KPMG Accounting and Auditing Update January 2015

ACCOUNTING
AND AUDITING
UPDATE
January 2015
In this issue
Government announces roadmap for implementation of Ind AS p1
The Ministry of Finance issues revised drafts on tax computation
standards p3
Liquor industry in India p7

AICPAs National Conference 2014 on current SEC and PCAOB
developments p12
Guidance note on derivative contracts p17
Income taxes the mystery of uncertainties p19
Revisions in NBFC framework: an overview of key
revisions p23
Regulatory updates p27
KPMG IFRS Conference 2015
Navigating the
convergence journey
5 - 6 February 2015, Mumbai p27
Editorial
2015 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
Jamil Khatri
Sai Venkateshwaran
Deputy Head of Audit,

KPMG in India
Global Head of Accounting
Advisory Services
Partner and Head,

Accounting Advisory Services,
KPMG in India
2015 has begun with a proverbial bang.

The Ministry of Corporate Affairs in the
Government of India has finally put out a formal
announcement relating to the updated timeline
and eligibility criteria for companies to apply
the new IFRS converged Indian Accounting
Standards (Ind AS). This development provides
some much needed clarity on timelines and
eligibility, and also confirms the commitment of
the authorities to move India back to the centre
stage globally of countries that are converging
with IFRS.
KPMGs IFRS Institute is organising the
KPMG IFRS Conference 2015: Navigating the
convergence journey, in association with the
IFRS Foundation in Mumbai on 5 and 6 February
2015. This conference will feature a wealth of
speakers including leading lights from the IASB,
regulators, industry leaders and KPMG experts;
more details are available in this months issue.
In this months issue, we also focus on the
liquor industry in India and assess its sector
specific accounting and reporting issues. We
also provide an overview of key highlights of
the annual AICPA conference held in the United

States focussing on current U.S. SEC and
PCAOB developments.
We also cast our lens on some of the more
detailed aspects of accounting for income
taxes focussing on the area of uncertain tax
positions and detailed reporting considerations
in this context. We also capture some of the
key changes to Non-Banking Finance Company
(NBFC) regulations by the Reserve Bank of India
(RBI) in the recent past.
This month, in addition to our regular round up of
regulatory updates, we also highlight the salient
aspects of the recently issued exposure draft of
the guidance note by the Institute of Chartered
Accountants of India (ICAI) on the area of
accounting for derivative contracts.
As always, we would like to remind you that
in case you have any suggestions or inputs on
topics we cover, we would be delighted to hear
from you. Wish you a very happy and successful
2015.
Happy reading!
Government
announces
roadmap for
implementation
of Ind AS
The new year heralds an important update; on 2 January

2015 the Ministry of Corporate Affairs (MCA) issued a press
release announcing a revised roadmap for implementation
of Indian Accounting Standards (Ind AS), converged with
International Financial Reporting Standards (IFRS). This
roadmap is applicable to companies other than banking
companies, insurance companies and non-banking finance
companies.1
This roadmap was developed after consultations with various
stakeholders and regulators. It comes as a follow up to the
announcement by the Finance Minister in his budget speech
that Ind AS will be made mandatory from the financial year
2016-2017.
a. companies having net worth of INR500 crore or more

whether their equity and/or debt securities are listed or
otherwise
b. holding, subsidiary, joint venture or associate
companies of the class of companies covered in (a)
above.
Phase II
i. For the accounting periods beginning on or after 1 April
2017, with comparatives for the periods ending 31 March
2017, or thereafter:
In this section, we have provided an overview of the revised

roadmap of implementation of Ind AS.
a. companies whose equity and/or debt securities are

listed or are in the process of being listed on any stock
exchange in India or outside India and having net worth
of less than INR500 crore
Overview of the revised roadmap
b. unlisted companies having net worth of INR250 crore or

more but less than INR500 crore
Background
The MCA, through a press release, on 2 January 2015
issued a revised roadmap for companies other than banking
companies, insurance companies and non -banking finance
companies for implementation of Ind AS converged with
IFRS.
The Ind AS shall be applicable to companies as follows:
On voluntary basis
For accounting periods beginning on or after 1 April 2015, with
the comparatives for the periods ending 31 March 2015 or
thereafter.
On mandatory basis
Phase I
i. For accounting periods beginning on or after 1 April 2016,
with comparatives for the periods ending 31 March 2016,
or thereafter:
Source: KPMG in India Analysis
c. holding, subsidiary, joint venture or associate

companies of the above class of companies.
Exceptions
Companies whose securities are listed or in the process
of listing on the Small and Medium Enterprises (SME)
exchanges will not be required to apply Ind AS and can
continue to comply with the existing accounting standards
unless they choose otherwise.
Other matters
Once a company opts to follow the Ind AS, it will be
required to follow the Ind AS standards for all the

subsequent financial statements.
Companies not covered by the revised roadmap could
continue to apply existing accounting standards prescribed

in the Indian GAAP.
1. Refer to KPMGs IFRS Notes- Issue 2015/01 released on 5 January 2015
The Ministry of Finance

issues revised drafts on tax
computation standards
1
This article aims to:

Summarise key changes between the draft ICDS issued in 2012 and revised draft ICDS issued in 2015.
Background
Currently, the Income-tax Act, 1961 (the Act) notifies two
accounting standards: one relating to disclosure of accounting
policies and disclosure of prior period and extraordinary items
and the other on changes in accounting policies.
The Ministry of Corporate Affairs had earlier announced a
roadmap for transition to Indian Accounting Standards (Ind
AS) from 1 April 2011. At that time, there was lack of clarity
of tax implications on adoption of Ind AS by the companies.
Therefore, in December 2010, under the aegis of the Central
Board of Direct Taxes (CBDT) a committee was constituted to
harmonise the accounting standards issued by the Institute of
Chartered Accountants of India (ICAI) with the provisions of
the Act.
other sources for taxpayers following a mercantile system.

These accounting standards are now termed as Income
Computation and Disclosure Standards (ICDS).
After the release of the draft ICDS (2012) by the CBDT,
concerns were raised by various stakeholders since it had
significant differences with generally accepted accounting
principles. In order to address some of these concerns, the
Ministry of Finance (MOF) reworked on the standards on
8 January 2015 issued revised drafts of 12 ICDS (2015) for
public comments.
This article provides an overview of key revisions made in the
revised draft ICDS (2015).
In August 2012, the committee, after deliberations issued 14

draft accounting standards to be applicable in computation of
profits and gains of business or profession or income from
1. Refer to KPMGs First Notes dated 14 January 2015
The draft ICDS on The Effects of Changes in Foreign
Transitional provisions
Draft ICDS (2012) did not specify any transitional provisions
which had led to concerns that implementation of draft ICDS
(2012) might lead to taxation of a transaction that had already
been subjected to tax in prior years.
In order to address this concern, the MOF has proposed
transitional provisions in all revised draft ICDS (2015) except
for the revised draft ICDS on Securities (2015) which does not
carry any transitional provision.
Alignment with generally accepted accounting

principles
The draft ICDS on Revenue Recognition (2012) provided
that in case ultimate collection with reasonable certainty is

lacking at the time of raising any claim for price escalation/
export incentives, revenue recognition is respect of such
claim should be postponed to the extent of uncertainty
involved. For other situations draft ICDS on Revenue
Recognition (2012) did not permit non-recognition of
revenue due to uncertainty in collection. Similarly, draft
ICDS on Construction Contracts (2012) did not permit
non-recognition of contract revenue due to uncertainty in
collection.
In order to align with generally accepted accounting
principles, it is proposed that revenue (under the revised
draft ICDS on Construction Contracts (2015) and revised
draft ICDS on Revenue Recognition (2015)) should be
recognised when there is a reasonable certainty of
ultimate collection. It carries forward the requirement
relating to price escalations/export incentives from the
draft ICDS on Revenue Recognition (2012).
Exchange Rates (2012) mentioned that foreign currency

transactions should be recorded on initial recognition by
applying to the foreign currency amount the exchange rate
between the reporting currency and the foreign currency at
the date of the transaction and foreign currency monetary
items are converted into reporting currency by applying the
closing rate at the last date of the previous year.
There were concerns that this requirement did not allow
practical expedients to use approximate exchange rate
between the foreign currency and reporting currency.
Therefore, the revised draft ICDS (2015) proposes that
average rate for a week or a month that approximates the
actual rate at the date of the transaction may be used for
recording all foreign currency transactions occurring during
that period. If the exchange rate fluctuates significantly,
then the actual rate at the date of the transaction should be
used.
Additionally, in the situations:
foreign currency monetary item has a restriction on
remittances, or
the closing rate is unrealistic and it is not possible to
effect an exchange of currencies at that rate.

then the relevant monetary item should be reported in
the reporting currency at the amount which is likely to be
realised from or required to be disbursed at the last date of
the previous year.
Under the draft ICDS on Inventories (2012), inventory
of a service provider was required to be valued at cost.

The revised draft ICDS (2015) proposes to align with the
general inventory valuation principle i.e. at cost or net
realisable value, whichever is lower.
Formula for capitalising borrowing cost revised

The draft ICDS on Borrowing Costs (2012) mentioned the following formula for capitalising borrowing costs on general
borrowings and utilised for acquiring a qualifying asset:
Borrowing costs incurred during

the previous year except on
borrowings directly relatable to
specific purposes (A)
Average of cost of qualifying asset

appearing in the balance sheet on
the first day and the last day of the
previous year, other than those
qualifying assets directly funded out
of specific borrowings (B)
X
Average of total assets (other
than assets directly funded out of
specific borrowings) as appearing in
the balance sheet on the first day
and the last day of the previous year
(C)
In the revised draft ICDS (2015), the above formula has been proposed to be revised to envisage a situation when the qualifying
assets (capital work-in-progress) do not appear in the balance sheet either on the first day/last day, or both on the first and last
day in the previous year. The formula in the revised ICDS (2015) now proposes that:
When the qualifying asset does not appear

in the balance sheet on the
The numerator (B) of the above formula would be
First day or both on the first and the last day of

the previous year
The half of the cost of the qualifying asset (other than those qualifying
assets directly funded out of specific borrowings)
Last day of the previous year
Average of cost of qualifying asset (other than those qualifying assets

directly funded out of specific borrowings) as on the first day of the
previous year and on the date of completion
Recognition and initial measurement requirements modified

