Voices on Reporting 30 May 2014 kpmg.com/in
Welcome Series of knowledge sharing calls Covering current and emerging reporting issues Scheduled towards the back end of each month Look out for our Accounting and Auditing Update and First Notes publications 1
Your Speakers Sai Venkateshwaran Partner and India Head- Accounting Advisory Services V. Venkataramanan Partner KPMG, India 2
Topics for today 1 Companies Act Matters for first board and general meetings 2 Treatment of mark to market losses on principal only currency swaps EAC opinion 3 Deferred tax liability on special reserve created by banks impact on auditor s report 4 ICAI s roadmap for adoption of Ind AS 3
Meeting of the board of directors New requirements such as appointment of independent directors (IDs), independence criteria for IDs etc. have to be considered Constitute/reconstitute various committees of the Board e.g. nomination and remuneration committee, CSR committee Pre-approval of non audit services for auditors New duties of directors to be codified at the meeting Approval of related party transactions (RPT) - not in the ordinary course or arm s length; establishing a framework for RPT Appointment and terms of Key Managerial Personnel (KMP) Establishment or reconstitution of a vigil mechanism Framework for risk management and compliance with laws and regulations 4
Approval of the shareholders Alteration of Memorandum and Articles of Association Appointment of independent directors, determination of the term and remuneration by getting notice of the candidature from any shareholder prior to the AGM Restriction on borrowing powers of the company Appointment of a managing director, whole-time director or manager Approve certain RPT based on transaction thresholds Appointment of auditors at Annual General Meeting Loans given to a managing or whole-time director pursuant to any scheme. 5
Audit committee Compliance with the reconstituted charter for audit committees Pre-approval of non audit services Approval of related party transactions Appointment and oversight of internal auditor. 6
Topics for today 1 Companies Act Matters for first board and general meetings 2 Treatment of mark to market losses on principal only currency swaps EAC opinion 3 Deferred tax liability on special reserve created by banks impact on auditor s report 4 ICAI s roadmap for adoption of Ind AS 7
Accounting for principal only currency swaps Background Accounting treatment of foreign currency contracts and derivative contracts is a complex area of accounting Expert Advisory Committee (EAC) published an opinion in February 2014 on accounting for principal only currency swaps (POS). POS in economic terms is similar to a foreign currency forward contract instrument. However, POS typically requires a periodic payment of swap cost (or forward premium) as opposed to a foreign currency forward contract that typically requires a payment/receipt of forward premium only at the settlement of the contract. 8
Accounting for principal only currency swaps Background of the query An Indian company borrowed a long-term INR loan to fund the capital expenditure for a project The company also entered into a derivative transaction by way of POS to the extent of the outstanding INR loan The purpose of the POS was to synthetically convert the underlying INR loan into a foreign currency loan The company would receive a periodic swap (forward premium) payment over the life of the POS POS was not entered for trading or speculation purpose. 9
Accounting for principal only currency swaps Queries addressed by the EAC Whether mark to market losses on the POS can be treated as exchange differences under Accounting Standard (AS) 11? If yes, whether such exchange differences can be accounted for under paragraph 46 and 46A of AS 11? 10
Accounting for principal only currency swaps Accounting literature under Indian GAAP AS 11 The Effect of Changes in Foreign Exchange Rates AS 1 Disclosure of Accounting Policies AS 30 Financial Instruments: Recognition and Measurement AS 31 Financial Instruments: Presentation 11
Accounting for principal only currency swaps Applicability of AS 11 The scope of AS 11 covers accounting for the following: Transactions in foreign currencies Translating the financial statements of foreign operations Foreign currency transactions in the nature of forward exchange contracts: o Which are entered into for hedging foreign currency risk where the underlying transaction is denominated in foreign currency o Which are intended for trading or speculation purposes. 12
Accounting for principal only currency swaps Is POS a forward contract within the scope of AS 11? The underlying transaction is an INR loan that does not give rise to any foreign currency risk POS transaction exposes the company to foreign currency risk The INR loan and the POS can not be treated as a single transaction but two separate transactions POS is not held for trading or speculation purpose. 13
