Issue 6: April 2019

Reporting InsightsIndia

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This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither Ernst & Young LLP nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.

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Ernst & Young Associates LLPEY | Assurance | Tax | Transactions | Advisory

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Foreword

EY India@EY_India EY EY Careers India ey_indiacareers

We continue to experience significant changes around different aspects of corporate governance, including accounting, reporting, taxation or even in the process of governance itself. In this edition, we have featured several topics which are of immediate relevance to you as you begin finalizing the financial statements for the year ended 31 March 2019.

Last year, during this time, the Ministry of Corporate Affairs (MCA) notified Ind AS 115 on revenue recognition. We have covered some of the challenges that companies are likely to face as they finalize the transition and manage the year-end-related disclosures. Additionally, we have discussed in detail the implications that these transitions are likely to have on the new standard Ind AS 116 on lease accounting, which in a way suggest including all the operating leases on to the balance sheet.

We also recently completed our global survey of senior finance professionals across the organization and sectors and one of the consistent messages that came as an outcome was increasing the impact of leveraging digital as well as the use of non-financial data by companies in relation to assessing and managing business and communicating the financial performance with different stakeholders. In relation to the non-financial data, we have shared our point of view regarding assessment of organization-wide culture, also known as trust analytics, and the role it may play in providing insights on gender-specific difference in perception, inclusive leadership and factors that limit or support inclusion.

In this edition, we have also featured an interview with Mr. Srinivas Phatak, Chief Financial Officer (CFO) of Hindustan Unilever Limited. Mr. Phatak has shared some of his priorities in relation to financial reporting and governance-related changes as well as how technology-related

changes will possibly shape the future of the finance function. He has also highlighted the ways in which digital can be embraced from the perspective of the finance function.

Additionally, we have also put together some of the key regulatory changes that were announced in the last three months along with some of the key developments under US GAAP. A significant number of IPOs by Indian companies have been seen on the SME platform and in this edition, we have shared our perspective on the same along with the steps companies need to take to list themselves successfully on the SME platform. Some of the changes, as mandated by SEBI as part of the Uday Kotak reforms, have come into effect from 1 April 2019 and we have discussed some of the important ones, that several companies may devote an immediate attention to ensure compliance.

We have also looked at the regulatory requirements of the GST audit and some of the key challenges around the same and how important these are for companies to engage with their auditors to plan this ahead of time to ensure compliance. Lastly, we have shared our opinion in relation to re-engineering the CFO finance function and the different steps companies take to improve the overall efficiency and effectiveness of their finance function.

We hope you will find our insights and perspectives useful. We look forward to your feedback and inputs to keep this magazine more relevant for you.

Sandip KhetanPartner and National LeaderFinancial Accounting Advisory Services (FAAS), EY Indiasandip.khetan@in.ey.com

Cont ents

Recent

updatesregulatory

Deepa Agarwal

Indian laws and regulations need to keep pace with the changing market dynamics to facilitate a business-friendly environment for corporates, investors and professionals in the country. Consequently, various regulators including Securities and Exchange Board of India (SEBI), Ministry of Corporate Affairs (MCA) and Institute of Chartered Accountants of India (ICAI) are relentlessly bringing in amendments to the existing regulations and are issuing clarifications which further enhance corporate governance, ease of doing business and better corporate compliance.

Introduction

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Scenario A: Where a company is the first-time adopter of Ind AS for the reporting period 2018-19

Scenario B: Where a company is not the first-time adopter of Ind AS

The MCA vide notification dated 20 September 2018 has notified the Companies (Indian Accounting Standards) Second Amendment Rules 2018 to amend Ind AS 20 Accounting for Government Grants. Ind AS 20 requires the measurement of the non-monetary government grants only at their fair value. The amendment provides for such non-monetary government grants to be recognized either at the fair value or at the nominal value. Thus, the companies will have the option of recording the non-monetary assets at nominal value without going through the exercise of determining the fair value. This amendment is effective for accounting periods commencing on or after 1 April 2018.

Accounting for government grants

ITFG noted that the general requirement in Ind AS 101 is that accounting policies followed in the opening Ind AS balance sheet and in reporting other periods included in first Ind AS financial statements should comply with all Ind ASs that are effective at the end of the first Ind AS reporting period. However, Ind AS 101 provides for certain mandatory exceptions and voluntary exemptions from retrospective application of some aspects/requirements of other Ind ASs. Ind AS 101 does not contain any mandatory exceptions or voluntary exemptions from retrospective application of Ind AS 20. Consequently, the company is required to apply the requirements of Ind AS 20, retrospectively at the date of transition to Ind ASs (and consequently in subsequent accounting periods).

The ITFG clarified the accounting under two scenarios:

As per the amendments, Ind AS 20 does not contain any specific transitional provisions. Accordingly, a company has to apply the change retrospectively, if it is permitted by Ind AS 8, and decides to voluntarily change its accounting policy (from a fair value to a nominal amount). A voluntary change in accounting policy by the company can be made only if the change results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on its financial position, financial performance or cash flows.

This clarification has cleared the doubts upon the applicability of the amendments of Ind AS 20 for companies who are first-time adopters of Ind AS and who are not the first-time adopters of Ind AS i.e. adopted Ind AS in any of the earlier years.

Ind AS Technical Facilitation Group (ITFG) of Ind AS Implementation Group has been constituted for providing clarifications on timely basis on various issues related to the applicability, and/or implementation of Ind AS, raised by preparers, users and other stakeholders. Recently, ITFG released Clarification Bulletin 17 and 18 on 19 December 2018 and 8 February 2019, respectively covering accounting clarifications on some of the key topics such as government grant, derivative financial liability on conversion of preference shares

into equity, accounting for investment property when following equity method under Ind AS 28, accounting for deferred tax asset on capital asset converted into stock in trade, classification of interest and penalties on delay in payment of taxes and related party transaction disclosures, interest free loan given to subsidiary by parent, retrospective restatement of business combination and accounting treatment of dividend distribution tax. Some of the key issues have been discussed in this section.

Ind AS Technical Facilitation Group (ITFG) Clarification Bulletin 17 and 18

Last quarter witnessed SEBI reforming the Capital Disclosure requirements, which became effective from 9 November 2018. Further, the valuation standards issued by ICAI for valuation reports have also become effective from 1 July 2018.

The current quarter has witnessed some important changes being made in the Companies Act, 2013, SEBI regulations

and other statutory requirements. With the increase in expectations of the various stakeholders, it is of a paramount importance that the companies gear up to adapt to these changes for enhanced transparency and consistency to financial reporting.

We are focused at bringing some of the important updates based on the changes made by regulators in the current quarter.

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ITFG has clarified that where a financial instrument is classified as financial liability in its entirety, the “dividend” thereon is in the nature of interest and is accordingly charged to profit or loss. Further, Guidance Note on Division II - Ind AS Schedule III to the Companies Act, 2013 issued by the ICAI has clarified as below:

“Dividend on preferences shares, whether redeemable or convertible, is of the nature of ‘interest expense’, only where there is no discretion of the issuer over the payment of such dividends. In such cases, the portion of dividend as determined by applying the effective interest method should be presented as ‘interest expense’ under ‘finance cost’. Accordingly, the corresponding DDT on such portion of non-discretionary dividends should also be presented in the Statement of Profit and Loss under ‘interest expense.’”

Considering Dividend Distribution Tax (DDT) as part of Effective Interest Rate (EIR)

This clarification will impact those companies who have not considered DDT as part of the EIR when classifying the preference shares as a liability in entirety.

Further, DDT should be charged to profit and loss, if the dividend itself is charged to profit or loss. Hence, where the preference shares are classified as a liability in their entirety and “dividend” thereon is therefore considered to be in the nature of interest, the related dividend distribution tax should be regarded as part of interest cost and should therefore form a part of EIR calculation.

There was a lack of clarity in terms of presentation of interest on an entity due to delay in payment of taxes to the local authority. ITFG clarified that the entity would need to evaluate whether the interest payable for delay in payment of taxes is compensatory in nature for time value of money or penal in

ITFG clarified that in case a subsidiary receives an interest free loan from its holding company and is under an obligation to repay the loan, then the loan represents a financial liability of the subsidiary. The excess of

Interest relating to expenses

Interest free loan given by holding company to its subsidiary

nature. This requires an exercise of judgment based on the evaluation of facts of the case. Based on such an evaluation, if it is concluded that in case the interest is compensatory in nature then it shall be included in finance cost and if it is penal in nature, then it shall be classified under “other expenses”.

loan amount over the fair value of the loan should be regarded as an equity infusion by the parent and should be credited directly to equity at initial recognition.

The accounting treatment of a transaction, as required under an order of a court or tribunal, overrides the accounting treatment that would otherwise be required to be followed in

respect of the transaction and it is mandatory for the company to follow the treatment as per the order of the court/tribunal.

In earlier ITFG Clarification Bulletin 9, in consolidated financial statements, a DTL was required to be created for the undistributed profits of the subsidiary expected to be distributed in the foreseeable future. However, the parent was allowed to recognize a DTA for

the income-tax set off only if it distributes the dividends to its own shareholders. However, ITFG 18 now clarifies that a DTA can be recognized earlier, if it is probable that the parent will distribute dividends and claim set-offs against its liability for payment of DDT.

Retrospective restatement of business combination wherein accounting treatment prescribed in a Court Scheme differs from the treatment prescribed in Ind ASs

Accounting for Dividend Distribution of Tax (DDT)

Scenario A: Business combination occurred on or after the date of transition by the entity to Ind ASs

Where the scheme approved by the relevant authority prescribes a treatment different from as the one required in Ind AS 103, the accounting for business combination would be prescribed in the scheme and would override the requirements of Ind AS.

Scenario B: Business combination occurred before the date of transition by the entity to Ind ASs

The ITFG clarified the accounting to be followed under two scenarios:

Where the scheme approved by the relevant authority prescribes a different treatment required by Ind AS 103, the issue whether the restatement of a business combination upon transition to Ind ASs is legally permissible requires a careful evaluation of the exact stipulations contained in the scheme. Every case requires a separate consideration of the issue of legal permissibility of restatement based on its specific facts. Where it is evaluated under law, scheme approved does not preclude restatement upon transition to Ind ASs, restatement is permissible subject to complying with conditions prescribed in Ind AS 101.