The draft ICDS on Tangible Fixed Assets (2012), Intangible
Assets (2012) and Securities (2012) mentioned following
requirements when an item is acquired in exchange for
another asset/shares/securities:
A tangible fixed asset acquired in exchange for another
asset/shares/securities, the cost of the tangible fixed asset

should be recognised at lower of:
fair market value of the tangible fixed asset acquired, or
fair market value of the assets/securities given up/
issued.
An intangible asset acquired in exchange for another asset/
shares/securities, the cost of the intangible asset should

be recognised at the fair value of:
asset given up if it is acquired in exchange for another
asset
securities issued if it is acquired in exchange for shares
or other securities.
The cost of a security acquired in exchange for another
asset should be recognised at lower of:

fair value of the security acquired, or
fair market value of the asset given up.
The revised draft ICDS (2015) on above topics propose that

actual cost of a tangible fixed asset/intangible asset/security
acquired in the above cases would be recognised at the value
of the asset acquired. Therefore, the revised draft ICDS (2015)
requires the use of value of the asset acquired and not the
value of the asset given up.
Other key revisions
Draft ICDS (2012) not re-issued
Under the draft ICDS on Tangible Fixed Assets (2012)
Following draft ICDS (2012) have not been issued as revised

drafts (2015):
machinery spares should be charged to revenue when

consumed for the purpose of preserving or maintaining
an already existing tangible fixed asset and which does
not bring a new asset into existence or does not result
into a new or different advantage that increases the future
benefits from the existing asset.
The revised draft ICDS (2015) proposes that the machinery
spares should be charged to revenue when consumed.
When such spares can be used only in connection with an
item of tangible fixed asset and their use is expected to be
irregular, they should be capitalised.
Events occurring after the previous year

Prior period expense.
Comment period
There is one month of comment period is available and it
would be important that the taxpayers actively participate
in the comment process to help ensure that ICDS that get
finalised and notified are the ones that are fair and reasonable
to the interests of both the taxpayers and the tax authorities.
The revised draft ICDS on Intangible Assets (2015)
proposes to include exchange fluctuations as an

adjustment to cost of an intangible asset subsequent to its
acquisition.
Liquor industry
in India
Highlight certain key challenges, accounting and reporting implications in the Indian liquor industry.
What is Liquor?
The origin of liquor and its close relative liquid was the
Latin verb liquere, meaning to be fluid. According to the
Oxford English Dictionary, an early use of the word in
the English language, meaning simply a liquid, can be
dated to 1225.
Liquors, commonly referred to as spirits, are
manufactured by concentrating alcohol in fermented
fruits and grains through a process of distillation. This
process results in the production of ethanol, a form of
alcohol that is found in all alcoholic drinks.
Alcoholic beverages can be produced through undistilled fermentation of agricultural produce such as
fruits (grapes), grains (barley, wheat, rye, oats, rice,
etc.), and vegetables (sugarcane, potato). As mentioned
above, liquor is produced first by fermenting these and
then concentrating the ethanol through distillation.
Accordingly, not all alcoholic beverages are classified as
liquors. Wine and beer are examples of alcoholic drinks
and are not liquor, these are fermented and not distilled.
Examples of a few distilled alcoholic beverages include
whisky, rum, vodka, gin, tequila.
The industry landscape

The Indian liquor industry is one of the fastest
growing industries in the world. The industry
landscape can be categorised in the following
manner:
Beer
Wine
Distilled beverages
Indian made foreign liquor (IMFL)
Imported liquor
* Bottled in origin (BIO)
* Bottled in India (BII)
Country liquor
Beer
Beer is a beverage fermented from molasses or from grain mash. Internationally,
beer is generally made from barley or a blend of several grains.
Wine
Wine is also a fermented beverage produced from grapes.
Distilled beverages
Distilled beverages are produced by distilling ethanol produced by means of
fermenting grain, fruit, or vegetables.
Country liquor
Country liquor also known as desi daru, represents relatively cheaper, flavoured
liquor usually distilled from molasses. Country liquor such as fenny, toddy, arrack
is generally consumed by less affluent members of the society at it is priced
significantly lower than other alcoholic beverages.
Key challenges
Alcohol is a state subject as per the State List under the Seventh
Schedule of the Constitution of India. Therefore, the laws
governing alcohol vary from state to state. The government
of each State is in receipt of the revenue generated from this
industry and therefore, have formulated their own excise policies
for alcoholic beverages including specific requirements in
relation to manufacturing, warehousing, distribution, retailing and
labeling. These policies are reviewed on an annual basis and are
implemented by respective state excise departments.
Accordingly, companies in this industry have to comply with
the tax regime of each state which includes obtaining separate
licenses for manufacture, bottling and distribution in the state in
which a company has its operations. Further, there are a number
of levies which are imposed at various stages of the value chain
of manufacturing till the ultimate distribution of the product to the
end consumer which greatly impact the pricing of the product in
each state and accentuates the challenge faced in this industry
especially for new entrants. Some of the taxes include state
excise duty, import fees, export fees, bottling fees, labeling fees,
etc.
The distribution channel of liquor to the end consumer is also
diverse in accordance with respective state policies. In our
experience, many states in India have adopted a varied market
structure, for example
Free market - permits the license holder to distribute liquor
after obtaining a license

Auction market - license to distribute are auctioned on an
annual basis
Government market - distribution is through government
controlled corporations in the wholesale and/or retail market.

Liquor in India is not sold on certain designated dates (usually
gazetted holidays) during the year which are known as dry days.
In addition, certain states have complete prohibition on sale of
liquor and are therefore known as dry states. These include the
states of Gujarat, Nagaland, Mizoram, Manipur, and the Union
territory of Lakshadweep. The governments of certain other
states such as Kerala, have also announced policies to prohibit
sale of liquor in the state over a period of time.
Brand building is considered to be extremely challenging as there
is a prohibition on direct advertising of liquor brands. Further,
there is an inherent volatility in the prices of major raw materials,
glass (for bottling), Extra Neutral Alcohol (ENA) and molasses,
owing to seasonality factors and demand supply pressures and
as a result of government policies. These factors, along with
state tax policies,therefore, add volatility to the margins of liquor
companies who also have to guard against the manufacture and
sale of spurious liquor.
Accounting and reporting implications

In this article, we focus on two issues - one, arrangements with
contract bottling units and two, revenue recognition in relation to
sales made to corporations.
Arrangements with contract bottling units
Selling liquor across states generally attracts higher excise duty
as compared to liquor manufactured and sold within a state.
The higher excise duty on liquor imported from other states
results in a higher price which puts a pressure on sales volumes.

As a result, almost all liquor manufacturers have either set-up
distilleries in the state where they want to have a distribution
network or partner with a local state distiller or brewer known
as contract bottling units (CBU) in order to remain competitive.
Typical features of such arrangement may include:
An agreed consideration in the form of fee per case is paid
to the CBU by a liquor manufacturer in lieu of production

overheads.
All other cost of production and dispatch such as purchase
of raw material, freight, etc. are incurred by the CBU (as a

principal) but in substance, these are on account of the liquor
manufacturer except to the extent of wastage in excess of
agreed limits and statutory compliances. The CBU purchases
the raw material from vendors approved by the liquor
manufacturer
The liquor manufacturer funds the working capital
requirements of the CBU. In order to facilitate this, each CBU

will usually open a designated bank account which will be
operated by the representatives of the liquor manufacturer
The sales are legally in the name of the CBU but at the
instance of the liquor manufacturer i.e. the liquor manufacturer

has the onus of identification of customers, determining the
sales price and the relevant terms and condition of the sale.
The responsibility of the CBU ceases at the time of making
sale in accordance with the stated terms
The CBU is debarred from creating any lien on inventory and
debtors in relation to the goods manufactured on behalf of the

liquor manufacturer
The liquor manufacturer is also generally responsible to
bear the insurance risk of inventories and transit and also

reimburses the cost of various import and export permits to
the CBU
A periodic statement of profit and loss account is drawn
up by the CBU and the net gain or loss on the transaction

undertaken by the CBU on behalf of the liquor manufacturer
are transferred to the liquor manufacturers account
In the event of termination of such agreements, the inventory
will be transferred at cost by the CBU to the company

In certain circumstances, the CBU may be barred from
entering into similar arrangement with other competitive liquor

manufacturer.
Thus, while the sales are legally and contractually made by the
CBU in its own name, in substance these are made at the behest
of the liquor manufacturer. Accordingly, a question arises in terms
of the manner of presentation of revenue from sale made by such
CBU i.e. either on a gross (sales to customers) or on a net basis
(conversion charges received from the liquor manufacturer) in the
financial statements of the CBU.
Paragraph 10 of AS 9, Revenue Recognition, states that revenue
from sales or service transactions should be recognised when
the requirements as to performance set out in paragraphs 11 and
12 are satisfied, provided that at the time of performance it is
not unreasonable to expect ultimate collection. If at the time of
raising any claim it is unreasonable to expect ultimate collection,
revenue recognition should be postponed.
10
Paragraph 11 of AS 9 further states that in a transaction

involving the sale of goods, performance should be regarded
as being achieved when the following conditions have been
fulfilled:
there could be an argument that for external stakeholders

being excise authorities, suppliers of raw materials and
debtors that the CBU is conducting these transactions on its
own account.
i. the seller of goods has transferred to the buyer the

property in the goods for a price or all significant risks and
rewards of ownership have been transferred to the buyer
and the seller retains no effective control of the goods
transferred to a degree usually associated with ownership
Thus, in view of the above complexity, a liquor manufacturer

should apply judgement and may seek a legal advice in order
to ascertain the true owner of the property in goods which
will be therefore, be one of the guiding principles insofar as
presentation of revenue is concerned.
ii. no significant uncertainty exists regarding the amount of

the consideration that will be derived from the sale of the
goods.
Revenue recognition in relation to sales made

to corporations
Thus, the main principle enunciated in paragraph 11(i) of

AS 9 is that sales should be recognised when either of the
following two conditions are satisfied:
a. The property in the goods has been transferred to the
buyer for a price, or
b. All significant risks and rewards of ownership have been
transferred to the buyer and the seller retains no effective
control over the goods.
In general, property refers to a persons legal right of whatever
description. It is the right to possess, use and enjoy a
determinate thing. Accordingly, it is important to analyse
whether either of the two conditions above have been
satisfied by the liquor manufacturer or the CBU.
Reading the requirements of AS 9, it seems that the CBUs
role is limited to manufacturing the products in the quantity
and the as per the quality specified by the liquor manufacturer.
For such services, the CBU earns a consideration in the form
of a fixed amount per case manufactured and actual cost
incurred on specified items. It is the liquor manufacturer and
not the CBU who bears the significant risk and rewards of
the product and has control of the products. The margin of
the CBU remains fixed irrespective of the changes in the sale
price or the related material cost of the product. In essence,
if it is the liquor manufacturer who has the effective control
of stocks at all times even though these are in physical
possession of the CBU i.e. the CBU can distribute these only
at the behest of the liquor manufacturer, is not permitted to
create a lien and is also required to hand over unsold inventory
at cost in the event of termination of the agreement.
Accordingly, there could be an argument that the revenue
accruing to the CBU is in the form of the fee earned per case.
However, it is pertinent to note that AS 9 also gives credence
to the legal position by including the definition of sale as per
the Sale of Goods Act by giving reference to the transfer
of property in the goods apart from principles based on
economic substance i.e. transfer of significant risks and
rewards, as a trigger for revenue recognition. Thus, the key
aspect which merits an evaluation is to determine whether
the CBU owns property in the goods at any time. While the
CBU performs the transactions at the behest of the liquor
manufacturer, all legal documentation such as purchase
orders, invoices, excise duty , sales tax and the legal permits
as per requirement of the relevant state are in the name
of the CBU. Thus, even though there may be a contractual
arrangement between the liquor manufacturer and the CBU,
As mentioned earlier, in certain states, market structure