Accounting for principal only currency swaps Conclusion POS is not a forward contract within the scope of AS 11, thus it is not a foreign currency transaction within the scope of AS 11 Mark to market losses on the POS can not be treated as exchange difference for the purpose of AS 11 Accordingly paragraph 46 and 46A of AS 11 would not applicable in this situation. Accounting alternatives: AS 1 AS 30 14
Topics for today 1 Companies Act Matters for first board and general meetings 2 Treatment of mark to market losses on principal only currency swaps EAC opinion 3 Deferred tax liability on special reserve created by banks impact on auditor s report 4 ICAI s roadmap for adoption of Ind AS 15
Deferred tax liability on special reserve: - impact on auditor s report Income tax Act, 1961 Reserve Bank of India (RBI) - Clarification Section 36(1)(viii) allows specified entities, a deduction while computing income chargeable to tax, on special reserve created by them However, any amount subsequently withdrawn from such special reserve is chargeable to income-tax. Deferred tax liability (DTL) as per AS 22, Accounting for taxes on income, should be created on the amounts so transferred to special reserve If DTL relating to special reserve has not been charged to the statement of profit and loss as at 31 March 2013 then it should be adjusted against reserves DTL for amounts transferred to special reserve from the year ending 31 March 2014 onwards should be charged to the statement of profit and loss of that year. 16
Deferred tax liability on special reserve: - impact on auditor s report ICAI s clarification (30 April 2014) Although the RBI s guidance is not in line with the accounting standards, the regulator (RBI) prescribed accounting treatment should be followed. Disclosure requirement The notes to the accounts should explain the nature of departure along with quantification Emphasis of matter paragraph should be included in the auditor s report as per Standard on Auditing (SA), 706. 17
Topics for today 1 Companies Act Matters for first board and general meetings 2 Treatment of Mark to Market Losses on Principal only Currency Swap EAC opinion 3 Deferred tax liability on special reserve created by banks impact on auditor s report 4 ICAI s roadmap for adoption of Ind AS 18
Proposed roadmap submitted to the Ministry of Corporate Affairs Two sets of accounting standards Ind AS (converged with IFRS) Existing notified accounting standards (AS) Ind AS applicable for the preparation of consolidated financial statements (CFS) for financial years beginning on or after 1 April 2016 along with comparatives for years ended 31 March 2016 or thereafter for: a. Listed companies or companies which are in the process of listing on any stock exchange in India or outside India b. Companies not covered in (a) above, having net worth of INR5 billion or more c. Holding, subsidiary, joint venture or associate companies of companies covered under (a) or (b) above. 19
Proposed roadmap submitted to the Ministry of Corporate Affairs AS should be applied for preparing individual financial statements of companies preparing CFS and for classes of companies not specified Net worth - should be calculated as per the standalone audited balance sheet of the company as at 31 March 2014 Net worth should be equal to the paid up share capital plus reserves and surplus less revaluation reserve Option to voluntary adopt Ind AS is available which is irrevocable Companies should continue to follow Ind AS even if they subsequently do not meet the eligibility criteria Separate roadmap for banks, NBFCs and insurance companies will be issued. 20
Q&A 21
Topics discussed in AAU and First Notes Accounting and Auditing update Transportation and logistics industry - Freight on the move Pushdown accounting Income taxes Component accounting: Dry dock expenditure Accounting for structured equity transactions Factoring of receivables accounting and disclosures Regulatory updates First notes The Companies (Share Capital and Debentures) Rules, 2014 have been published in the Official Gazette effective from 1 April 2014. As compared to the final Rules released by the Ministry of Corporate Affairs, the Gazetted Rule exempt certain class of companies and in case of other companies, reduce the percentage for creation of debenture redemption reserve. 22
Others Missed an issue of the Accounting and Auditing Update? Missed an issue of the First Notes? Coming up next? June 2014 New Issue of Accounting and Auditing Update First Notes Download from www.kpmg.com/in Download from www.kpmg.com/in 23
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