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The Ministry of Corporate Affairs (MCA) issued Companies (Acceptance of Deposits) Amendment Rules, 2019 vide notification dated 22 January 2019, effective from the date of their publication in the official gazette i.e., 22 January 2019.

Currently, every company (covered under Companies (Acceptance of Deposit) Rules), 2014 is required to file with the Registrar of Companies (RoC), a return of deposits comprising information contained therein as on March 31 of that year duly audited by the auditor of the company in Form DPT 3, on or before June 30 of every year along with the specified fees. The amendment rules have inserted an explanation to this rule which clarifies that Form DPT 3 should be used by every company, other than a government company for filing (a) a return of deposit; (b) particulars of a transaction not considered as deposit; or (c) both.

Further, every company (other than a government company) would need to file with an ROC, a one-time return in Form DPT 3 for receipt of money/loan by a company outstanding from 1 April 2014 to 22 January 2019 but it should not be considered as a deposit. Such a return is required to be filed till 22 April 2019 along with specified fees. This will be a tedious task for the companies as they will be required to collate the data beginning 1 April 2014 within a period of 90 days.

Certain other amendments relate to exclusion of amount received by a company from real estate investment trusts from the definition of deposits, changes to Form DPT 3 by adding new sections and some other additional disclosures.

Amendment to deposit norms – mandatory return for all amounts not considered as deposits

MCAThe Government of India constituted a committee to review the existing framework dealing with offences under the Companies Act, 2013 (2013 Act) and related matters. With the twin objectives of ease of doing

business and better corporate governance, based on the recommendations of the Committee, the Companies (Amendment) Ordinance, 2018, had been issued which came into effect from 2 November 2018.

Ministry of Law and Justice issues Companies (Amendment) Ordinance, 2018

The amendment has been categorized in the following categories:

• Central government to approve changes to financial year (instead of tribunal), alteration of articles pursuant to conversion of public companies into private companies.

• Additional disqualification for directors.

• Additional events included to remove a company’s name from Registrar of Companies.

• Revised timelines for registration of charge.

Changes in main provisions of the Companies Act, 2013

Changes in penal provisions

The MCA has once again considered the implementation issues faced by the companies and issued the above ordinance and various other amendments to remove the difficulties and enhance transparency and corporate governance.

• Non-compliance with provisions relating to issue of shares at discounts will lead to only a penalty, instead of imposition of fine, imprisonment or both.

• Furnishing false/incorrect information at the time of creating charge would be liable to action under Section 447 of the 2013 Act (i.e., fraud).

• Failure to file an annual return would result in a penalty instead of a fine or an imprisonment.

• New Section 454A for repeated defaults.

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Based on the recommendations made by the “Committee to review the offences under the Companies Act, 2013”, the MCA has noted that certain other amendments would be required to strengthen the corporate governance and enforcement framework. These proposed amendments have been formulated and issued for public comments/suggestions. The comment period was till 20 November 2018.

Among other things, these proposed amendments relate to:

• The company will need to take steps to identify significant beneficial owner and require the significant beneficial owner to comply with the provisions of Section 90.

• National Financial Reporting Authority shall perform its functions through various sub-divisions as may be prescribed.

• Corporate Social Responsibility (CSR) amount remaining unspent shall be transferred by the company within 30 days from the end of the financial year to a special account in any scheduled bank to be called the Unspent Corporate Social Responsibility Account, and such

MCA proposes amendments to the 2013 Act

an amount shall be spent by the company in pursuance of its Corporate Social Responsibility Policy within a period of three financial years from the date of such a transfer. The companies which have not completed the period of three financial years since their incorporation would be required to spend 2% of the average net profits for the period computed since its incorporation as per its CSR policy.

• Section 149 is proposed to be amended to provide that total pecuniary relationship with the company, its holding, subsidiary or associate companies, or their promoters or directors, shall not exceed 25% of the total income of such promoters or directors, of which, professional or any services rendered by him, other than such services, as may be prescribed, shall not account for more than 10% of the total income of such promoters or directors.

• An independent director can be removed by a company by passing special resolution at any time of his/her tenure.

• Additional powers to the central government to take actions in cases of frauds and mismanagement.

NBFC Ind AS Schedule III notified and amendments to Schedule III to Companies Act 2013

The MCA vide its notification dated 11 October 2018, has notified Ind AS Schedule III applicable to NBFCs as defined in the Companies (Indian Accounting Standards) (Amendment) Rules, 2016. This Schedule III will apply to NBFCs covered under Ind AS applicability.

Additionally, the MCA has also amended the existing Division I (Indian GAAP) and Division II (Ind AS) Schedule III. Among other changes, Ind AS Schedule III changes require companies preparing Ind AS financial statements to

give additional disclosures relating to trade receivables, i.e., revised sub-classification (based on Expected Credit Loss model under Ind AS 109, Financial Instruments)

• Considered goods - secured

• Considered goods - unsecured

• Receivables which have significant increase in credit risk, and

• Receivables - credit impaired

Further, specified disclosures added to comply with the disclosure requirements under the Micro, Small and Medium Enterprises Development Act, 2006 and other changes made were clarificatory in nature.

The amendments are applicable to all financial statements authorized for issue on or after 11 October 2018, irrespective of the period to which these financial statements pertain. The companies will also need to re-group/reclassify their comparative information in accordance with the new requirements.

Further, SEBI has clarified the applicability for the amended Schedule III formats for presentation of financial results:

National Financial Reporting Authority Rules 2018

With the aim of the central government to set up a separate and independent regulatory body to assist in the framing and enforcement of legislation relating to accounting and auditing and improving investor and public confidence in the financial reporting of an entity, National Financial Reporting Authority (NFRA) has been constituted under the provisions of Section 132 of the Companies Act, 2013 with effect from 1 October 2018 for establishing and enforcing the auditing and accounting standards and to oversee the work of the auditors and audit firms. Recently on 13 November 2018, the MCA has notified the NFRA rules, 2018.

NFRA has the power to investigate and also conduct quality reviews for the following prescribed class of companies. The entities covered by rules are:

• Companies whose securities are listed on any stock exchange in India or outside India

• Unlisted public companies having paid-up share capital of not less than INR500 crores or annual turnover of not less than INR1,000 crores or in aggregate, outstanding loans, debentures and deposits of not less than INR500 crores as on

the March 31 of immediately preceding financial year

• Insurance, banking, electricity companies or companies governed by any special Act or those bodies corporates referred to it by the central government

• Any other class of companies or body corporates specified by Central Government in public interest to NFRA

• Any corporate which is incorporated or registered outside India, if it is a subsidiary or associate of any company of any specified entity (as referred above), if the income or net worth of such a subsidiary/associate company exceeds 20% of consolidated income or consolidated net worth of such specified entity.

A company or body corporate shall continue to be governed by NFRA for a period of three years after it ceases to be covered in limits specified above.

Among other matters, the NFRA has the following responsibilities:

• Make recommendations on the foundation and laying down of accounting and auditing policies and standards;

• Listed entities are advised to follow the existing formats till the quarter ending 31 December 2018. However, entities, desiring to submit financial statements as per the new format prescribed by the MCA, may have the option to present results in the new format in addition to existing formats prescribed under the Companies Act, 2013.

• Entities will follow amended formats, new Schedule III of Companies Act, 2013, for annual financial statement/quarter ending on or after 31 March 2019.

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SEBISEBI issues amendments to provisions relating to reclassification of promoters

With the increase in spate of economic offenders who have absconded from the country, the Parliament passed the “Fugitive Economic Offenders Act, 2018” in July 2018. This will help banks and financial institutions in expediting the recovery proceedings against these offenders. The act will empower enforcement agencies to confiscate assets of economic absconders till the time they submit to the jurisdiction of law in India. With the amount involved in such economic offences running into billions, the regulators realized that it is high time to strengthen the laws of the country for increasing investors’ confidence and transparency.

SEBI in its drive for better corporate governance has amended the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (referred to as Listing Regulations) on 16 November 2018 for

revision of provisions pertaining to re-classification of shareholders and bring greater clarity in the Listing Regulations. The definition of “fugitive economic offender” has been included in the amended regulations to mean an individual who is declared a fugitive economic offender under Section 12 of the Fugitive Economic Offenders Act, 2018 (17 of 2018).

Currently, Regulation 31A of SEBI Listing Regulations permits reclassification of promoters of listed entities as public shareholders in different scenarios, subject to specified conditions. The reclassification scenarios, inter alia, include (a) when a promoter is replaced by a new promoter or (b) where a company ceases to have any promoters (i.e., becomes professionally managed).

• Monitor and enforce the compliance of the accounting standards and auditing standards;

• Oversee the quality of service of the professionals (such as auditors, CFOs, etc.) and suggest measures required for improvement in the quality of service;

• Power to investigate and disciplinary proceedings

Further NFRA may upon review of the financial statements of a company, may direct such a company in writing for further information or explanation or any other

relevant documents relating to such a company or body corporate. Further, the authority may require the personal presence of the officers of the company for seeking any additional information/explanation in connection with review of the financial statements.

The rules are effective from 14 November 2018. The new independent regulator has been entrusted with independent powers and ample responsibilities. Considering the wide powers, the NFRA will act as the single source for regulating all the auditors and for ensuring better and stricter reporting compliance.

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Compliant listed entity: eligibility basis compliance with:

• Minimum public shareholding requirement

• Shares have not been suspended from trading

• No outstanding dues to SEBI, the stock exchanges or the depositories

Disclosure of material events: disclosure of the following events as material events not later than 24 hours from the occurrence of such an event.

• Receipt of a request for reclassification from the promoter by the listed entity.

• Minutes of the board meeting considering such a request and views of the Board of Directors on such request.

• Submission of reclassification application to stock exchanges.

• Decision of the stock exchanges on such an application as communicated to the listed entity.

Transfer of shares by way of transmission/succession/inheritance/gift: SEBI provides the following clarifications in this context:

• Recipient to be classified as promoter immediately on such transfer.

• In case the recipient (currently classified as a promoter) subsequently proposes to seek reclassification of status as a public shareholder, it could do so, subject to compliance with the conditions specified above.

• In case of death of a promoter, such a person would automatically cease to be included as a promoter subsequent to transmission of shares to a recipient.