involves government market wherein the distribution is
through government controlled corporations (corporations)
in the wholesale and/or retail market.
In this regard, each corporation will generally enter into
an agreement with the liquor manufacturer in relation to
purchase and onward sale of liquor produced by the liquor
manufacturer. Such agreements also contain clauses to the
effect of levy of demurrage charges, payment terms and
circumstances in which the loss associated with unsold
stocks will be required to be borne by the liquor manufacturer.
The agreement also envisages a specific right to return goods
after a particular period of time in relation to expired goods in
order to ensure that expired goods can not and should not be
sold in the market.
Over the years, certain corporations have been additionally
including a clause in the agreement with the liquor
manufacturer to the effect that the supply of liquor to the
corporation against order for supplies shall be construed as
an agreement to sell under sub-Section 3 of Section 4 of the
Sale of Goods Act. The sale shall be concluded only when
the liquor is delivered to the buyers by the corporation. The
corporation would take necessary care of the stocks held for
sale as it is reasonably possible and expected of it.
A question, therefore, arises on the timing of revenue
recognition in sales made to such corporation i.e. on dispatch
of goods to the corporation or as and when the goods are
delivered to the buyers i.e. distributors by the corporation.
As per the Sale of Goods Act, 1930, (the Act):
a. A contract of sale of goods is a contract whereby the seller
transfers or agrees to transfer the property in goods to the
buyer for a price.
b. There may be a contract of sale between one part-owner
and another.
c. A contract of sale may be absolute or conditional.
d. Where under a contract of sale the property in the goods
in transferred from the seller to the buyer, the contract is
called a sale, but where the transfer of the property in the
goods is to take place at a future time or subject to some
condition thereafter to be fulfilled, the contract is called an
agreement to sell.
e. An agreement to sell becomes a sale when the time
elapses or the conditions are fulfilled subject to which the
property in the goods is to be transferred.
11
Additionally, some of the corporations have, in the past, also

represented to government authorities that they are the legal
owners of the goods. Accordingly, there is divergence in practice
on revenue recognition in relation to sales made to corporations.
rewards. Hence, it may be prudent for the liquor manufacturer

to recognise revenue at the time of sale to the customer of the
corporation and not at the time of dispatch of goods to such
corporation. From an Indian GAAP perspective, such corporations
are, therefore, considered as a distribution agents of the liquor
manufacturer which hold the goods in trust for the liquor
manufacturer for sale to further customers. The stock with the
corporation may, therefore, also be considered as the inventory of
the liquor manufacturer till sale is concluded.
In practice, certain liquor manufacturers conclude that significant

risks and rewards associated with ownership have been
transferred to the corporation along with the transfer of the
property in goods since the corporations have complete physical
control over the goods and the liquor manufacturer would usually
not have any right to take back or have lien on such goods.
Accordingly, revenue is recognised at the time of dispatch/
delivery to the corporation in accordance with the general
terms of sales contained in the agreement. However, it would
be appropriate for the liquor manufacturer to clearly state the
revenue recognition policy on such sale.
Conclusion
However, based on the facts and circumstances, it can also be

considered that the property in the goods vests with the liquor
manufacturer and is not transferred to such corporations at the
time of dispatch. As per the agreement, the property in such
goods will transfer only when it is delivered to the buyers by the
corporation which will also coincide with the transfer of risks and
There are numerous aspects in the Indian liquor industry which

are complex and yet interesting akin to the blends used in
whisky or whiskies. The challenges associated with this sector
in India are largely due to complex state tax regulations and other
restrictions. The adoption of Ind AS could also have an impact on
the revenue recognition accounting policy of this sector.
Thus, in order to determine when revenue should be recognised,

one should apply judgement and care should be taken to
ascertain the facts and circumstances as the terms of agreement
with corporations could vary from state to state.
12
AICPAs National
Conference 2014 on
current SEC and PCAOB
1
developments
This article aims to :
Summarise the important messages of the AICPA conference held in Washington, D.C. in December 2014.
The annual AICPA2 conference on SEC3 and PCAOB4 developments was held from 8 to 10 December 2014 in
Washington D.C. It featured speakers from the SEC, PCAOB, FASB5, IASB6, Center for Audit Quality (CAQ), AICPA, etc.
The speakers discussed recent developments and initiatives in accounting, auditing and financial reporting which
included discussions on the new revenue recognition standard, managements responsibility on internal financial
controls, COSO 2013 and disclosure effectiveness initiatives, amongst others.
1. KPMGs Issues-In-Depth, 2014 AICPA National

Conference on Current SEC and PCAOB Developments
2. AICPA: American Institute of Certified Public Accountants
3. SEC: U.S. Securities Exchange Commission
4. PCAOB: Public Company Accounting Oversight Board

5. FASB: Financial Accounting Standards Board
6. IASB: International Accounting Standards Board
13
In this article, we present to you some of the important

discussions during the conference.
IFRS adoption by the U.S. domestic issuers

James Schnurr, the SECs recently appointed Chief
Accountant, Office of the Chief Accountant (OCA),
announced that making a recommendation to the
Commission regarding the possible incorporation of IFRS
into the financial reporting regime for U.S. issuers is one of
his near-term priorities. Since 2007, the Commission has
allowed foreign private issuers to report under IFRS without
reconciling to the U.S. GAAP. These issuers are clearly a
significant component of the U.S. capital markets, making up
trillions of dollars in aggregate market capitalisation. The SEC
emphasised that the regulatory considerations for foreign
private issuers are different than for domestic registrants.
Therefore, while historical knowledge gained through the use
of IFRS by foreign private issuers has proven to be useful, any
recommendation with respect to U.S. domestic registrants
will need to be made independently of those considerations
used for foreign private issuers. He acknowledged that the
continued uncertainty related to IFRS has caused uneasiness
among some investors as well as the international financial
reporting community. In addition to approaches previously
considered by the SEC staff, Mr. Schnurr described the
possibility of allowing U.S. domestic issuers an option to
provide supplemental IFRS-based financial information and
such information, if provided by registrants, may not be
considered as non-GAAP.
New revenue recognition standard

The SEC staff emphasised on the importance of successful
implementation of the new revenue recognition standard
and stated that implementation of this standard is critical in
bringing comparability among the U.S registrants. The SEC
staff acknowledged that there would be numerous questions
related to accounting for transactions under the new revenue
standard. The Transition Resource Group (TRG), has been
constituted to consider issues that could have a widespread
and significant impact on implementation. The SEC staff
continues to monitor implementation issues and will work
closely with the FASB to identify issues that may require
additional guidance or standard setting and will consider if
any existing SEC disclosure or reporting requirements will
be affected by the adoption of the new revenue standard.
The staff noted that the new revenue standard allows for
greater use of management judgement, but also results in
more robust and transparent disclosure. Companies will need
to evaluate their existing systems, processes, and controls
to support the application of the new revenue standard and
make modifications as appropriate.
to be focussed on registrants assessments of ICFR.

Additionally, the staff reminded registrants that they have a
quarterly responsibility to report material changes to ICFR,
as well as material weaknesses. The SEC staff reminded the
registrants on the following:
The SEC staff believes that the top-down, risk-based
approach described in the SECs 2007 Commission

Guidance Regarding Managements Report on Internal
Control over Financial Reporting is a reasonable basis
for determining whether a material weakness exists,
because it helps to ensure that sufficient and appropriate
considerations are being applied when identifying and
describing a deficiency
The SEC staff recommended that management should
consider factors such as nature of control deficiency,

its impact on ICFR, root cause of the deficiency and
remediation efforts in describing a control deficiency
While evaluating the severity of a control deficiency,
the SEC staff emphasised on the need for careful

consideration of the magnitude of the potential
misstatement that could result from a deficiency. The
potential magnitude of the transaction goes beyond the
error identified and requires consideration of the nature of
the transactions and the amounts or total population that
could be exposed to the deficiency.
Implementation of COSO 2013

In May 2013, the COSO7 released its updated Internal
Control Integrated Framework (2013 Framework). The 2013
Framework updates the original COSO Framework released
in 1992. COSO announced that the 1992 Framework will no
longer be supported as of 15 December 2014.
In response to a question, Mr. Croteau, Deputy Chief
Accountant, SEC Office of the Chief Accountant stated that
the SEC has not set a deadline for transition to the 2013
Framework. Both he and Ms. Shah, Deputy Chief Accountant,
Division of Corporate Finance (DCF) stated that the SEC
staff will not object if registrants continued to use the 1992
COSO Framework for the 2014 fiscal year filings but reiterated
that the SEC staff are more likely to question the use of an
outdated framework with the passage of time. Both Mr.
Croteau and Ms. Shah indicated, however, that registrants
should disclose the framework that has been used.
Managements responsibility over ICFR

The SEC staff emphasised the need for registrants to ensure
that their responsibilities related to Internal Control over
Financial Reporting (ICFR) are fulfilled. Representatives from
the SEC staff stated that they have been and will continue
7. The Committee of Sponsoring Organisations of the Treadway
Commission
14
Division of Corporation Finance (DCF) focus

areas
Income taxes
The DCF staff discussed circumstances where there could be
improvements in income tax disclosures including situations
in which there are:
Significant differences between the expected income tax
expense and the actual income tax expense

Significant changes in the annual effective income tax rate
or materially volatile but offsetting components

Material components in the rate reconciliation that
significantly impact the effective income tax rate

Foreign earnings that are a significant component of a
registrants total pre-tax earnings.

