentation


12


Applicability of AS 11

• The scope of AS 11 covers accounting for the following: • Transactions in foreign currencies • Translating the financial statements of foreign operations • Foreign currency transactions in the nature of forward exchange contracts:

o Which are entered into for hedging foreign currency risk where the underlying transaction is denominated in foreign currency

o Which are intended for trading or speculation purposes.


13


Is POS a forward contract within the scope of AS 11?

• The underlying transaction is an INR loan that does not give rise to any foreign currency risk • POS transaction exposes the company to foreign currency risk • The INR loan and the POS can not be treated as a single transaction but two separate transactions • POS is not held for trading or speculation purpose.


14


Conclusion

• POS is not a forward contract within the scope of AS 11, thus it is not a foreign currency transaction within the scope of AS 11

• Mark to market losses on the POS can not be treated as exchange difference for the purpose of AS 11

• Accordingly paragraph 46 and 46A of AS 11 would not applicable in this situation.

Accounting alternatives: • AS 1 • AS 30


15







16

Voices on Reporting Deferred tax liability on special reserve: - impact on auditor’s report

• Section 36(1)(viii) allows specified entities, a deduction while computing income chargeable to tax, on special reserve created by them

• However, any amount subsequently withdrawn from such special reserve is chargeable to income-tax.

• Deferred tax liability (DTL) as per AS 22, Accounting for taxes on income, should be created on the amounts so transferred to special reserve

• If DTL relating to special reserve has not been charged to the statement of profit and loss as at 31 March 2013 then it should be adjusted against reserves

• DTL for amounts transferred to special reserve from the year ending 31 March 2014 onwards should be charged to the statement of profit and loss of that year.

Income – tax Act, 1961 Reserve Bank of India (RBI) -

Clarification


17

Voices on Reporting Deferred tax liability on special reserve: - impact on auditor’s report

ICAI’s clarification (30 April 2014)

• Although the RBI’s guidance is not in line with the accounting standards, the regulator (RBI) prescribed accounting treatment should be followed.

Disclosure requirement

• The notes to the accounts should explain the nature of departure along with quantification • Emphasis of matter paragraph should be included in the auditor’s report as per Standard on Auditing

(SA), 706.


18



Treatment of Mark to Market Losses on Principal only Currency Swap – EAC opinion 2




19

Voices on Reporting Proposed roadmap submitted to the Ministry of Corporate Affairs

• Two sets of accounting standards • Ind AS (converged with IFRS) • Existing notified accounting standards (AS)

• Ind AS applicable for the preparation of consolidated financial statements (CFS) for financial years beginning on or after 1 April 2016 along with comparatives for years ended 31 March 2016 or thereafter for:

a. Listed companies or companies which are in the process of listing on any stock exchange in India or outside India

b. Companies not covered in (a) above, having net worth of INR5 billion or more

c. Holding, subsidiary, joint venture or associate companies of companies covered under (a) or (b) above.


20

Voices on Reporting Proposed roadmap submitted to the Ministry of Corporate Affairs

• AS should be applied for preparing individual financial statements of companies preparing CFS and for classes of companies not specified

• Net worth - should be calculated as per the standalone audited balance sheet of the company as at 31 March 2014

• Net worth should be equal to the paid up share capital plus reserves and surplus less revaluation reserve

• Option to voluntary adopt Ind AS is available – which is irrevocable

• Companies should continue to follow Ind AS even if they subsequently do not meet the eligibility criteria

• Separate roadmap for banks, NBFCs and insurance companies will be issued.


21

Voices on Reporting

Q&A


22

Voices on Reporting Topics discussed in AAU and First Notes

Accounting and Auditing

update

Transportation and logistics industry - Freight on the move Pushdown accounting Income taxes Component accounting: Dry dock expenditure Accounting for structured equity transactions Factoring of receivables – accounting and disclosures Regulatory updates

First notes

The Companies (Share Capital and Debentures) Rules, 2014 have been published in the Official Gazette effective from 1 April 2014. As compared to the final Rules released by the Ministry of Corporate Affairs, the Gazetted Rule exempt certain class of companies and in case of other companies, reduce the percentage for creation of debenture redemption reserve.


23

Voices on Reporting Others

Coming up next?

June 2014 • New Issue of Accounting and Auditing

Update

• First Notes

• Voices on Reporting

Missed an issue of the Accounting and

Auditing Update?

Missed an issue of the First Notes?

Download from www.kpmg.com/in

Download from www.kpmg.com/in

Thank you Contact: kpmg.com/in

© 2014 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International Cooperative (“KPMG International”) The views and opinions expressed herein are those of the presenters to the topics covered in today’s ‘Voices on Reporting’ knowledge sharing call and do not necessarily represent the views and opinions of KPMG in India. The information contained in the slide pack is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. .

Feedback/Queries can be send on [email protected]

slide deck - may 2014(pdf, 1.3 mb)

Documents