Further, in order to strengthen disclosures relating to safety of women at corporate sector workplaces, amendments to Schedule V of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 have been approved to insert the disclosure requirement with respect to complaints under the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 in the corporate governance report as part of annual reports of listed entities.

SEBI noted many instances of non-submission/delayed submission of financial results by many listed entities within the stipulated timelines. While the fact of delay was intimated by these companies in default but the reason for such delay was not disclosed. While, there were standard operating procedures in place which provided for penalty, freezing of promoter shareholding and suspension of trading, a need was felt for disclosure of such delay by such listed entities to the investors at large which may impact their investment decisions in the future.

Hence, in the interest of the investors, the SEBI vide circular dated 19 November 2018 requires disclosure of reasons for delay in

Disclosure of reasons for delay in submission of financial results by listed entities

submission of financial results by listed entities within the following timelines:

• If a listed entity does not submit financial results within timelines specified in regulation 33 of listing regulations, then it is required to disclose detailed reasons for such delay to the stock exchanges within one working day of due date of submission of results.

• If a listed entity has taken a decision to delay the results prior to the due date, then it is required to disclose detailed reasons for such delay to the stock exchanges within one working day of due date of such decision.

The circular comes into force from 19 November 2018.

Process to be followed for reclassification:

• Uniform process to be followed for reclassification under different scenarios.

• Application for reclassification with rationale for such request to be filed within 30 days from receiving the approval from the shareholders in general meeting.

Conditions to be satisfied to seek reclassification: the new amendments provide that the promoters (seeking reclassification), and the persons related to the promoters should not:

• Hold more than 10% of the total voting power.

• Exercise control over the affairs of the listed entity (directly or indirectly).

• Act as a Key Managerial Personnel.

• Be a wilful defaulter as per RBI guidelines.

• Be a fugitive economic offender.

• Be represented on the board of directors (including not having a nominee director) of the listed entity.

• Have any special rights with respect to the listed entity through formal or informal arrangements including through any shareholders’ agreements.

Basis recommendations of Kotak Committee on Corporate Governance, SEBI decided to revamp existing provisions; the key amendments in the regulations are as follows:

Format for publishing financial results and disclosure of significant beneficial ownership in the shareholding pattern

The MCA vide its notification dated 14 June 2018, notified the Companies (Significant Beneficial Owners) Rules, 2018 under which various requirements pertaining to disclosures regarding “significant beneficial owners” have been specified.

SEBI had earlier vide its circular No. CIR/CFD/CMD/13/2015 dated 30 November 2015, prescribed a format for disclosure of holding

of specified securities and shareholding pattern. In the interest of transparency to the investors in the securities market, SEBI vide its circular dated 7 December 2018, has modified the format for disclosure of significant beneficial owners of specified securities for all listed entities.

This circular will come into force with effect from the quarter ended 31 March 2019.

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International Accounting Standards Board (IASB) issued amendments to IAS 1, Presentation of Financial Statements and IAS 8, Accounting Policies, Changes in Accounting Estimates and revised the definition of the term “material” for better understanding of the preparers of financial statements. The new definition has been aligned with IFRS Standards and the Conceptual Framework.

The revised definition of material included in IAS 1 and IAS 8 is outlined below:

“Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.”

The amendments provide definition and explanatory paragraphs in one place. The concept of “obscuring” has been added to the definition, along with the existing references to “omitting” and “misstating”. Additionally, the IASB enhanced the threshold of “could influence” to “could reasonably be expected to influence”.

However, the IASB has removed the definition of material omissions or misstatements from IAS 8. The refined definition of material complements the guidance the IASB released last year outlining a four-step process for judging materiality. The revised definition has been made effective from 1 January 2020. However, early adoption is permitted.

IASB clarified definition of material

The guidance note is applicable to initial offer document and other related subsequent filings filed on or after 21 January 2019, however, earlier adoption is voluntary. The guidance should be considered for all filings in India.

The purpose of this guidance note is to provide guidance on compliance with the provisions of the Companies Act, 2013, and the SEBI, (Issue of Capital and Disclosure Requirements) Regulations, 2018, relating to the reports required to be issued in prospectus issued by the companies for the offerings made in India.

ICAI issued its first edition of “Technical Guide on the functioning of Audit Committee and its Review Checklist”. This guide aims to provide a comprehensive guidance on the duties and role of audit committees to ensure their effectiveness. Additionally, the guide contains FAQs and a specimen checklist for performance evaluation of an audit committee.

ICAI issued “Technical Guide on the functioning of Audit Committee and its Review checklist”

ICAIICAI issues “Guidance Note on Reports in Company Prospectuses”

ICAI has issued a guidance note for providing guidance to the practitioners in reporting requirements that are required in relation to financial information to be included in the prospectus in case of initial public offering (IPO) and other types of filings for the issue of securities (equity shares, debentures, notes, etc.) such as letter of offer (in case of right issue), placement document (in case of qualified institutions placements i.e., QIPs), etc. with the SEBI.

The plethora of amendments brought by SEBI and MCA are aimed at simplifying, streamlining and bringing greater clarity to the existing regulations. The amendments will provide a mechanism to the companies in increasing long‐term value and at the same time, protecting shareholders’ interest by applying proper care, skills and diligence to business decisions. We believe that the ever-changing regulations have important consequences for economic efficiency and the investors. It will enhance transparency and accountability of the corporates and increase investors’ confidence which will pave the way for foreign investments and growth.

Conclusion

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Amit Jain

The SEBI formed a committee on corporate governance in June 2017 under the chairmanship of Mr. Uday Kotak with a view to enhance the standards of corporate governance of listed entities in India. The committee submitted its report on 5 October 2017 and on 9 May 2018, SEBI released amended regulations in order to adopt and give effect to several recommendations that were proposed in the given report.

The current corporate governance practices of the Indian listed corporate entities, where a sizeable number of such entities are still promoter-led, are on the verge of evolution with these Corporate Governance Amendments. To adjust to new governance requirements as well as overcome any implementation challenges, SEBI has provided a phased timeline from 1 October 2018 to 1 April 2020 for most of the amendments.

reforms - Uday Kotak

Immediate steps

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A summary of key reforms is below:

Minimum number of directors on board

Maximum number of directorship

• The amendments propose to increase the minimum number of directors on the board to six as against three under the Companies Act. This will be in phased manner where it will come into effect from 1 April 2019 for top 1,000 listed entities and from 1 April 2020 for top 2,000 listed entities.

• ‐ The amendments restrict maximum directorships to eight listed entities and seven listed entities with effect from 1 April 2019 and 1 April 2020 respectively. Directorship as independent director is restricted to seven listed entities, except where a person who is serving as a whole-time director / managing director in any listed entity, shall serve as an independent director in not more than three listed entities.

• ‐ The count for the number of listed entities on which a person is a director / independent director shall be only those whose equity shares are listed on a stock exchange.

2 Independent woman director• ‐ The amendments require at least one

independent woman director on the board of the top 500 listed entities by 1 April 2019 and for the top 1000 listed entities by 1 April 2020.

• ‐ The top 500 and 1000 entities shall be determined on the basis of market capitalization, as at the end of the immediate previous financial year.

4 Definition and eligibility criteria of independent directors• ‐ The amendments extend the definition of

an “independent director” (ID) to exclude even those persons who are members of the “promoter group” of a listed entity. The definition would now exclude persons who are non-independent directors of another company on the board of which any non-independent director of the listed entity is an independent director. This amendment is effective from 1 October 2018.

• ‐ The amendments have modified the criteria for evaluation of IDs by the board by specifically requiring an evaluation of:a. Performance of the directorsb. Fulfilment of the independence

criteria as specified in the SEBI (LODR) Regulations and their independence from the management

Corporate governance related mattersA 6

7

Formation of new committees

Enhanced monitoring of group entities

• ‐ The amendments widen the role of the committees and address the fundamentals such as balanced representation in board committees and a quorum for each such committee. The responsibilities of Risk Management and Stakeholders Relationship Committee have also been broadened to enable more effective board governance and high-quality investor services respectively.

• ‐ The amendments require companies to have an effective governance program in place for its subsidiaries. Amendments have widened the ambit of the definition of material subsidiary. Further, board of a listed entity is required to have under its purview all significant transactions and arrangements entered into it by all its unlisted subsidiaries. To build an effective oversight role, companies will now need to appoint at least one independent director on the board of unlisted material subsidiary including foreign subsidiaries from the year beginning 1 April 2019.

5 Quorum of board meeting• ‐ The quorum for every meeting of the

board of directors of the listed entity to be one-third of its total strength or three directors, whichever is higher, including at least one independent director.

• ‐ The above amendment for top 1,000 listed entities shall come into effect from 1 April 2019 and for top 2,000 listed entities shall come into effect from 1 April 2020.

• In addition to above, the amendments introduce a new requirement for independent directors to submit a declaration stating that they meet the criteria of independence as specified in the amended definition of an “independent director”, followed with a confirmation that they are not aware of any circumstance or situation, which exists or may be reasonably anticipated, that could impair or impact their ability to discharge duties with objective independent judgements and without any external influence.

• Such declaration and confirmation needs to be given by every ID at the board meeting in which they first participate and thereafter, at the first board meeting held in every financial year or whenever there is any change in the circumstances affecting their independence status.

• The Amendments also cast an onus on the board of directors of the listed entity to assess the veracity of the declaration and confirmation given by ID before taking the same on record. Further, in the Corporate Governance Report, the board is required to state their confirmation that independent directors fulfill the conditions specified in SEBI (LODR) Regulations and are independent of the management. This amendment is effective from 1 April 2019.

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2 Last quarter financial result• ‐ The amendments relax the

requirement of getting the financial results of the last quarter audited before submission and allows limited review of financial results of the last quarter when the listed entity submits them along with the results for the entire financial year. This amendment is effective from 1 April 2019.

8 Disclosure of key financial indicators• ‐ The amendments introduce a

requirement for all the listed entities to disclose in the Management Disclosure and Analysis section of the annual report:

• ‐ Details of significant changes (i.e., change of 25% or more as compared to the immediately previous financial year) in the key financial ratios, along with detailed explanations therefor including: i. Debtors turnover ii. Inventory turnover iii. Interest coverage ratio iv. Current ratio v. Debt equity ratio vi. Operating profit margin (%) vii. Net profit margin (%) or sector-specific equivalent ratios, as applicable.