Foreign taxes
The DCF staff observed that they continue to see registrants
making generic disclosures about changes in foreign taxes.
Where foreign pre-tax earnings are significant, the DCF staff
recommended disclosing the description of the composition
of foreign earnings line of the rate reconciliation, the material
jurisdictions in which the company has operations along
with their pre-tax earnings and the statutory and effective
tax rates and significant reconciling items between the
statutory and effective tax rates, and trends, uncertainties,
and expectations associated with the specific jurisdictions in
which the company operates.
Fair value
The DCF staff continues to focus on fair value measurements
and disclosures that affect initial recognition, particularly as
they relate to business combinations and impairments, and
disclosure requirements associated with nonrecurring fair
value measurements.
The DCF staff reminded registrants to consider the following
related to fair value measurements and disclosures:
Situations in which material impairment indicators have
been disclosed or are known to exist, but no impairment

charge has been recorded
Required disclosures for nonrecurring fair value
measurements
Careful selection of the proper fair value hierarchy
classifications.
Current accounting practice issues

The staff stated that excessive reliance on SEC speeches
as a basis for accounting conclusions should be avoided,
because the facts and circumstances are often unique and
the speeches are not authoritative. In addition, Mr. Murdock,
SEC Office of the Chief Accountant noted that OCAs views
on issues tend to evolve over time and as a result speeches
tend to become less relevant and less reflective of the current
OCA staffs view over time.
The SEC staff discussed on several topics and its experience

on queries received on topics such as segment reporting,
gross versus net presentation of revenues, consolidation and
joint ventures, statement of cash flows, financial instruments,
goodwill impairment test and push down accounting. A few
takeaways are highlighted below:
Segment identification and aggregation
Mr. Murdock indicated that SEC staff will be taking a
refreshed approach when evaluating operating segment
disclosures. The SEC highlighted the following segment
identification steps.
The SEC staff noted that they have seen companies
default to the CEO as the chief operating decision maker

(CODM) and urged registrants to take a fresh look at
those determinations and consider what the key operating
decisions are and who is actually making the key decisions
The staff referenced that an operating segment is often
evident from the structure of a companys internal

organisation. The SEC staff also cautioned against
over reliance on the information package provided to,
and regularly reviewed by, the CODM noting that this
is only one factor to consider, and it is not necessarily
determinative
The SEC staff emphasised the aggregation of segment
should be carried out only when all of the criteria are met.
Given that a core objective of the standard is to provide
disaggregated information, meeting the aggregation
criteria is intended to be a high hurdle.
Gross versus net revenue recognition
The SEC staff commented on the questions they have
received on the gross versus net application issues in
emerging business models of internet advertising, online
gaming and stated that evaluation of gross versus net for
these business models is consistent with the historical
views. Principal versus agent assessment is more than a
presentation exercise. The results of the assessment provide
information to financial statement users on: (1) who is the
customer in the transaction, (2) what is being sold to that
customer, and (3) the ultimate revenue stream earned for that
transaction.
Its analysis should begin with identification of the
deliverables in the arrangement, followed by an evaluation
of which party in the arrangement is the primary obligor
with respect to those deliverable. In some circumstances
the primary obligor may not be clear, and in such a case the
inventory risk and pricing latitude indicators take on greater
importance.
15
Goodwill impairment testing date

The SEC staff has required a preferability letter for changes
in an entitys goodwill impairment testing date because this is
considered a change in the method of applying an accounting
principle. The SEC staff indicated that a preferability letter
would no longer be required if:
An entity determines that a change in its goodwill
impairment testing date does not result in a material

change in the method of applying the accounting principle,
which may be the case even if goodwill is material to the
financial statements
The change in the goodwill impairment testing date is
prominently disclosed.
Consolidation and joint ventures
The staff has discussed several practice issues regarding the
application of the variable interest entity (VIE) consolidation
model which included the following:
Shared power Topic 810 provides that no party is the primary
beneficiary of a VIE when power to direct the significant
activities of the entity is shared by multiple unrelated parties.
The OCA staff commented that for shared power to exist,
all the decisions related to the significant activities of the
VIE must require the consent of each of the parties sharing
power.
Decision maker acting as an agent The OCA staff discussed
instances in which a decision maker is not a variable interest
holder (i.e., is acting as an agent on behalf of another party)
and whether it would be appropriate for other parties to
stop their consolidation analysis upon that determination.
When the decision maker is determined to not be a variable
interest holder, the other parties should further consider
the substance of the arrangement to determine if any of the
parties would be considered the party with power.
Joint ventures The OCA staff specifically discussed
instances in which two businesses are contributed to a
venture in an effort to generate synergies and the significant
judgement required in determining whether this type of
transaction meets the definition of a joint venture under ASC
Topic 323. The OCA staff encourages registrants to consider
pre-clearing joint venture formation transactions with the
OCA staff in light of the lack of the U.S. GAAP guidance and
the related complexity.
Financial instruments
Preferred shares. The SEC staff commented on the
lack of U.S. GAAP guidance for determining whether an
amendment to equity classified preferred shares represents
an extinguishment or modification, and referenced four
methods: the quantitative approach, the fair value approach,
the cash flow approach and the legal form approach used by
registrants to make this determination.
In situations where the conclusion is reached that an
amendment to a preferred instrument is a modification,
the SEC staff indicated that analogy to the guidance in ASC
Subtopic ASC 718-20 related to the modification of equity

classified share-based payment awards is an appropriate
method to measure the impact of the modification. With
respect to recognition, the SEC staff indicated that they
have accepted reflecting the impact of the modification as a
deemed dividend, or, in limited circumstances, as a charge
to earnings as a form of compensation for agreeing to
restructure.
Derivative novations. A novation of a derivative instrument
is when one counterparty is replaced with another and is
typically viewed as a legal termination and therefore, would
generally have an impact on hedging conclusions reached
under ASC Topic 815.
The SEC staff noted that they have received questions related
to the impact of novations on hedging relationships in other
fact patterns, including:
The merger of an entitys derivative counterparty into
a surviving entity that assumes the same rights and

obligations that existed under the derivative instrument
prior to the merger
The novation of an entitys derivative counterparty to an
entity under common control of the derivative counterparty

Instances where an entity is aware of and documents
contemporaneously the novation of a derivative

counterparty that will occur in the future.
In the instances above, the SEC staff did not object to the
continuation of hedge accounting by the entity. The SEC staff
indicated that the conclusions on the above fact patterns
should not be applied by analogy.
Statement of cash flows
The staff commented that statement of cash flow
restatements continue to increase each year and noted that
many of the restatements were in areas that are considered
to be less complex in nature. The SEC staff commented that
entities should consider how they collect the data necessary
to prepare the statement of cash flows including the controls
on accuracy and completeness of data, the understanding of
the professionals responsible for preparation of the statement
of cash flows and timing of preparation of the cash flow to
allow sufficient time for review.
International reporting matters
The SEC staff highlighted the following reporting issues
which could impact foreign private issuers which included the
following:
Disclosures of known trends and uncertainties related to
the economic turmoil in the Venezuela Region

Lack of adequate guidance on reorganisation transactions
such as carve-outs, common control reorganisations, and

drop downs for entities applying IFRS, which has caused
challenges for registrants undertaking IPOs, spinoffs, etc.
16
Disclosure effectiveness initiative

The SEC staffs objective is to develop recommendations to
reduce the costs and burdens on companies while continuing
to provide effective and meaningful disclosures to investors.
With this objective the staff started a comprehensive review
of the SEC reporting requirements under Regulation S-X and
S-K and related guidance to provide specific recommendations
for updates and improvements. Initially, the review will
focus on the business and financial disclosures required
in periodic and current reports. Subsequent phases of the
project will likely include compensation and governance
information included in the proxy statements. The SEC staff
is conducting an outreach with investors and preparers and
they are expected to a release an concept document for public
comments.
Disclosure best practices

The SEC staff discussed a number of actions that registrants
can take to improve the effectiveness of their current
disclosures. Key focus areas included the following:
Critical accounting estimates - The SEC staff reminded that
the disclosure of the critical accounting estimate should:
Address the variability of the underlying estimate and the
sensitivity of those judgements to different circumstances

Be tailored to the identification of the material assumptions
and uncertainties as well as the expectation underlying the

key assumptions and how they relate to past experience
Address the known trends and assumptions that have had,
or are reasonably likely to have a material favourable or

unfavourable impact on the estimate
Provide an understanding of how management forms its
judgements about future events.

Re-evaluate existing disclosures - The DCF staff encouraged
updates and improvements, including eliminating disclosures
that are no longer relevant. The DCF staff is open to discussing
potential changes in disclosures with registrants but will not
formally pre-clear disclosures.
Audit quality
Auditor independence - Auditor independence and the
role of the audit committee were highlighted as focus
areas for improving audit quality. The SEC and the PCAOB
representatives commented on recent independence issues,
and questioned whether registrants and audit committees
have the appropriate policies and procedures to evaluate and
monitor auditor independence.
The Staff reminded management and audit committees to
always consider whether a relationship or service provided by
an auditor:
The auditors should continue to evaluate and apply the

independence rules carefully and ensure that partners and
staff, including those responsible for providing non-audit
services, receive sufficient training on auditor independence
rules and that necessary oversight and monitoring is
in place. Audit committees should also be vigilant in
carefully considering risks when fulfilling their preapproval
responsibilities and, where appropriate, should establish
monitor on an ongoing basis from decisions to proceed with
services that may pose scope creep threats.
The role of the audit committee

Audit committees play a critical role in providing oversight
over, and serving as a check and balance on a companys
financial reporting system. A consistent theme throughout the
conference was the importance of audit quality and the role
audit committees play in enhancing audit quality through their
oversight of auditors. The SEC staff has been working closely
with staff from the Division of Corporation Finance and others
throughout the Commission to consider existing disclosure
requirements, current audit committee disclosure practices,
and publicly available observations and commentary and
evaluate at whether improvements can be made to the audit
committee reporting requirements.
PCAOB inspection trends and focus areas

The PCAOB noted that 2014 inspections have shown some
promising improvements, especially when audit firms are
performing root cause analyses and proactively monitoring
and measuring the effectiveness of remedial actions on a realtime basis.
Ms. Munter, Director, Registrations and Inspections, PCAOB
indicated that ICFR continues to be the area with the highest
number of inspection findings, particularly with respect to an
auditors understanding of the flow of transactions to identify
and select appropriate controls to test, and the precision of
management review control. The PCAOB further emphasised
on inclusion of appendix (Appendix D) included in the reports
of annually inspected firms that summarises the auditing
standards referenced within the inspection reports. They
believe this appendix could be particularly useful for audit
committees to promote meaningful discussions with auditors
about whether and how those same standards are being
applied on their engagements to help to address or avoid
similar issues.
With respect to 2015 inspections, it highlighted a number of
new focus areas including business combinations, income
taxes, valuation of financial instruments, risk assessment
in light of business risks (e.g., falling oil prices), and the
statement of cash flows.
Creates a mutual or conflicting interest with their audit
client
Places them in a position of auditing their own work
Results in acting as management or an employee of the
audit client or
Places them in a position of being an advocate for the audit
client.
17
Guidance note of
derivative contracts
issued by the ICAI
Provide background on the need for this guidance note and its key features.
The Institute of Chartered Accountants of India (ICAI) has recently issued an

exposure draft of a proposed guidance note on derivatives. This exposure
draft is open for public comment till 21 January 2015 and proposes certain
important changes to how derivatives are currently accounted for in practice
in India. This article seeks to provide background on the need for this
guidance note and its key features.
Background
In 2007, the ICAI issued AS 30, Financial Instruments:
Recognition and Measurement and AS 31, Financial
Instruments: Presentation. Both of these accounting
standards were to come into effect in respect of
accounting periods commencing on or after 1 April 2009
and were to be recommendatory in nature for an initial
period of two years. These were to become mandatory
in respect of accounting periods commencing on or after
1 April 2011. However, till date these standards are not
mandatory in nature and while they provide persuasive
guidance, they are not required to be followed per se in
the Indian context.
Separately in March 2008, the ICAI issued an
announcement that in case of derivatives, if an entity does
not follow AS 30, keeping in view the principle of prudence
as enunciated in AS 1, Disclosure of Accounting Policies,
the entity is required to provide for losses in respect of all
outstanding derivative contracts at the balance sheet date

by marking them to market. This announcement became
applicable to financial statements for the period ending 31
March 2008, or thereafter. In case of forward contracts to
which AS 11, The Effects of Changes in Foreign Exchange
Rates (revised 2003) applies, entities need to fully comply
with the requirements of AS 11.
Currently, the relevant source of guidance for accounting
of foreign currency forward exchange contracts is AS
11, which is notified under the Companies (Accounting
Standards) Rules, 2006. AS 11 lays down accounting
principles for foreign currency transactions and foreign
exchange forward contracts and in substance similar
contracts. However, it does not cover all types of foreign
exchange forward contracts since contracts used to
hedge highly probable forecast transactions and firm
commitments are outside the scope of AS 11.
18
Key aspects of the guidance note

The objective of the guidance note is to provide guidance
on recognition, measurement, presentation and disclosure
for derivative contracts so as to bring uniformity in their
accounting and presentation in financial statements. The
guidance note, while addressing some aspects of hedging
activities, does not purport to be a guidance note on all
hedging activities. This is because of the fact that many types
of hedging involve potential conflicts with existing notified
accounting standards and a guidance note does not have the
ability to override such authoritative guidance.
The guidance note also provides accounting treatment for
derivatives where the hedged item is covered under notified
accounting standards, e.g., a commodity, an investment,
etc., because except AS 11, no other notified accounting
standard prescribes any accounting treatment for derivative
accounting.
The guidance note is an interim measure (till IFRS
convergence is achieved in India) to provide recommendatory
guidance on accounting for derivative contracts and hedging
activities considering the lack of mandatory guidance in
this regard with a view to bring about uniformity of practice
in accounting for derivative contracts by various entities.
For certain entities that do not require to move to Ind AS
(IFRS converged standards), this guidance note will have an
enduring impact.
To a significant extent, the guidance note does not materially
impact entities that have been already following AS 30 type
accounting policies and guidance, and transition to the new
guidance note will be relatively smooth for such entities.
What constitutes a hedgable risk including aggregated and
net exposures and components of non-financial items

Which instruments can qualify as hedging instruments
including improving the ability to hedge with options

Removes bright line 80/125 per cent hedge effectiveness
test requirements
Allows for qualitative assessments in certain situations
Clarifies that permissibility (e.g. RBI) of a product is not
adequate to qualify for hedge accounting

Permits basis adjustments for hedges relating to
recognition of non-financial items

Prohibits voluntary hedge de-designation if risk
management objectives and hedging instruments are

unchanged
Presentation in the financial statements including guidance
on current vs non-current designation.
Potential impact of the draft guidance note

The guidance note represents a significant move forward in
the reporting guidance and requirements for companies in
India. It is expected to bring some much needed transparency
in the area of derivative and hedge accounting using such
derivative instruments. The changes for some companies
could, however, be significant and while simpler to apply
than the AS 30 type rules, the guidance note would add to
the already full work plan for many preparers of financial
statements in the coming year.
The guidance note includes definitions of various terms

including of what is a derivative, hedging instrument, hedged
item, etc. These definitions are largely comparable with those
used internationally.
Hedge accounting continues to be optional under this
guidance note but once applied needs to be based on the
entitys risk management objective and goals and then can
not be subsequently turned on or off if the risk management
objective remains the same.
Compared to the earlier guidance under AS 30, hedge
accounting is considerably easier to apply in many situations
and in particular there is additional guidance on the following
aspects:
Synthetic accounting
Fair value of derivatives focus on exit price
Situations where the hedged item is covered by an existing
notified standard (AS 2, Valuation of Inventories, AS 13,

Accounting for Investments and AS 11, The Effects of
Changes in Foreign Exchange Rates (revised 2003))
The application of this guidance to non-foreign currency
derivatives
19
Income taxesthe mystery of

uncertainties
Discuss the concept of the uncertain tax positions

Discuss the guidance available under Indian GAAP, IFRS and U.S. GAAP.
The tax laws is one of the most talked about subjects by regulators and accounting
professionals across the globe given the dynamic and complex nature of tax rules.
Generally, there are complexities involved in tax computation due to judgements
and estimates required in determining tax liabilities and sometimes contrary
judgements available are tax matters that appear similar.
On account of attributes mentioned above, there might be situations where an
entity is uncertain about the sustainability of a tax position it has taken in its
income tax returns. Such uncertainty may be challenged by tax authorities. They
may result in additional taxes, penalties or interests. They could lead to change
in the tax basis of assets and liabilities and changes in the amount of available
tax losses carried forward that would reduce a deferred tax asset or increase a
deferred tax liability. These types of uncertainties are referred to as uncertain tax
positions (UTPs) or income tax exposures (ITEs). There is no specific guidance
under Indian GAAP on this subject. U.S. Generally Accepted Accounting Standards
(U.S. GAAP) extensively discusses the UTPs under ASC 740, Income Taxes. Under
IFRS, IAS 12, Income Taxes, does not provide any explicit guidance on how to
account for uncertain tax positions and divergence in treatment has developed in
practice. In practice, many entities have adopted an all or nil approach, i.e. the
benefit of a tax deduction is recognised in full in the financial statements if it is
probable that it would be sustained.
20
In this article, we aim to highlight key practical

implementation challenges resulting from such uncertainties.
Determining the recognition threshold for each

tax position
Identifying the tax positions
This is one of the most critical elements in the process of

accounting for UTPs/ITEs. There is no specific guidance on
recognition of income tax exposures under Indian GAAP and
IFRS and therefore, the general guidance in Indian GAAP/IFRS
applies. However, under U.S. GAAP, the benefits of UTPs
are recognised only if it is more likely than not (likelihood of
greater than 50 per cent) that the positions are sustainable
based on their technical merits (i.e. ignoring the detection
risk) and facts and circumstances as of the reporting date.
Examples of tax position include deductions taken on

tax returns that may be disallowed by the tax authorities,
transactions structured to utilise existing tax losses carried
forward that may otherwise expire unused, transactions that
could affect an entitys non-taxable or tax-exempt status, and
an unresolved dispute between the entity and the relevant
tax authority about the amount of tax due. Identifying the
tax position is itself a time consuming and complex process
given that this requires companies to make an inventory
of all such uncertain tax positions for open tax years and
in respect of all individual tax jurisdictions. There is no
specific threshold provided under IFRS, U.S. GAAP, or Indian
GAAP, for identification of such tax positions. Therefore,
it is critical for companies to identify all such positions
even if the recognition threshold under the accounting
standards is clearly met. In certain situations, contrary
judicial pronouncements could be available and this could
lead to difficulties in the identification of tax positions for
companies. Similarly, for companies having operations in
multiple jurisdictions, it is critical to identify the compliance
requirements and understand the statute of limitations and
tax rulings and tax treaties between taxing authorities for
each jurisdiction before making a repository of such uncertain
income tax positions.
Unit of account
There is no definition of unit of account under the accounting
standards. A unit of account could be used to identify an
individual tax position. This would represent the manner
in which a company would like to take up income tax
positions and the approach expected to be taken up by the
regulatory authorities to examine such positions. Some of
the key aspects to consider while determining the unit of
account would be the nature of tax benefit, significance of
a particular tax position to the entitys tax return as a whole,
inter-dependence with other tax positions, etc. Given that
the approach of tax authorities could differ from country to
country, it could make it difficult for companies to determine
the unit of account. Similarly, if there are multiple tax positions
of a similar nature, where contrary judicial pronouncements
exist, it may pose additional challenges while ascertaining the
unit of account.
Under U.S. GAAP, probability threshold is applied

for recognition of uncertain income tax exposure, it
involves application of judgement based on the facts and
circumstances of each case. In evaluating the recognition
criteria, consideration is also given to past practices and
procedures. This will help companies to avoid biased
conclusion on certain UTPs based on judicial pronouncements
that supports their position.
Additionally, the conclusion on whether the UTPs are
sustainable should not be based on the fact that the tax
authority has not specifically evaluated the item of UTP.
The analysis of whether it is remote that the tax authority
will examine such UTP should be based on the premise
that such authorities have full knowledge of the facts and
circumstances of the UTPs.
In the situations where companies may tend to write back
a provision for a particular UTP when an assessment for
a tax authority is complete for a particular UTP and such
tax authority has not inspected or enquired about such
UTP. However, companies will have to evaluate the facts
and circumstances on a case to case basis. Some of the
considerations for such evaluation could be (a) whether such
item of UTP was a discrete entry in the tax computation (b)
whether the detailed computation and supporting information
to the tax computation provides sufficient clarity/description
about such UTP (c) whether tax authorities specifically
enquired about or sought additional information about the
said UTP during examination, etc. Therefore, a conclusion
based on the fact that the assessment is complete by the tax
authorities may not be appropriate.
21
Measurement of tax position

Once the income tax position has been identified, another
challenging aspect is to measure such position. There is no
specific guidance on recognition of income tax exposures
under Indian GAAP and IFRS and therefore, the general
guidance in Indian GAAP/IFRS applies. However, under
U.S. GAAP, once a tax position has met the recognition
threshold it is initially measured at the largest amount of
benefit that is greater than 50 per cent likely of being realised
upon settlement with tax authority assuming that the tax
authorities have full knowledge of all relevant information. The
benefits of UTPs are recognised only if it is more likely than
not (likelihood of greater than 50 per cent) that the positions
are sustainable based on technical merits and facts and
circumstances of each case as of the reporting date.
A critical element in ascertaining the amount of benefit is
assigning probabilities to each possible outcomes. Unlike
in the U.S. and certain other jurisdictions, where there is
a likelihood of settlement of different amounts with tax
authorities, in India, a tax benefit is either fully allowed or
fully disallowed by the tax authorities. Accordingly, in practice
companies in India follow a binary approach to measure
such tax positions. While this may sound to be an easy-to-do
exercise for the India jurisdiction, it will require significant
judgement and evaluation of history of negotiation with
regulators, understanding the tax treaties with regulators, etc.
in respect of income tax positions in jurisdictions like U.S.
The principle of effective settlement