• ‐ Details of any change in Return on Net Worth as compared to the immediately previous financial year along with a detailed explanation thereof.

• ‐ This will strengthen the focus around a mix of qualitative and quantitative analysis to be provided by the management with respect to the company’s business and financial performance resulting into an informed decision-making by investors and an onus on the management to appropriately explain any variance in the disclosed financial indicators.

• ‐ This amendment is effective from 1 October 2018.

1 Consolidated financial statement in every quarter• ‐ The amendments remove the option

given in every financial year to the listed entity to opt for submission of consolidated financial results on a quarterly / year-to-date basis and rather, make it mandatory to submit consolidated financial results on a quarterly / year-to-date basis. This amendment is effective from 1 April 2019.

B Accounting related matters

3 Disclosure of adjustment made in last quarter• ‐ The amendments require the listed

entity to disclose, by way of a note, aggregate effect of material adjustments made in the result of last quarter pertaining to earlier periods. This amendment is effective from 1 April 2019.

4 Half yearly cash flow statement• ‐ Listed entity shall submit as part of

its standalone and the half-yearly consolidated financial results, a note on the statement of cash flows for the half-year. This amendment is effective from 1 April 2019.

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1 Mandatory quantification of audit qualifications• ‐ The amendments mandate that in

cases where audit qualifications are not quantifiable, the management shall make an estimate which the auditor shall review and report accordingly with the exception being only for matters like going-concern or sub-judice matters.

3 Disclosuresa. Disclosure of credentials and audit fee

of auditors

• ‐ From the year beginning 1 April 2019, adequate disclosure of the skill set of the auditors as well as credentials highlighting professional competence and experience of the audit firms / auditors is now required to be made. This will enable shareholder to make informed decisions in appointing auditors.

b. Disclosure of reasons for resignation of auditors

• ‐ The amendments require, from the year beginning 1 April 2019, the listed entity to disclose to the stock exchanges as soon as possible but not later than 24 hours from the receipt from the auditors, detailed reasons for resignation of auditors.

2 Audit / Limited reviewa. Audit / Limited review of quarterly

consolidated financial results:

• ‐ Listed entity to ensure, for the purposes of quarterly consolidated financial results, that at least 80% of each of the consolidated revenue, assets and profits, respectively shall have been subject to audited or subjected to limited review.

b. Limited review of subsidiaries

• ‐ The statutory auditor of a listed entity needs to undertake a limited review of the audit of all the entities / companies whose accounts are to be consolidated with the listed entity as per AS 21 in accordance with guidelines issued by SEBI on this matter.

• ‐ SEBI needs to specify whether limited review, of the entities in the group, to be performed by the statutory auditor of the parent listed entity, would extend to even foreign subsidiaries. Also, the above amendment requires considering consolidation criteria as per AS 21 but the ICAI is to issue guidance on whether it is equally applicable if listed entities are following Ind AS. Further, the ICAI is to issue guidance on limited review of audit of all components considering that Standards on Auditing (SA) 600 Using the Work of Another Auditor, deals with the responsibility of principal auditor in relation to the use of work of other auditors.

C Auditing related matters

These amendments will pave the way for aligning with some of the best practices followed globally and bring in a renewed focus on improved corporate governance by way of better structure, more rigorous checks and balances and greater independence of all key gate-keepers including boards and auditors.

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SME IPOs – An emerging trend

Veenit Surana

However, the journey to get listed is not easy. SMEs face several challenges such as inadequate access to timely credit, inadequate marketing and branding, no streamlined corporate governance processes, etc. High interest rates on loans and high demands for returns or not being of optimal size for private equity or venture capitalists are some of the other problems faced by such companies.

The key benefits of listing have included greater visibility and access to capital, including favorable debt terms and broader investor base, providing an aide to employee retention, for e.g., by offering employee equity incentive plans and liquidity for shareholders.

There is a growing gradual interest from various investors towards this segment,

particularly attracted by the potential of earning high returns in an otherwise relatively stagnant growth accessible in other parts of the world. The BSE SME IPO Index has appreciated more than 1000% since its launch making it to one of the top indexes in the world for its performance and relative value creation. SMEs planning for a listing come from a rich mix of diverse sectors, including traditional as well as new-age technology. Investors are attracted to new concepts and emerging innovation in a business. Some of the recognized large institutional investors have set-up dedicated funds specifically dedicated to tap into the growth opportunity offered by this segment whilst having the appetite for taking risks.

In recent years, there has been a landscape shift in terms of how small and medium enterprises (SMEs) have approached capital raising in the form of an initial public offering (IPO). Since 2012, more than 280 companies have listed on the BSE SME and more than 160 companies have listed on the NSE Emerge platform. This is particularly spectacular given more than 70% of these companies have listed over the last two years. This volume of companies is only forecast to significantly increase over the coming years.

1 https://www.bsesme.com/static/about/smebrochures.aspx

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Given the relatively longer investment holding period for an SME IPO investor, the valuations offered can be attractive. The company must be listed for a minimum period of two years before migrating from the SME platforms to the main board. On migration to the main board, the company will have to comply with the applicable regulations of SEBI LODR (Listing Obligations and Disclosure Requirements) Regulations 2015. In addition, complying with corporate governance requirements applicable to main board companies is a high hurdle. On average, about 20% of the companies listed on the BSE SME platform have migrated to the main board. Given the relatively nascent history of these platforms (less than 10 years old), this trend depicts potential to make a difference to the SME companies providing them with equity capital at an important juncture in the journey.

The growing popularity of SME platforms, providing visibility, is likely to enhance the ability of these companies to not just access equity capital but also explore other avenues such as acquisitions, partnership with other stakeholders and enable comparison with larger main board companies enabling them to distinguish themselves.

While IPO activities have significantly dropped over the last quarter of 2018, the outlook for 2019 and beyond has a strong promise, with an ever-increasing entrepreneurial mindset combined with desire to innovate and establish future distinctive growth businesses is paving the way for a new India, where SMEs play an even greater role.

Broadly, in terms of eligibility requirements for an IPO, SMEs need to have a positive net-worth, track record of at least three years, positive cash accruals from operations for at least two years and post-issue paid up capital (face value) of less than INR25 crores. SME IPOs need to be 100% underwritten. Among other rules, companies must also comply with the SEBI Issue of Capital and Disclosure Regulations and the offer document must contain information material pertaining to the company, such as business, risks involved, industry, objects of the offering, management, financial information, litigation and other related information. Merchant bankers are responsible for ensuring market making for a period of three years from IPO.

High growth plans of SME companies have drawn institutional investors and high net-worth individuals to invest in this segment. However, it has been generally argued that limited liquidity (trading volume) influenced by IPO application “trading lot” size of INR1 lakh and having the necessary infrastructure in place to face the rigors of a publicly-listed company has acted as deterrents. The management or promoter mindset is another critical area that drives the success of some of these companies.

With increasing regulatory requirements, companies have sought to work on their preparation for an IPO by engaging early with various stakeholders and enhance its readiness for a successful listing. This advanced preparation has helped companies navigate through the listing process and gain more credibility from the investor community.

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Chaitanya Kalia

In a resource constraint and unequal world, companies need to develop an understanding of how they create value for their stakeholders and society at large, to be able to develop a transparent strategy that will enable them to retain their license to operate. Financial statements partially capture the value creation of a company as they report mostly financial and manufactured capitals. Long-term value

sets a company apart from its competitive peers as it takes cognizance of the long-term vision of the workforce dynamics, transparency in reporting of intangibles, and the importance of viewing issues through a cultural lens. This is essential for the enhancement of governance structures, mitigation of risks due to cultural stress and for leveraging cultural insights to deliver a sustainable long-term performance.

Culture assessment of organizations for long-term value creation

It is evident that people are at the heart of long-term value creation. To create a workforce of the future, it is essential to understand changing regulatory and policy climate and develop a strategy to manage cultural differences that may arise as a result of socio-political uncertainties. Companies have prioritized what was earlier considered “softer focus areas”, such as operating in a conscientious manner and attuning to cultural and social values at par with most business functions. Organizational governance structures have been evolving,

laying utmost emphasis on egalitarian principles of diversity and inclusion (D&I) in the workforce. D&I has transitioned from being an affirmative step for the increased representation of minority groups in the workforce to a driver of improved business performance. According to EY’s study on D&I, the increase in D&I has led to a significant improvement in team collaboration, increased retention, improved market share and higher success rates in new markets.

Source: EY Study on Culture, Diversity & Inclusion

People

The National Equality Standard

Enhanced reporting, legal and governance

Long-term value

Workforce of the future

Culture, behaviors and risk

Trust and reputation

Trustanalytics

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Source: EY Study on Culture, Diversity & Inclusion

External organizations across industries that rate D&I highly have reported the following results:

+57%better

Team collaboration

+45%More likely

Improve market share

+19%greater

Retention

+19%greater

Success in new markets

A healthy corporate culture is a valuable asset, a source of competitive advantage and is vital to the creation and protection of long-term value

Most business success factors can be replicated, but a true marker of a company’s values and norms is its “work culture”. A progressive organizational culture can differentiate a company from its competitors for investors and stakeholders.

Such a culture can improve business performance as it aligns the actions and aspirations of the workforce with specific goals and targets that not only benefits the company, but the society at large.

Source: EY Study on Culture, Diversity and Inclusion

Board members

Evidence that a healthy culture improves performance and reduces risk

Requiring companies to monitor culture in the wake of corporate scandals

Demanding significantly improved reporting on human capital, intangible asstes and long-term value

Digital disruption and economic uncertainty affects workforce behaviors

Regulators

Investors Workforce

The business case for culture

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The NES is a holistic standard developed and sponsored by EY to incorporate all aspects of D&I into one single national standard, addressing all D&I considerations. The NES was collectively developed and tested by an external board through combining insight and research from 20 public and private sector organizations. The NES involves a robust process that examines an organization’s D&I policies and their application to successfully change D&I outcomes. If the diversity requirements have been satisfied in accordance to the standard, a national certification would be awarded to the organization. EY as a partner to NES has a unique insight from

its breadth of client experience. Over 100 public and private sector organizations have undergone the NES in the UK.

India has a diverse culture that permeates into the work setting. As a result, Indian workforce is in need of workplaces that speak to their cultural ethos. Values and norms of a company are integral factors to the participation of people in the workforce, and the workplace must address the uniqueness of the cultural landscape and celebrate cultural differences. Given the importance assigned to work culture, the NES can be adopted to assess and recommend D&I frameworks to private organizations in India.

UK National Equality Standard (NES)

The organization culture assessment process, also known as trust analytics involves meeting with stakeholders, desk reviewing documents, followed by conducting a survey to gain an insight on gender-specific difference in perception, inclusive leadership and factors that limit or support inclusion. The process is participatory and involves regular interactions with stakeholders to validate evidence collected through interviews and focus group discussions.

The report is designed to create change and drive action and impact across the company as it recommends strategies and action plans to improve stakeholder engagement data collection. The outcomes of the report drive a long-term value as it feeds into the strategic planning of the organizations by identifying the areas of diversity or key initiatives to focus on, accelerates improvement by benchmarking performance against global practices and demonstrates credible commitment to D&I through its participatory approach.

Organization culture – assessment process

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With the evolving reporting guidelines, it is recommended for organizations to track and monitor their D&I-specific intangible outcomes as it enhances brand loyalty and trust amongst stakeholders. An assurance of the same provides the management the confidence in accuracy and completeness of the reported information. Further, organizations should develop strategies to strengthen their internal systems and controls for collecting such information. EY in collaboration with NES UK and other partner organizations will be instrumental in guiding companies to re-evaluate and re-imagine their initiatives to be accurate, goal oriented and effective in ensuring a diverse and inclusive workplace for all.

Demonstrating a credible commitment to D&IAccelerating improvementStrategic planning

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The objective of financial reporting is to help investors and other stakeholders understand the financial performance for the period and the updated financial position of the company. Hindustan Unilever Limited has always taken pride in staying ahead of the curve to give a comprehensive overview of our performance to all our stakeholders beyond the financial metrics. We had voluntarily started on the journey of integrated reporting for the year ended 31 March 2018. The key priority for this year is to build on these strong foundations of integrated reporting.

Chief Financial Officer (CFO), Hindustan Unilever Limited

Which are the key priorities from financial reporting perspective for the upcoming year end?

In conversation with

SrinivasPhatak

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The Indian Accounting Standards have been evolving over the years and progressively aligning with IFRS. Being a global corporation also means that we comply with these changes ahead of their requirement in India from an IFRS perspective.

We leverage the expertise available globally in the Unilever world and in the industry to navigate such changes. The first step is to start with a detailed internal impact assessment and adapting our internal processes and systems using best in class integrated technology solutions to ensure that compliance is not seen as a burden but embedded in our ways of working.

Often these standards make compliance mandatory, but not communication. Most stakeholders are unable to appreciate the impact and implications of such changes clouding their judgement about the company’s underlying performance. We have always been transparent in communicating the impact of major changes affecting the financial statements. For e.g., HUL, in its investor calls and communication, proactively explained the impact of IndAS and GST to ease comparability of financials with prior periods. It is imperative that such communication be kept simple and explain the impact of the change in a language the stakeholders understand, using both GAAP and non-GAAP measures.

The new revenue recognition standard has already become effective and the leasing standard is expected to be effective from next year. What strategy you follow to: (a) manage these accounting changes, and (b) communicate with investors/analysts?

Change is the only constant thing in this world and the regulatory and business environment is no exception. It is critical for organizations to embrace this change and adapt themselves to the changing environment. Some of the best practices that have held us in good stead are:

• Plan ahead of the change: There can beno substitute to good planning and onewould rather sweat in peace than bleedin war

• End-to-end business solutions:Look at solutions from an end-to-end

business value chain perspective and not functional silos. The whole is greater than the sum of its part

• Leverage technology: Constantlyre-imagine and re-invent traditionalprocesses to deal with the changingenvironment – disrupt yourself ratherthan being disrupted

• External engagement: Work withthe regulators and change makerspro-actively and learn from eachother – being proactive is always moreproductive

Regulatory landscape has undergone significant changes – for e.g., GST, IBC, Companies Act, etc. What are some of the best practices you will recommend companies to manage these changes?

Integrated reporting provides the framework for the comprehensive reporting of strategy and performance of the business clearly highlighting the strategic levers that add value to all the stakeholders in the short, medium and long term.

By focusing on the six capitals employed in the business, the framework provides a structured approach for companies to think holistically and articulate its strategy and plans and the impact that it has, measured

in a tangible manner. I strongly believe this is a great opportunity for companies to redefine the way it engages with its stakeholders.

The integrated reporting framework enables an investor to make more informed investment choices by clearly bringing out the key risks and opportunities for the business. It also helps to build overall confidence on the management of the business.

The purpose of financial reporting is to provide stakeholders a good understanding of the company’s performance. The enabling regulations, be it the Companies Act or SEBI guidelines provides a framework for companies to communicate their performance by prescribing certain minimum mandatory standards.

In our communications, we use a blend of various metrics such as non-GAAP measures, long term performance trends and sustainability impact to better communicate our performance. For example:

• We report the underlying volumegrowth and price growth, which are notmandated by GAAP. We believe thiswould help our stakeholders appreciatethe quality of our growth

• We also publish a 10-year trend of keymetrics to enable an assessment of howconsistent the performance has been

• Linking the performance to strategyand other non-financial objectives, we also highlight sustainability metricswhich help stakeholders understand theenvironmental and social impact

SEBI has mandated the requirement of submission of Business Responsibility Report (BRR) for top 500 listed entities. It has now recommended such companies to adopt integrated reporting on voluntary basis. Can you share your views on whether integrated reporting will enhance decision making for investors and what benefits it will accrue for companies?

What are some of the best practices you will recommend companies to adopt in communication of their financial performance to key stakeholders like investors, analysts – for e.g., use of non-GAAP measures to explain performance of the company?

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“Digital” is one of the key priorities for most of the companies. Can you share your thoughts on key areas which they should embed in their strategy for digitization of the finance function?

The effectiveness of the finance function of the future lies in the ability of the finance teams to re-imagine finance roles and processes for a digital world and harnessing the power of technology in a transformative way. This combined

with traditional finance strongholds of understanding and partnering value could act as force multiplier for the function and the organization and could unleash the next wave of value creation for the organization.

What are your thoughts on how emerging technologies like Blockchain, Artificial Intelligence, Robotics Process Automation can help improving finance function effectiveness?

CFOs have dual responsibilities

• Drive and support digital transformationof the customer journey and hencebroader digital transformation in thebusiness. Bring the outside in, championthe digital agenda along with the CEOand adequately / appropriately fund thedigital experiments

• Transform the finance function to partner for value, i.e., unlock growthand margin potential across the valuechain (effective partnering). This meansconnecting various data sets usinganalytics and information and makingthe journey from hindsight to insight toforesight. One can also call it the journeyfrom insight to intervention

In many cases CFOs are still trying to come to grasp with the change (i.e., what is digital transformation) while some are focused on driving efficiencies in finance and reducing finance costs. This unfortunately means that only a few are driving the required end-to-end business digital transformation and partnering for value.

CFOs and the finance function need to partner for value while taking out transaction

costs. I am not covering the broader subject of business digital transformation here.

• First, understand how much of your core ERP can you leverage without making significant investments. There is a 15 % -25% upside here

• Define your “automation index” and this goes along with “elimination index”, i.e., how much can be stopped, done better and faster without manual intervention. Solutions include Robotics Process Automation and go up the value chain. Solutions with process changes give higher and better value

• Build a funnel of projects and then prioritize using size of price and ease of implementation. Digital projects need to have a short time to value criteria, i.e., secure returns within 12 months

• Information and analytics is perhaps the “multi bagger idea”. You can drive growth, take costs out, enhance controls and do much more. Think in terms of descriptive (what happened), diagnostic (why), predictive (what will happen) and prescriptive analysis (how can we make it happen) as a framework

As technology and digital disrupt the way we do our business, one big area companies should invest is in upskilling its human capital primarily in areas such as data science, analytics, intelligent automation and other skills which will help finance professionals stay relevant and effective in a digital world. The function of finance will morph from providing information to

providing insights. These insights could then lead to the right interventions, creating a large impact for the organization.

At the same time, it is important to continue honing our core functional skills like stewardship and control. We need to be brilliant at these basics which earns us the seat at the top table.

What are the key skills and capabilities companies should invest in to enhance the effectiveness of finance function?

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CFOs are uniquely placed to lead risk management for the organization and future proofing the business. As technology reinvents our business model, one can’t afford to miss the risks that come with this rapid change. As the lead for enterprise risk management, it is important to deal with the impact of technology and digitization on:

1. Change in consumer and customerbehaviors and their interaction withbrands

2. Technology obsolescence and shorteningbusiness cycles

3. Information security and re-skilling oftalent

All of them are critical risks for an organization to deal with on a war footing.

Lastly, in your view which are the top three risks which the CFO function should focus in the next three years?

The role of the CFO has evolved over the years and the pace of evolution is only set to accelerate with the rapid change in the environment in which we operate. Some of the critical roles the CFO would need to perform to steer the business into the future are:

1. Lead the organization agenda on valuecreation and generating fuel for growth

2. Build organization agility andresponsiveness by reinventing systemsand processes

3. Be an evangelist for change and builda culture of experimentation in theorganization. There is more value lost innot trying than failing

4. Dynamically allocate organizationalresources for needs of today and future.Gone are the days of annual planning

5. Lead the creation of new business modelsto be future fit

6. Uphold corporate governance andproactively manage risks of operating ina connected world

FMCG sector in India has witnessed significant dynamic changes with high volume growth, increased impact of e-commerce and increased mergers and acquisitions. How do you see the role of CFO changing in supporting the business strategy to manage responsible growth?

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How will regulators help you achieve your disruptive vision?ey.com/fsinsights #BetterQuestions

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Jigar Parikh and Sivasatya Ramakrishnan

Embracingsustainable applicationInd AS 115 for a

Preface

Despite getting notified in March, companies managed their transition to the new revenue standard well. However, it’s important to consider that the quarterly reporting requirements are significantly lower than the annual reporting requirements. Thus, so far, companies could manage with just complying with the accounting requirements, without laying too much emphasis on compliance, internal controls, tax impacts,

etc. However, with the year-end reporting being just around the corner, it is time for companies to take a stock of the current situation and change gears.

As a recap, we bring out the areas which impacted Indian corporates and the practical challenges they faced while implementing the new revenue standard in the past three quarters, along with the areas of focus for corporates, going forward.