There is no guidance under IFRS/Indian on the concept of
effective settlement. Under U.S. GAAP, a tax position is
considered as effective settlement when all the following
three conditions are satisfied:
a. the tax authorities have completed the examination
procedures including all appeals and administrative
reviews that they are required and expected to perform for
a particular tax position
b. a company does not intend to appeal or litigate any aspect
of the tax position included in the completed examination
c. it is remote that the tax authorities would examine or reexamine any aspect of the tax position.
The criteria of effectively settled is another matter of
significant judgement which requires a detailed study on
a case to case basis depending on the facts of the matter.
Additionally, the tax authoritys policies around opening the
already concluded examinations could differ from country
to country. If a countrys tax laws allow tax authorities to
re-examine the assessments of completed years based on
additional information for subsequent assessments, it would
be difficult for companies to conclude whether the effective
settlement criteria has been met. Similarly, a tax position
may be evaluated by various levels of tax authorities during
the course of the assessment. If a tax benefit is allowed by a
lower level tax authority based on certain preliminary inputs
by the assessee, it may be disallowed by a higher level tax
authority during re-examination.
22
One of the practical implementation issues that companies

often face is whether a tax position can be considered as
effectively settled for all open assessment years if the tax
regulator has completed the assessment for a particular
year and not specifically reviewed a particular uncertain tax
position. This matter becomes very judgemental and is largely
dependent on the facts and circumstances.
Timing of evaluation of UTPs/ITEs

Once an UTP/ITE is recognised and measured, it should
continue to be recognised in the balance sheet. A new
information about the recognition and measurement should
trigger the re-evaluation. New information may include
changes in tax laws, developments in tax rules/case laws,
tax return examination by regulators or any other rulings or
pronouncements by tax authorities. Companies should carry
out an evaluation on whether a new information has become
available about the existing tax positions at each balance
sheet date.
Conclusion
Accounting and measurement of UTPs/ITEs is quite complex
and has a significant impact on an entitys tax liabilities for the
current and future period. There is a continuous requirement
for entities to evaluate each of its tax positions, both certain
and uncertain, based on new information available regarding
its recognition and measurement. Robust analysis and
documentation would be required when the position involves
a significant amount of uncertainty.
U.S. GAAP contains extensive guidance on the accounting of
such UTPs.
It may be noted that like IFRS/Indian GAAP, even in Ind AS
12, Income Taxes, which would be effective from 2016-17,
no specific guidance is available with respect to recognition,
measurement and disclosure of UTPs/ITEs. In order to ensure
smooth transition to Ind AS 12 entities should also implement
a variety of processes, controls, and procedures for evaluating
their tax positions based on the nature of the positions
as well as their level of uncertainty. Among other things,
those controls and procedures and related documentation
should address all relevant facts and circumstances that
affect the entitys conclusions, including, but not limited to,
relevant tax laws (e.g. legislation and statutes, legislative
intent, regulations, rulings, case law), prior experience with
the taxing authority, and widely-understood administrative
practices and precedents.
23
Revisions
in NBFC
framework:
an overview of
key revisions
Summarise the revisions to the NBFC framework.
The Reserve Bank of India (RBI) on 10 November 2014 issued

revised Regulatory Framework for Non-banking Finance
Companies (NBFC) (the framework). The framework aims
to address the issues relating to systemic risk in the sector,
focusses on dealing with some of the identified regulatory
gaps and arbitrage arising from differential regulations, both
within the NBFC sector as well as in relation to other financial
institutions, harmonise and simplify regulations to facilitate a
smoother compliance culture among NBFCs and strengthen
the overall governance standards. The framework was
revised keeping in mind the recommendations made by the
Working Group on Issues and Concerns in the NBFC Sector
and the committee on Comprehensive Financial Services for
Small Businesses and Low Income Households. This article
aims to summarise the salient features of the significant
changes made to the revised framework by the RBI.
24
Minimum net owned fund (NoF) of INR20

million for all NBFCs
As per the RBI regulations, NBFCs which were in existence
before 21 April 1999 are required to have a minimum NoF of
INR2.50 million and NBFCs incorporated after 21 April 1999
are required to have a minimum NoF of INR20 million.
Given the need for strengthening the financial sector,
technology adoption and in view of the increasing complexity
of services offered by the NBFCs, the framework has
prescribed a uniform minimum NoF requirement for all
NBFCs.
NBFCs existing before 21 April 1999 would be required to
attain the minimum NoF of INR20 million in a phased manner
as follows:
Threshold for systemic significance redefined

The threshold for defining systemic significance has been
revised in the light of the overall increase in the growth of
the NBFC sector. The framework has revised the asset size
threshold as follows:
NBFC groups
Present asset size

threshold
Revised asset size

threshold*
Non-deposit taking
NBFCs (NBFCs-ND)
Less than INR1,000

million
Less than INR5,000

million
Non-deposit taking
systemically
important NBFCs
(NBFCs-ND-SI)
INR1,000 million
and above
INR5,000 million
and above
*based on last audited balance sheet

Source: KPMG in India analysis
INR10 million by the end of March 2016

INR20 million by the end of March 2017.
In case the NBFC fails to achieve the minimum NoF within

stipulated time, the RBI would initiate its procedures to
cancel the registration certificate of the said NBFC.
Statutory auditors of the NBFCs having NoF below INR20
million would need to submit a certificate at the end of
each of the two financial years as given above certifying
compliance to the revised levels.
Deposit acceptance
In order to harmonise the deposit acceptance regulations
across all deposit taking NBFCs (NBFC-D) and to move over
to a regiment of only credit rated NBFCs-D accessing public
deposits, the following changes have been introduced:
Where NBFCs are part of a corporate group or are floated by

a common set of promoters, those NBFCs will not be viewed
on a standalone basis. The total assets of NBFCs in a group
including NBFCs - D, if any, will be aggregated to determine
if such consolidation falls within the asset sizes of the two
categories mentioned in the above table. Regulations as
applicable to the above two categories equally apply to each
of the NBFC-ND within the group. Statutory auditors would
be required to certify the asset size of all the NBFCs in the
group.
The term group will have the same meaning as contained
in accounting standards (AS). Companies in the group shall
mean an arrangement involving two or more entities related
to each other through any of the following relationships:
subsidiary, parent, joint venture, associate (as defined in
relevant AS)
Particulars
Existing deposit
acceptance limits
Revised limits
Unrated Asset
Finance Company
1.5 times of NOF

or INR100 million,
whichever is lower
To get themselves
rated by 31 March
2016, failing
which they renew
or accept fresh
deposits*
for listed companies, a related party (as per AS 18, Related
1.5 times of NOF**
The framework provides that systemic risks posed by the

NBFCs functioning exclusively out of their own funds and
NBFCs accessing public funds can not be equated and hence,
can not be subjected to the same level of regulation. As a
result, enhanced prudential regulations viz. Fair Practices
Code (FPC), Know Your Customer (KYC) norms should
be made applicable to NBFCs wherever public funds are
accepted and conduct of business regulations will be made
applicable wherever customer interface is involved.
Rated Asset Finance

Company
4 times of NOF
promoters, promotee (as provided in the SEBI Regulations)

*until rating is obtained or rating obtained is of sub-investment grade, existing
deposits can only be renewed on maturity and no fresh deposits can be raised.
**Companies holding public deposits in excess of the revised limits would not
be allowed to raise fresh deposits or renew existing deposits until they conform
to the revised limits, the existing deposits can run off till maturity.
Based on the data available with the RBI, most Asset Finance
Companies are already in compliance with the revised limits
and very few NBFCs have deposits in excess of 1.5 times of
the NOF. As the excess is not expected to be not substantial,
therefore, the RBI does not expect this harmonisation
measure to be disruptive.
Party Disclosures), common brand name, and investment

in equity shares of 20 per cent and above.
Prudential norms
25
The RBI has also revised the maintenance of capital to risk weighted assets ratio, compliance with credit concentration norms
and Tier 1 capital requirements. In this regard, the framework prescribes as under:

Note: The term public funds has been defined to include funds raised directly or indirectly through public deposits, commercial papers, debentures, inter-corporate
deposits and bank finance but, excludes funds raised by issue of instruments compulsorily convertible into equity shares within a period of five years from the date
of issue.
* Exempted from the requirement of maintaining capital to risk weighted assets ratio and complying with credit concentration norms and should maintain a
leverage ratio (i.e. total outside liabilities/owned funds) of seven.
** Tier 1 capital should be increased in a phased manner as follows:
8.5 per cent by the end of March 2016

10 per cent by the end of March 2017
Asset classification
The framework has harmonised the asset classification criteria norms in respect of NBFC-ND-SI and NBFC D, and have
aligned it in a phased manner with that of banks as given below:
Classification
Existing requirements
Revised requirements
Non-performing asset
(NPA) lease rentals and hire
purchase assets
Overdue for 12 months

or more
Overdue for 9 months for FY ending 31 March 2016

Overdue for 6 months for FY ending31 March 2017
Overdue for 3 months for FY ending 31 March 2018 and thereafter
NPA other than lease rentals

and hire purchase assets
Overdue for 6 months or

more

Overdue for 3 months for FY ending 31 March 2018 and thereafter
Sub-standard loans/hire
purchase assets/leased
assets
NPA for 18 months or

more
NPA for a period not exceeding 16 months for FY ending 31 March 2016
and thereafter
Doubtful loans/hire purchase

assets/ leased assets
Sub-standard assets for 18

months or more
Sub-standard asset for period exceeding 16 months for FY ending 31

March 2016
Sub-standard asset for period exceeding 14 months for FY ending 31
March 2017
Sub-standard asset for 12 months for period exceeding FY ending 31
March 2018 and thereafter
For the existing loans, a one-time adjustment of the repayment schedule which should not be a restructuring would be
permitted under the framework.
26
Provisioning for standard assets

The provision for standard assets for NBFCs-ND-SI and for
all NBFCs-D has been increased from 0.25 per cent of the
outstanding standard assets in a phased manner as given
below:
0.40 per cent by the end of March 2018.
Strengthening corporate governance and

disclosure norms
Under the present norms:
the audit committee is required to be constituted by
NBFCs-D with deposits of INR200 million and above, and

NBFCs-ND with asset size of INR500 million and above
a nomination committee (to ensure fit and proper status
of proposed/existing directors) and risk management

committee is advisable for NBFCs-D with deposits of
INR200 million and above and NBFCs-ND with assets of
INR1,000 million and above
it is advisable to rotate partners of audit firms appointed
for auditing NBFCs-D, with deposits of INR500 million and

above, every three years.
In order to instill high quality corporate governance culture,
the framework mandates for the NBFCs-ND-SI and the
NBFCs-D to constitute audit committee, nomination
committee and risk management committee and mandate
rotation of partners of audit firms appointed for auditing. The
audit committee should ensure that an Information Systems
Audit of the internal systems and processes is conducted
at least once in two years to assess operational risks faced
by the company. With effect from 31 March 2015, NBFCsND-SI and NBFCs-D would be subject to following additional
corporate governance requirements:
establish policy, based on guidelines in the framework, to
determine fit and proper criteria for proposed/existing

directors
furnish a quarterly statement on change of directors
certified by the auditors within 15 days of the end of the

quarter
attain a certificate from the Managing Director that fit and
proper criteria in selection of directors has been followed.
Comprehensive disclosures requirements
prescribed additional disclosure of certain items in the notes

to the annual financial statements/annual report of NBFCsND-SI and NBFCs-D from 31 March 2015. Some of them are
as follows:
registration/license/authorisation obtained from other
financial sector regulators

credit ratings assigned and migration of ratings during the
year
penalties levied by any regulator
area, country of operation, joint venture partners and
overseas subsidiaries
asset liability profile, extent of financing of parent company
products, NPAs and movement of NPAs, details of all

off-balance sheet exposures, structured products, etc.
and other disclosures as outlined in the annexure to the
framework.
Applicability to NBFC-Micro Finance

Institutions (NBFC-MFI) and registered Core
Investment Committee (CIC)
The revisions in the NBFC framework shall be applicable
to NBFC-MFIs and registered CICs except wherever they
are in conflict with the NBFCMFI Directions 2011 and CIC
Directions 2011 respectively.
Conclusion
With the introduction of the revised framework for NBFCs,
the temporary suspension of issuance of new registrations
was withdrawn. This was a positive development for the new
players waiting to enter the NBFC sector.
Whilst on one hand, the RBI has made certain requirements
quite stringent e.g. the accelerated provisioning
requirements, higher tier 1 capital, enhanced governance
requirements and disclosure requirements recognizing the
systemic risk that large NBFCs pose to sector. It has provided
certain relaxations in the form of raising the limits for NBFCND-SI, exemption from prudential regulations for NBFCND, simpler reporting, etc. which will no doubt ease the
compliance burden for many small industry players.
In balance, the guidelines appear to be quite pragmatic and
though the revised requirements relating to additional tier 1
capital and accelerated provisioning may impact profitability,
in the long term, these amendments will strengthen
individual NBFC s and benefit the overall sector.
As per present norms, NBFCs with assets of INR1,000 million

and above are required to make additional disclosures in their
balance sheets from the year ended 31 March 2009 relating
to capital to risk weighted assets ratio, exposure to real estate
sector (both direct and indirect), and maturity pattern of
assets and liabilities respectively.
Under the framework, the above disclosures are mandatory
for the NBFCs-ND-SI and NBFCs-D. The framework has also
27
Regulatory updates
IRDA (Insurance Brokers) Regulations, 2013

certain clarifications
The Insurance Regulatory and Development Authority (IRDA)
has clarified that the net worth of any insurance broker should
be calculated as specified in Section 2(57) of the Companies
Act, 2013 and thus, should not be calculated by any other
method. Further, each component of the net worth should
be mentioned separately while furnishing the net worth
certificate.
As regards appointment of statutory auditors for financial
year 2015-16 or thereafter, the insurance brokers have been
advised to ensure that the auditors should be retained for a
maximum period of five years.
[Source: IRDA/BRK/MISC/CIR/240/10/2014 and IRDA/BRK/MISC/
CIR/241/10/2014 dated 30 October 2014]
Penalty for non-compliance with Corporate

Social Responsibility (CSR) provisions of
the Companies Act, 2013
The Minister of Corporate Affairs, Mr. Arun Jaitley, in
response to a question raised in the Rajya Sabha said that
penalty provisions under Section 134(8) of the Companies
Act, 2013 shall apply in case of non-compliance of provisions
relating to CSR as per Section 135 of the Companies Act,

2013.
Sction 134(8) of the Companies Act, 2013 states that if a
company contravenes the provisions of this section, the
company shall be punishable with fine which shall not be less
than fifty thousand rupees but which may extend to twentyfive lakh rupees and every officer of the company who is in
default shall be punishable with imprisonment for a term
which may extend to three years or with fine which shall not
be less than fifty thousand rupees but which may extend to
five lakh rupees, or with both.
[Press Information Bureau, Government of India, Ministry of Corporate Affairs
dated 9 December 2013]
Information regarding guidance note on

Audit of Internal Financial Controls Over
Financial Reporting
The Institute of Chartered Accountants of India (ICAI) has
withdrawn its recently issued guidance note on Audit of
Internal Financial Controls Over Financial Reporting. It is
under revision and the revised versionis expected to be
available in due course.
[Source: ICAIs announcement dated 12 December 2014]
28
Framework for Revitalising Distressed

Assets in the Economy Non-cooperative
borrowers
In 2014, the Reserve Bank of India (RBI) had released
Framework for Revitalising Distressed Assets in the
Economy (the framework). The framework had laid down
guidelines for early recognition of financial distress, taking
prompt steps for resolution, and thereby attempting to ensure
fair recovery for lending institutions. It had also included
specific prudential measures and reporting requirements in
respect of Non-Cooperative Borrowers (NCBs).
The RBI has now changed the definition of NCBs and also
advised banks on measures to be taken in classifying/
declassifying a borrower as NCB and reporting information on
such borrowers to the Central Repository of Information on
Large Credits (CRILC). The definition of NCBs now includes
a borrower who defaults in timely payment of dues while
having the ability to pay and who is in effect, a defaulter who
deliberately stonewalls legitimate efforts of the lenders to
recover their dues. The measures suggested to the banks in
this regard include:
a. The borrowers should be classified as NCBs if their
aggregate borrowing (fund-based and non-fund based
taken together) from the concerned bank or financial
institution (FI) is more than INR50 million
b. In case of a company, a NCB will also include, besides
the company, its promoters and directors (excluding
independent directors and directors nominated by the
government and the lending institutions)
c. The banks are expected to put a transparent mechanism in
place to classify borrowers as a NCB. The decisions about
such classification should be entrusted to a Committee
of higher functionaries headed by an Executive Director
and consisting of two other senior officers of the rank of
General Managers/Deputy General Managers as decided
by the Board of the concerned bank/FI.
d. It is clarified that a single or isolated instance should not be
the basis for such classification.
i. The status of NCBs should be reviewed by the Boards

of banks/FIs on a half-yearly basis. If based on the credit
discipline and cooperative dealings, a NCB is decided not
to be classified as such, then such information should be
separately reported under CRILC with adequate reasoning/
rationale for such declassification.
j. It is clarified that any fresh exposure to a NCB will entail
greater risk and thus, banks/FIs will be required to make
higher provisioning as applicable to sub-standard assets
in respect of new loans sanctioned to NCBs. Such higher
provisioning will also be required for any new loans
sanctioned to any other company that has on its Board
of Directors any of the whole time directors/promoters
of a non-cooperative borrowing company or any firm in
which such a NCBs is in charge of management of the
affairs. However, for the purpose of asset classification and
income recognition, the new loans would be treated as
standard assets.
[Source: RBI/2014-15/362 dated 22 December 2014]
SEBIs discussion paper - Re-classification

of Promoters as Public
The Securities and Exchange Board of India (SEBI) has
released a discussion paper (DP) on Re-classification of
Promoters as Public.
The DP aims to lend objectivity to the process of
reclassification of promoters of listed companies as public
shareholders under various circumstances. This is owing
to the fact that the present regulatory framework does not
prescribe criteria for such re-classification.
The DP proposes the following three scenarios under which
an entity belonging to promoter/promoter group of listed
companies may re-classify its shareholding to public category
subject to certain conditions:
a. Pursuant to an open offer under the SEBI (Substantial
Acquisition of Shares and Takeovers) Regulations, 2011
or on account of an exemption granted by SEBI under the
said Regulations.
e. If the Committee concludes that the borrower is noncooperative, it shall issue a Show Cause Notice to the
concerned borrower (and the promoter/whole-time
directors in case of companies).
b. In case of a separation agreement, the said agreement

should be duly registered under the Registration Act,
1908 or the material terms of the separation agreement
should be disclosed to the stock exchanges, prior to the
reclassification.
f. After considering the submissions of the borrower, the

Committee should issue an order classifying the borrower
as NCB along with reasons for the same. The borrower
should be given an opportunity of being heard if the
Committee feels such an opportunity is necessary.
c. The promoter along with the entire promoter group to

which the promoter belongs, taken together, holds less
than 5 per cent shares in the company (including any
convertibles/outstanding warrants/ American Depository
Receipts/Global Depository Receipt Holding).
g. The order of the Committee should be reviewed by

another Committee headed by the Chairman/CEO and
Managing Director and in addition consisting of two
independent directors of the Bank/FI. Only if the order is
confirmed as reviewed, the final order should be issued
The DP also sets out requirements relating to information

to be provided to stock exchanges, timelines relating to
re-classification and procedure to be followed post reclassification, etc.
h. Banks/FIs will be required to report such information

regarding their NCBs to CRILC through their quarterly
submissions.
Public comments have been invited.

[Source: SEBIs report dated 30 December 2014]
29
Exposure draft on Ind AS compliant

Schedule III to the Companies Act, 2013
released an exposure draft (ED) of Ind AS compliant Schedule
III to the Companies Act, 2013, for companies other than nonbanking finance companies (NBFCs). Schedule III deals with
the General instructions for preparation of balance sheet and
statement of profit and loss of a company. The ED aims to
align Schedule III with the requirements of Indian Accounting
Standards (Ind AS). The key changes to Schedule III that have
been proposed in the ED include:
Primary statement added
a. Statement of changes in equity added
h. Share application money should also be classified as equity

or liability depending on whether such money is refundable
or not
i. Preference shares should also be classified as equity or
liability depending on its underlying characteristics
j. Compound financial instruments such as convertible
debentures should be split into equity and liability
components based on accounting standards and shall be
classified as such
Changes related to statement of profit and loss
k. New line items proposed are other comprehensive income
and total comprehensive income and related disclosures
Changes related to balance sheet
l. Finance cost includes dividends on redeemable preference

shares
b. Instead of shareholders funds new term equity has been

proposed
m. Reference to items of extraordinary nature and prior period

items has been removed
c. A new category has been proposed as equity component

of other financial instruments and liability component of
other financial instruments
n. Disclosures such as, CIF value of imports, expenditure

in foreign currency, purchase of goods traded in case of
trading companies, etc. have been removed
d. Term financial liabilities has been inserted to differentiate

between financial liabilities and other liabilities
Other changes
e. New line items proposed to be inserted include group(s) of

assets held of disposal and non-current assets classified as
held for sale
f. A new heading for financial assets has been inserted
g. A balance sheet at the beginning of the earliest
comparative period should be presented in case an
accounting policy is applied retrospectively or the company
makes a restatement of items in the financial statements
or it reclassifies items in its financial statements
o. Reference to minority interest has been replaced with noncontrolling interests