The Ministry of Corporate Affairs (MCA) notified Ind AS 115 (corresponding to IFRS 15) on 28 March 2018, which came into effect from 1 April 2018. Ind AS 115 replaces Ind AS 11 - Construction Contracts and Ind AS 18 – Revenue (erstwhile Ind ASs). It is a single source of revenue guidance for entities across industries. The new standard is a significant change in approach, is principle-based and provides more application guidance than erstwhile Ind ASs.

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B Identification of performance obligation

A Evaluation of whether certain contracts are scoped in Ind AS 115Ind AS 115 does not consider non-monetary exchanges between entities in the same line of business as revenue-generating activities. Since Ind AS 115 does not provide elaborate guidance on “non-monetary exchanges” and “same line of businesses”, there was a diversity of interpretations by different companies.

Identification of performance obligations is another area which impacted companies and also resulted some of them to modify their accounting policies. For example, an engineering company identified various performance obligations like sale of product, sale of spares, commissioning, supervision and maintenance. Consequently, it also changed its accounting policy to recognizing revenue over a period of time. Also, an Indian multinational pharmaceutical company had to reverse the income recognized in earlier periods in relation to “out-licensing agreements” as it did not meet the separate performance obligation criteria.

Major challenges faced by companies on implementation of Ind AS 115

Ind AS 115 creates a single source of revenue requirements for all entities in all industries. The new revenue standard is a significant change from legacy revenue standard. It affects all entities that enter into contracts to provide goods or services to their customers, unless the contracts are in the scope of other Ind AS requirements, such as the leasing standard. To understand the real challenges faced by companies, we bring an insight into the practical experience of implementing Ind AS 115:

1 C Satisfaction of performance obligation Companies have majorly faced issues in the application of the third criterion wherein the agreement between the parties does not clarify the enforceable right to payment for performance completed to date. Further, the enforceability is a matter of law of the land, for example – The Sale of Goods Act, 1930, Indian Contract Act, 1872, legal precedents, etc. Significant judgment is required to conclude enforceability of payments in most of these cases. Companies from real estate sector have largely failed to satisfy the enforceability of right to payment condition to recognize revenue over a period of time, i.e., percentage of completion method (PoCM).

D Application of PoCMCompanies within the engineering, construction and technology sectors, where supply of bought-out items are a significant component of the overall contract, faced challenges in the application of PoCM. With respect to uninstalled material, i.e., when goods are delivered to a customer site, but the entity has not yet integrated the goods into the overall project (e.g., the materials are “uninstalled”), an entity is required to recognize revenue at an amount equal to the cost of the goods used to satisfy the performance obligation (i.e., a zero margin). Margin adjustment is required under Ind AS 115 only for significant bought-out items where the company is not involved in designing the product. Thus, companies were required to exercise critical judgement to decide what constitutes “significant bought-out items”.

Real estate companies following PoCM method of revenue recognition are also facing challenges in deciding on when to start recognizing revenue in the absence of bright lines that were provided by erstwhile “Guidance Note on Accounting for Real Estate Transactions (for entities to whom Ind AS is applicable)”.

E

F

Timing of revenue recognition

Expected credit loss (ECL) on unbilled receivables

Shift in the recognition criterion from “transfer of risks and rewards” to “transfer of control” required a detailed evaluation in many cases across sectors. For example:

a. Significant judgement was required to assess the point at which transfer of control of goods takes place in cases where terms of contract provide an unlimited right of return to their customers – for e.g., sales made by consumer product companies to their retail counterparts.

b. Sales made on cost-insurance-freight (CIF) basis: whether transfer of control happens when goods are loaded on to ship or when goods reach the ultimate destination.

c. Sale and repurchase agreement, i.e., sale of raw material to the contract manufacturer with back-to-back arrangements to purchase the finished goods. This is very common in pharma, steel and consumer-product industries. Many companies having contract manufacturing arrangements required a detailed assessment of whether an arrangement with contract manufacturer was on principal basis or was a job work contract.

The erstwhile revenue recognition standard did not specifically discuss about impairment of receivables arising from revenue contracts. Thus, there was diversity in practice. Some companies provided for impairment on unbilled receivables along with other financial assets. In contrast, Ind AS 115 requires an entity to assess a contract asset (including unbilled receivables) for impairment as per Ind AS 109 Financial Instruments using ECL method. This is a significant change in practice.

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A Completeness and accuracy of disclosuresInd AS 115 provides explicit presentation and disclosure requirements, which are more detailed than under Ind AS 18/Ind AS 11, thereby increasing the sheer volume of disclosures required to be provided. Many of the new requirements involve information that entities did not previously disclose such as quantitative and qualitative information about its contracts with customers, explanation of significant changes in contract assets and liabilities, amount of transaction price allocated to remaining performance obligations, etc. Also, entities operating in multiple segments with many different product lines may find it challenging to gather the data needed to be provided in the disclosures. Additionally, Ind AS 115 requires entities to present a reconciliation of the amount of revenue recognized in the statement of profit and loss with the contracted price, separately showing each of the adjustments made to the contract price, for example, on account of discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, etc. and specifying the nature and amount of each such adjustment separately.

In light of the expanded disclosure requirements and the potential need for new systems to capture the data needed for these disclosures, we believe that entities will need to ensure that they have the appropriate systems and checklists in place to collect and disclose the required information.

The key risks arising out of application of the new standard include the following:

Pre-requisites for a smooth journey ahead

Adoption of the new standard does not comprise of only accounting compliance alone. It affects a wider gamut of things, including processes, controls, disclosures, etc. We believe that even those entities that have not had significant changes in the measurement and timing of revenue recognition, will need to identify necessary changes to policies, procedures, internal controls and systems to ensure that revenue transactions are appropriately evaluated through the lens of the new model.`

2G Determination of transaction pricea. Variable consideration

Variability could be on account of discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, penalties, liquidated damages and incentives. In the erstwhile Ind AS 18 regime, companies accounted for penalties and liquidated damages as cost. In contrast, Ind AS 115 requires companies to estimate the amount of variable consideration and account for the same as reduction from revenue.

Further, the assessment of whether the entity has granted its customer a material right requires significant judgement and affects revenue to be recognized for satisfied performance obligation.

b. Significant financing component

Ind AS 18 does not require entities to discount the consideration when the customer pays in advance or in arrears. However, Ind AS 115 states that the consideration should be discounted since in substance, the entity has either effectively received financing (when consideration is received in advance) or provided financing (when consideration is received in arrears). However, Ind AS 115 also provides a practical expedient to not discount the consideration if the period between transfer of goods or services and the receipt of consideration is one year or less. Significant judgment is required by entities to decide whether or not the practical expedient of not discounting the consideration for the effects of significant financing component applies to the contracts entered into by the company.

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B

C

Revision to accounting policies, key estimates and judgements

Robust internal control mechanism

Ind AS 115 is a principle-based standard and provides guidance on a lot of areas which were not included in the erstwhile revenue recognition standard. Thus, companies may need to review and revise their accounting policies and procedures, delegation of authority matrices, maker-checker policies, etc. Detailed documentation of accounting conclusions arrived at, including the underlying key estimates and judgements, is critical. Companies also need to ensure that Board of Directors and audit committees have all the information they need to discharge their responsibilities. Modifications to the financial statement close process may also be required in order to accommodate the revised accounting requirements and increased reporting requirements. Consistent roll-out and application of these revised policies and procedures throughout the organization is key.

Companies may also consider identifying, developing and testing new data requirements, reconciliations and reports and how information technology systems and analytics could be used to facilitate the same.

The new five-step model of revenue recognition, may give rise to new financial reporting risks, including new or modified fraud risks, and the need for new processes and internal controls. Companies will therefore need to consider these new risks and how to change or modify internal controls to address the new risks. Management could establish data governance, policies and standards for identifying and resolving data gaps and implementing processes to verify the quality of information needed for application of the new standard. Robust internal control mechanisms will ensure utmost quality, compliance and completeness of the financial statements, including quantitative and qualitative disclosures.

D Key tax issuesThe central government in September 2016 had notified ICDS IV Revenue recognition to specifically deal with recognition of revenue from sale of goods and rendering of services. However, there still exist significant differences in recognition and measurement principles between ICDS and Ind AS. Some of the key differences are as follows:

a. Revenue is measured at transaction value under both, Ind AS and ICDS. However, deferred payment consideration is required to be discounted as per Ind AS, if material. ICDS does not require discounting, except in case of instalment sales. Thus, the top-line for companies could be different as per Ind AS and ICDS.

b. ICDS does not provide guidance with respect to multiple element contracts and barter arrangements. As a result there would be timing differences in the pattern of recognition of revenue as per accounting standards and as per tax requirements.

c. Ind AS permits usage of percentage of completion method or completed contract method, depending upon satisfaction of conditions prescribed. On the other hand, ICDS mandates only percentage of completion method. This could have a significant impact specifically on real estate companies using completed contract method.

d. In case of service concession arrangements, notional construction revenue is arguably not liable to tax (being income from self). Also, amortisation / depreciation for tax purposes will be net of notional construction profit. On the other hand, Minimum Alternate Tax (‘MAT’) will be driven by book treatment as per Ind AS

The above differences could significantly result in distinction between the company’s top line and profitability as per accounting standards and as per tax laws. It could also give rise to increase in deferred tax assets or liabilities. It is also pertinent to note that ICDS does not apply to the computation of “book profits” for the purpose of MAT.

Further, the tax auditor is required to certify that the computation of total income is made in accordance with ICDS. In order to facilitate tax audit, companies may consider preparing a reconciliation with profit and loss account and balance sheet to ensure that all adjustments required on account of ICDS have been considered. Alternatively, companies may need to maintain two separate books of accounts – one for accounting purposes and the other for tax purposes.

Based on the above discussion, it’s time for Indian companies to gear up for an all-embracing and sustainable adoption of

the new revenue standard. It should be a fine balancing act between having an eagle-eye view on the details as well as catering to the increasing needs of all stakeholders to deliver insights into comprehensive adoption of the new revenue standard. It is also important to keep in mind that it is not a one-time adoption exercise. In fact, consistent application of the accounting principles on a year-on-year basis is imperative. With timely decisive action across the organizations and developing the right mix of capabilities in their finance function, companies can wade through this new wave effectively.