p. References and disclosure requirements relating to
statements of changes in equity, other comprehensive
income and total comprehensive income have been
included.
30
Formats of illustrative auditors report

under the Companies Act, 2013
released illustrative formats of independent auditors report
on the stand-alone financial statements of a company under
the Companies Act, 2013 (2013 Act). The illustrative formats
include illustrative reports for unmodified opinion, qualified
and adverse opinion and disclaimer of opinion. The key
changes from the current format of auditors report include:
Reference to companys board of directors in place of
companys management
Changes to the management responsibility paragraph
to include reference to generally accepted accounting

principles in India which includes accounting standards, for
preparing financial statements. Earlier the reference was
only to accounting standards.
Additionally, management responsibility now specifically
includes
Maintenance of adequate accounting records in
accordance with the provisions of the 2013 Act for

safeguarding of the assets of the company and for
preventing and detecting frauds and other irregularities
Selection and application of appropriate accounting policies
Making judgements and estimates that are reasonable and
Design, implementation and maintenance of adequate
internal financial controls, that were operating effectively

for ensuring the accuracy and completeness of the
accounting records, relevant to the preparation and
presentation of the financial statements that give a true and
fair view and are free from material misstatement, whether
due to fraud or error.
Auditors responsibility now specifically refers to taking
into account the provisions of the 2013 Act, Rules made

thereunder and accounting and auditing standards.
Under auditors responsibility reference to considering
internal controls relevant to the companys preparation of

financial statements that give true and fair view has now
been changed to refer to internal financial controls.
Other matter paragraph now specifically refers to reliance
on the reports of branch auditors for branches which have

not been audited by the independent auditor.
Report on other legal and regulatory requirements now
specifically refers to matters specified under section 143(3)

of the 2013 Act.
The ICAI is expected to issue the illustrative format related
to independent auditors report on consolidated financial
statements under the Companies Act, 2013 in due course
after consultation with the Ministry of Corporate Affairs.
prudent
31
KPMG IFRS Conference 2015
Navigating the convergence journey

in association with the IFRS Foundation
An initiative by the KPMG India IFRS Institute
Financial reporting in India is on the cusp of an exciting and challenging phase of its evolution, with the convergence
with International Financial Reporting Standards (IFRS) expected to become a reality for corporates in India.
In this context, KPMG in India is organising a first of its kind IFRS conclave in India, KPMG IFRS Conference 2015:
Navigating the convergence journey in association with the IFRS Foundation, on 5 and 6 February 2015 in Mumbai.
The IFRS Foundation is an independent, not-for-profit organisation working in the public interest, whose primary
mission is to develop a single set of high quality, understandable, enforceable and globally accepted International
Financial Reporting Standards based upon clearly articulated principles. IFRS are developed by the International
Accounting Standards Board (IASB), the independent standard-setting body of the IFRS Foundation.
For whom
Date and time
Chief Executive Officers, Executive Directors,

Chief Financial Officers and Finance Controllers of
companies that are required to transition to Ind AS
standards.
5 - 6 February 2015, Mumbai
This would help these key decision makers understand

the wider business and organisational implications
of the transition to Ind AS standards beyond just
accounting.
Day 1 of the conference is aimed at providing a wideranging overview and is suited for Chief Executive
Officers, Executive Directors and Chief Financial
Officers. Day 2 is aimed at providing more insight
into some of the key areas of change from a financial
reporting perspective, and is suited for Chief Financial
Officers and Finance Controllers.
Day 1: 14.00 to 18.30 hrs.

Day 2: 09.30 to 17.30 hrs.
The first days sessions will be followed by a
networking dinner at the venue.
Venue
Taj Mahal Palace, Mumbai
(Non-residential)
Fees
Registration process
The conference fee for this two day non-residential

programme is INR 50,000 (Indian national rupees
fifty thousand only) excluding taxes. This fee covers
program materials, session costs, meals and snacks.
Click here to register online.
All participants will also get a copy of

Insights into IFRS 2014/2015 - 11th
Edition - KPMGs practical guide
to International Financial Reporting
Standards.
32
Conference Agenda
5 February, 2015 - Day 1
6 February, 2015 - Day 2
14:15 16:00 hrs.
Session 1
09:25 09:30 hrs.
Day 2 opening remarks
Welcome and Introduction to the

conference
09:30 10:45 hrs.
Perspectives on IFRS convergence:

Businesses, Investors and Regulators
Keynote 1 Indias convergence with

IFRS
Challenges and opportunities for

users and preparers
Keynote 2 The future of financial

reporting
Challenges and opportunities for

regulators both in standard setting
and financial reporting oversight and
enforcement
Embracing global standards the way

forward and impact on Corporate India
10:45 11:15 hrs.
Coffee break
11:15 12:00 noon
Managing the tax implications of IFRS

convergence: Income computation and
disclosure standards
12:00 13:00 hrs.
Implementing recently issued

standards: Implementing IFRS 9
Financial instruments (non-financial
institutions)
The road ahead for India Inc.

-- Roadmap
-- Bridging the gaps the walk from
Indian GAAP to IFRS
-- Impact beyond accounting.
13:00 14:00 hrs.
Lunch break
14:00 15:00 hrs.

standards: Business combinations and
consolidation: Implementing IFRS 3,
IFRS 10, IFRS 11 and IFRS 12
Panel Discussion: Investor focused IFRS

update managing key stakeholder
communications, discussing the effects
of changes on financial analysis and
valuations.
15:00 16:00 hrs.

standards: Implementing IFRS
15 Revenue from contracts with
customers
16:00 16:30 hrs.
Coffee break
18:30 18:45 hrs.
Break
16:30 17:30 hrs.
18:45 20:00 hrs.
Session 3
Convergence in India - First time

adoption of Ind AS and carve-outs from
IFRS
17:30 17:45 hrs.
Closing
Overview of KPMG report and closing

remarks
16:00 16:15 hrs.
16:15 18:30 hrs.
Coffee break
Session 2
IASB Update Covering key projects in
progress and important IFRIC agenda
items
Huddle with the experts: Informal

networking session over cocktails
20:00 hrs.
onwards
Dinner
Select list of resource persons

Eminent speakers from the regulatory, corporate and consulting world would be present at the conference. The
confirmed speakers include:
Hans Hoogervorst, Chairman IASB
Ian Mackintosh, Vice-Chairman IASB
Kumar Dasgupta, Technical Director IASB
C. B. Bhave, Trustee IFRS Foundation and former
Chairman of the Securities and Exchange Board of
India
Saumen Chakraborty, President and CFO

Dr. Reddys Laboratories
Charanjit Attra, Executive Director 3i Infotech
Saurabh Mukherjea, CEO Institutional Equities,
Ambit Capital
Richard Rekhy, CEO KPMG in India
Suresh Senapathy, CFO Wipro
Jamil Khatri, Deputy Head of Audit KPMG in India
T.V. Mohandas Pai, Chairman - Manipal Global

Education
Sai Venkateshwaran, Partner and Head

Accounting Advisory Services, KPMG in India.
Introducing IFRS Notes

IFRS convergence: Government announces roadmap for implementation of Ind AS
The new year heralds an important update; on 2 January 2015 the Ministry of Corporate Affairs
(MCA) issued a press release announcing a revised roadmap for implementation of Indian Accounting
Standards (Ind AS), converged with International Financial Reporting Standards (IFRS). This roadmap is
applicable to companies other than banking companies, insurance companies and non-banking finance
companies.
This roadmap was developed after consultations with various stakeholders and regulators. It comes
as a follow up to the announcement by the Finance Minister in his budget speech that Ind AS will be
made mandatory from the financial year 2016-2017.
In this issue of IFRS Notes we have provided an overview of the revised roadmap of implementation of
Ind AS along with our points of view.
Missed an issue of Accounting and Auditing Update or First Notes?

December 2014
As 2014 draws to
a close, we step
back to look at the
practical implications
and application
challenges associated
with the Companies
Act, 2013 (2013
Act). The December
2014 edition of the
Accounting and Auditing Update contains
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the Ministry of Corporate Affairs (MCA)
press release on 2 January 2015 relating to
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revised drafts of 12 Income Computation

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KPMG Accounting and Auditing Update January 2015

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KPMG Accounting and Auditing Update January 2015

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ACCOUNTING

Liquor industry in India p7

KPMG IFRS Conference 2015

Deputy Head of Audit,

Partner and Head,

2015 has begun with a proverbial bang.

the annual AICPA conference held in the United

The new year heralds an important update; on 2 January

a. companies having net worth of INR500 crore or more

In this section, we have provided an overview of the revised

a. companies whose equity and/or debt securities are

Overview of the revised roadmap

b. unlisted companies having net worth of INR250 crore or

Source: KPMG in India Analysis

c. holding, subsidiary, joint venture or associate

required to follow the Ind AS standards for all the

continue to apply existing accounting standards prescribed

1. Refer to KPMGs IFRS Notes- Issue 2015/01 released on 5 January 2015

The Ministry of Finance

This article aims to:

other sources for taxpayers following a mercantile system.

In August 2012, the committee, after deliberations issued 14

The draft ICDS on The Effects of Changes in Foreign

Alignment with generally accepted accounting

that in case ultimate collection with reasonable certainty is

Exchange Rates (2012) mentioned that foreign currency

effect an exchange of currencies at that rate.

of a service provider was required to be valued at cost.

Formula for capitalising borrowing cost revised

Borrowing costs incurred during

Average of cost of qualifying asset

When the qualifying asset does not appear

The numerator (B) of the above formula would be

First day or both on the first and the last day of

Last day of the previous year

Average of cost of qualifying asset (other than those qualifying assets

Recognition and initial measurement requirements modified

asset/shares/securities, the cost of the tangible fixed asset

shares/securities, the cost of the intangible asset should

asset should be recognised at lower of:

The revised draft ICDS (2015) on above topics propose that

Other key revisions

Draft ICDS (2012) not re-issued

Under the draft ICDS on Tangible Fixed Assets (2012)

Following draft ICDS (2012) have not been issued as revised

machinery spares should be charged to revenue when

Events occurring after the previous year

The revised draft ICDS on Intangible Assets (2015)

proposes to include exchange fluctuations as an

The industry landscape

after obtaining a license

controlled corporations in the wholesale and/or retail market.

Accounting and reporting implications

results in a higher price which puts a pressure on sales volumes.

to the CBU by a liquor manufacturer in lieu of production

of raw material, freight, etc. are incurred by the CBU (as a

requirements of the CBU. In order to facilitate this, each CBU

instance of the liquor manufacturer i.e. the liquor manufacturer

debtors in relation to the goods manufactured on behalf of the

bear the insurance risk of inventories and transit and also

up by the CBU and the net gain or loss on the transaction

will be transferred at cost by the CBU to the company

entering into similar arrangement with other competitive liquor

Paragraph 11 of AS 9 further states that in a transaction