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Manish Handa

Transitioning to the new leasing standard –

Ind AS 116 • ‐ With Ind AS 116 effective from April 2019, all entities will have to assess the impact on implementation.

• ‐ Lessees will have a single accounting model for all leases, with two exemptions (low value assets and short-term leases).

• ‐ Under Ind AS 116, assets held under operating leases and lease liabilities will generally be recognized in balance sheet on day one, subject to a few exceptions.

• ‐ Companies with operating leases will appear to be asset rich, but also more heavily indebted

• ‐ Lessor accounting substantially unchanged.

• ‐ Ind AS 116 may impact cost of borrowings of smaller borrowers by recognizing the erstwhile off-balance sheet lease liabilities.

• ‐ Potential impact on cost of borrowings may lead companies to reassess lease or buy decisions.

• ‐ Increased disclosure requirements.Ke

y ta

keaw

ays

The new leasing standard, Ind AS 116 Leases, has replaced the existing standard (Ind AS 17) from accounting periods beginning 1 April 2019. This standard is the Indian equivalent of the global standard IFRS 16, which has become effective for annual periods beginning on or after 1 January 2019.

The new standard is expected to bring about a substantial change in lease accounting for lessees by replacing existing dual finance vs operating lease model with a “single accounting model for all leases” which recognizes leases in the balance sheet on day one, in the form of a right-of-use asset and a lease liability.

Ind AS 116 is expected to affect commonly used financial ratios and performance metrics such as the gearing ratio, current ratio, asset turnover ratio, interest coverage ratio, earnings before interest, tax and depreciation, operating profit, net income, earning per share, return on capital employed, return on equity and operating cash flows. The change in such ratios may have a bearing on compliance of debt covenants.

We have surveyed annual reports of top 100 companies listed on the Bombay Stock Exchange along with certain additional sector-specific entities to gather an understanding of current leasing landscape and the likely impact of the new leasing standard. Following is a snapshot of the companies encompassed in the analysis:

For the purpose of analysis, we reviewed lease disclosure made as per Ind AS 17 and based on a set of rational assumptions, we have evaluated the potential impact of the new standard.

Company nature Number

BSE Top 100 Companies 100

Add: Additional sector specific companies

6

Less: Financial service sector companies not covered in phase I of Ind AS applicability

(25)

Less: Companies with a different year-end

(4)

Total 77

Survey of high market-cap companies

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To evaluate the sector-wise impact of the new standard, we performed a sector-wise comparison of percentage of present value of future lease payments to total assets and total liabilities.

* Source: EY Publication - Transitioning to new leasing standard – Ind AS 116 (November 2018)1

Basis the entities surveyed, the new standard is expected to have a significant impact on airlines, retail and telecom sector given that leasing costs are involved in their respective operating models.

Airline: Significant impact is expected as most airline companies finance aircrafts and other assets through operating lease models.

Retail and consumer: Initial direct costs might need to be included as part of right to use asset and leases with variable payments will be required to be re-measured at each date of change of contractual cash flows.

Telecom: Companies need to consider impact on unbundled network

arrangements and assess tower-sharing arrangements for lease and non-lease components.

Information technology: Arrangements for co-location hosting and cloud services need to be evaluated and as they usually contain multiple elements of hardware support along with personnel assistance.

Oil and gas: Companies need to consider the impact on unbundled network arrangements and assess

Survey results of present value of future lease payments*

Sector-wise potential impacts

1 https://www.ey.com/Publication/vwLUAssets/ey-transitioning-to-new-leasing-standard-ind-as-116/%24File/ey-transitioning-to-new-leasing-standard-ind-as-116.pdf

2 https://www.ey.com/Publication/vwLUAssets/ey-transitioning-to-new-leasing-standard-ind-as-116/%24File/ey-transitioning-to-new-leasing-standard-ind-as-116.pdf

* Source: EY Publication - Transitioning to new leasing standard – Ind AS 116 (November 2018)2

% of present value of future payments to total assets and total liabilities

0

10

20

30

40

50

60

Airlines

Retail

Teleco

m

Technology

Oil and g

asMed

ia

Logistic

s

Automobiles

Mining

Health

care

Consumer/

Industr

ial

Real e

state,

infra

and p

ower

% of total assets % of total liabilities

Based on the survey of lease disclosures, we analyzed potential impact of the new standard sector-wise:

SectorLease expense

DepreciationFinance Cost

EBITDA PPE LiabilityProfit/ Equity

Airlines (5,482) 4,322 1,742 5,482 11,516 12,097 (582)

Retail (1,425) 1,040 601 1,425 4,426 4,643 (216)

Telecom (7,414) 5,325 3,279 7,414 24,481 25,671 (1,190)

Technology (2,576) 1,923 1,010 2,576 7,254 7,611 (357)

Oil and gas (16,363) 13,372 4,161 16,363 24,455 25,626 (1,170)

Media and entertainment

(126) 108 24 126 107 113 (6)

Transportation and logistics

(50) 38 19 50 133 140 (7)

Automobiles and transportation

(1,163) 850 486 1,163 3,568 3,741 (173)

Mining and minerals

(1,033) 753 437 1,033 3,221 3,378 (157)

Healthcare, pharmaceuticals and chemicals

(357) 277 121 357 819 860 (41)

Consumer/Industrial products

(398) 313 127 398 842 883 (42)

Real Estate, infrastructure, power and utilities

(267) 193 111 267 815 853 (37)

Total (36,654) 28,514 12,118 36,654 81,637 85,616 (3,978)

Potential impacts on financial statements

whether an arrangement is a lease or a service contract as existing accounting for operating leases and service contracts is similar.

Transportation: Wet lease arrangements to be allocated in lease and non-lease components.

Power: Companies to reassess agreements for substitutions rights and lease and non-lease components.

Engineering and construction: Companies need to assess components of arrangements for lease and non-lease components.

Mining and minerals: Companies need to assess leases taken for exploration and evaluation under the new standard.

Healthcare and pharmaceuticals: Companies need to evaluate leases taken for medical equipment under the new standard.

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Asset and debt: Companies with operating leases will appear to be asset rich, but also appear to be more heavily indebted as a result of recognition of right of use asset and corresponding lease liability.

Earnings before interest, tax, depreciation and amortization (EBITDA): EBITDA is expected to increase on account of de-recognition of operating lease expenses. These expenses now take the form of depreciation and interest expense, which improves EBITDA.

Profit/equity: The aggregate of interest expense and depreciation will generally result in higher total periodic expense in the earlier periods of lease. However, over the period of lease there will not be any impact on the profitability.

Cash-flow statement: Favorable impact on cash flow from operations is expected as a result of de-recognition of lease expense.

Interest coverage ratio: Earnings before interest and tax (EBIT) as well as interest expense is expected to increase.

Debt equity ratio: Financial liabilities are expected to increase and equity is expected to decrease.

EBIDTA to sales ratio: EBIDTA to sales ratio is expected to increase as EBITDA will increase whereas there will be no impact on revenue.

The magnitude of change of the above ratios will depend on characteristics of lease portfolio.

Potential impacts on financial ratios

• ‐ The standard may be applied to a portfolio of leases with similar characteristics, provided that it is reasonably expected that the effects will not differ materially from applying the standard to the individual leases within that portfolio.

• ‐ Entities are permitted to make an election whether to reassess contracts to identify contracts containing a lease or apply practical

expedient such that contracts that do not contain a lease under Ind AS 17 are not required to be reassessed.

• ‐ A lessee may elect, by class of underlying asset, not to separate non-lease components from lease components and instead account for both as a single lease component

• ‐ A lessee has the option to, but is not required to, apply the standard to leases of intangible assets

Accounting policies choices

Lessees are permitted to choose between two transition approaches, applied consistently to all leases:

Full retrospective approach in which comparative periods are restated as if Ind AS 116 is applied from the commencement of the lease. In such a case, a third balance sheet as at the beginning of the preceding period in addition to the minimum comparative financial statements is required to be presented.

Modified retrospective approach where effective date of initial application will be 1 April 2019 for the FY 2019-2020. Present value of the remaining lease payments for existing

operating leases using incremental borrowing rate is recognized as a financial liability. Further, this approach allows for the following two options to recognize right of use (RoU) asset:

• ‐ The RoU asset can be measured as if the standard had been applied since the commencement date, but discounted using incremental borrowing rate at the date of initial application; or

• ‐ The RoU asset can be measured at an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to it.

Transition provisions

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FAAS Survey

Artificial Intelligence to impact how finance leverages data-driven insight –

Global FAAS Survey 20181 reveals 93% of finance leaders in India believe Artificial Intelligence (AI) will have significant impact on how finance drives data-driven insight

64% of finance leaders in India say that businesses are highly trusted by public

76% of finance leaders in India indicate that nonfinancial information is being increasingly used in investors’ decision-making

86% respondents say finance should recruit talent with nontraditional backgrounds

Global

1 https://www.ey.com/Publication/vwLUAssets/ey-how-can-the-digital-transformation-of-reporting-build-the-bridge/%24File/ey-how-can-the-digital-transformation-of-reporting-build-the-bridge-between-trust-and-long-term-value.pdf

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The vast amount of data collected by finance teams is not being utilized to its full advantage, according to the survey. Organizations across the world have larger data than ever before due to increase in computer processing power, growing connectivity, cloud and great storage capacity.

The survey identifies two priorities — exploiting rapid technological advances in automation, AI and blockchain, and building trust into data analytics — to make the most of the smart technologies in corporate reporting. 64% respondents in India (58% globally) said that their finance

function is already making significant investments in artificial intelligence. 83% respondents from India (64% globally) said AI has the capability to fundamentally disrupt how finance and corporate reporting is conducted.

As the corporate reporting function adopts smart technology and new ways of sharing information, it will require a different talent profile and skillsets the survey finds, with 86% of respondents from India (74% globally) saying that there is an urgent need for finance to recruit new skills. In addition, 86% respondents (76% globally) responded that there is an urgent need to recruit talent with

nontraditional backgrounds. While finance teams recognize the urgency of transforming the workforce, they also note the obstacles, especially when it comes to technological innovation, 83% of finance leaders in India (63% globally) said that resistance and cultural differences within teams are barriers to digital innovation.

More than 1,000 CFOs or financial controllers of large

organizations with revenues greater than US$500m across 25 countries participated in the annual global survey with 40 finance leaders from India. It found that transparent value-driven reporting, which will increase the public trust in the business and includes the nonfinancial data, is a key challenge amid failings of corporate ethics and other controversies.

Smart data set to provide new insights to corporate reporting if deployed correctly

Transforming the workforce is key for finance reporting

The organizational ability to create long-term value based on reporting transparency, embracing smart technologies and innovative approaches to talent are set to take centerstage in the future of corporate reporting, according to the latest findings of the EY Financial Accounting and Advisory Services (FAAS) fifth annual survey, “How can digital transformation of reporting build a bridge between trust and long-term value?”

In India, 64% of finance leaders (58% globally) surveyed say that businesses are highly trusted by the public, with transparency in reporting being a key driver to gain trust. Reporting nonfinancial data is gaining prominence with 76% of finance leaders in India (72% globally) indicating that nonfinancial information is being increasingly used in investors’ decision-making. This means that finance teams need to manage nonfinancial information with the same rigor and assurance as financial information.

The survey identifies priorities for corporate reporting teams to address the workforce challenges – hire creatively and use an innovative approach to recruiting. Skills in high demand, such as experience in Artificial Intelligence (AI), blockchain and machine learning, will be critical in driving innovation forward, with 93% of respondents (72% globally) identifying AI skills as the most vital.

More than 1,000 CFOs or financial controllers of large organizations were surveyed to understand the challenges they face in corporate reporting. The research was conducted by Longitude on behalf of EY Global Financial Accounting Advisory Services (FAAS).

Over one-third of respondents’ organizations, i.e., 35%, have

revenues in excess of US$5b a year, and 12% in excess of US$10b a year. Just under half of the respondents (49%) were from the CFO community, with around one in five (19%) being group CFOs, alongside divisional and regional CFOs. The remaining 51% were finance directors, financial controllers (group, divisional or regional) or from the treasury

function. Respondents were split across the Americas, Asia-Pacific, Europe, the Middle East, India and Africa (EMEIA), and Japan. Thirteen main sectors were represented, with 55% publicly held or listed and 45% privately owned. The survey supplemented in-depth interviews with CFOs, heads of reporting organizations and EY subject-matter professionals.

About the survey

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India’s historic tax reform, Goods and Services Tax (GST), right from its inception, was expected to be more of a self-assessed tax regime with various intrinsic checks like matching of credits, etc. being envisaged in the bare model itself. A significant part of this self-assessment construct was the annual return (GSTR-9) and audited reconciliation statement (GSTR-9C); with GSTR-9 essentially being a consolidated return of the various transactions executed in the financial year and GSTR-9C, being a reconciliation between the disclosures in the annual return and the audited financial statements of the company.

While these filings were envisaged in the GST law from inception, the industry in general had hopes of getting a relaxation for the first year; essentially because the formats were not being released for more than a year after inception and the hope of the government providing a breathing time for the settling of the new tax regime prevailed. However, releases on 4 September 2018 and 13 September 2018, caught unawares for businesses who suggested it otherwise; with GSTR-9 and GSTR-9C formats being notified by the government and the deadline for submission of the same being decreed as 31 December 2018 for the filings pertaining to FY 17-18.

A phase/anxiousness as was prevalent at the time of implementation of this new regime, seemed to have returned with companies struggling to keep pace with time on understanding the disclosure requirements, determining the possible ways of obtaining the information from their enterprise resource planning/accounting systems, appointment of an auditor - one or multiple for pan-India registrations, etc. With multiple representations by businesses and industry associations requesting an extended time-period, the deadline for these filings was initially extended to 31 March 2019 and recently to 30 June 2019.

GST auditand

Abhishek Jain

its nuances

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While the companies undeniably have gained on time with this extension, most of them are still concerned and apprehensive on some of the disclosure requirements, as such granular and detailed records were not maintained by most businesses. To illustrate, with suspension of GSTR-2 (the detailed form for inward supplies), there have been cases where companies did not maintain detailed records of disclosures that were required in Form GSTR-9 and GSTR-9C. These include inward supplies like the categorization of procurements into inputs, input services and capital goods, details of inward supplies on which credit has not been claimed, etc. Such companies are grappling to find alternate ways of compiling these details, which were not accounted for at the first instance of recording in the ERP system.

Similarly, another point of concern for the industry in reference to the categorization of procurements has been on capital goods. Technically, the GST law includes only the goods which are capitalized in the books of accounts within the ambit of “capital goods”, whereas from an accounting perspective, services in relation to capital goods are as well capitalized and accounted under fixed assets head/capital work in progress, etc. Most industry players have been anticipating the categorization of capital assets into capital goods and input services as one of the major impediments in GSTR-9 and are still deliberating on the ways of culling out information for this disclosure.

Another aspect of worry for the industry and in specific, the service industry, has been on the possible requirement of computing a state-wise turnover for the period April 2017 to June 2017; the period during which pre-GST taxes like excise duty, service tax, VAT, etc. were applicable and companies were not mandated to as such maintain a state-wise track of revenue or expenses.

Besides this, the industry was also apprehensive about Harmonized System of Nomenclature (HSN) code wise reporting of inward supplies. With multiple representations from the industry on this aspect, the GST Council, in its 31st meeting held 22 December 2018, approved a relaxation on this aspect, with HSN-wise reporting now only being required for inward supplies whose value independently accounts for 10% or more of the total value of inward supplies.

On similar lines, most industry players were worried on the possible remedy in scenarios where an additional tax liability is uncovered and agreed by the company during the course of GST audit. For this, the GST Council had in its 31st meeting, approved an amendment to the annual report format, to allow an option of making any additional payments, if required to be paid by companies.

While on a first instance look, these additional compliances of annual return and audit report filings may appear onerous, but they may have a silver lining enclosed to it. With an annual review on account of these filings, the companies could trace any inadvertent errors or incorrect tax positions being adopted; entailing an early discovery of any additional tax liabilities payable, lesser interest and penalty implications vis-à-vis detection of any such liabilities on account of scrutiny/investigation by revenue authorities.

On a separate note, while one of the key advantages of these filings is early detection of any additional tax payments to be made, there has been a general expectation of the industry on relaxations in departmental audits in terms of the frequency of audits, mechanism of conducting the audits and so on and so forth, after GSTR-9 and GSTR-9C filings.

As any new compliance/change takes time to stabilize, these filings may as well initially witness some hiccups; both in terms of ambiguities on the scope of disclosures and challenges in the system. However, with this government’s concerted efforts on ironing wrinkles of this new law, most of these issues should as well find a solution soon; through detailed guidelines on disclosure requirements or appropriate relaxations on some of the disclosure requirements, etc.

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How technology can redefine

success Arpinder Singh

Globalization of organizations, enhanced scale of operations, increasing complexities of transactions and evolution of risks are deeply changing a chief financial officer’s (CFO’s) DNA. CFOs are expected to don multiple hats to monitor changing regulations, manage emerging risks and become custodians of sound governance practices. Simultaneously, they are answerable to various stakeholders, namely, boards, regulators, IT, government, auditors, employees, etc.

How technology can redefine chief financial officer’s success

Chief Financial Officer’s

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Analytics

Blockchain

In order to address these challenges and enhance their organization’s performance, CFOs must proactively explore use of sophisticated and result-oriented technologies in finance. These include:

analytics can be helpful in providing valuable insights into the financial performance of organizations, by combining structured and unstructured data for an all-inclusive view. For e.g., by combining structured and unstructured data, a company can identify unusual activities, patterns and trends and mitigate risks such as frauds or cyber breaches. A company can also use an algorithm to audit employee expense reports. This algorithm will help cross-check reports against travel and personnel data to highlight any potentially fraudulent activity. And at the same time, deliver output data to identify areas where policies may be unclear or misused. Some of the key changes would involve adapting technology as an enabler in decision-making to effectively enhance the same qualitatively and quantitatively.

automation can help improve finance functions. For e.g., Blockchain, a digital ledger or shared database that can be viewed across a network of computers based in different geographical areas. An identical copy of the ledger is available to all the people in the Blockchain network and all changes to the ledger are reflected in real-time basis. Blockchains include a smart contract feature, so that the delivery and payment details relating to a transaction can be integrated into the contract itself. The Blockchain ledger containing this feature, can have a rule that the payment is made only on the completion of a service. Being tamperproof, Blockchain help provide protection against fraud and hacking. They also collate information of suppliers and vendors with the internal system, thus helping CFOs to pull data from multiple Blockchains.

01

02

Business Process Re-Engineering (BPR)

an effective BPR system could lead to fewer enquiries and faster turnaround of invoices and payments. Using BPR, a manager would be able to provide performance information to senior management on a timely basis. Technology would also help in establishing deep-rooted business partner relationships and translating these into notable returns. With BPR, organizations can employ robust and automated solutions to ensure high optimization of accounts payable systems, a centralized receipt of invoices, with automated approvals for review of invoices.

03

Robotic Process Automation (RPA):

RPA can help improving an organization’s performance by automating key finance processes, such as data reporting and payments. This can be done by accessing data from multiple systems to improve corporate reporting. Use of RPA to streamline, automate and integrate subsidiary data — an area that usually requires extensive manual intervention can be helpful. It can also provide a clear audit trail and can be beneficial in compliance with regulatory requirements. RPA is also known to reduce costs significantly and improve quality through error reduction.

04

Centers of excellence for specialist functions:

many organizations are developing finance centers of excellence to streamline and centralize the organization’s expertise in one place, consolidate data, standardize finance-related processes and data analysis. Centers of excellence are a reliable, one-stop shop for the organization’s most crucial finance information. It promotes a healthy alliance between IT, finance and other departments for better communication, higher efficiency and reduced costs. Such centers of excellence can help CFOs and their teams achieve financial excellence.

05

Shared services centera shared services center focuses attention on standards and end-to-end process excellence, eliminating silos and reducing costs. A shared service center, can be either in-house or outsourced, and helps in standardization and process optimization. Digital technologies are the most effective ways to manage today’s fast paced and complex business environments. CFOs must transform their finance functions and embrace technology.

06

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US GAAPAjith Thambi

The year 2018 will be remembered for the implementation and challenges relating to the new revenue recognition standard (ASC 606). Public entities have adopted the new revenue standard from the period beginning January 2018 and all entities now follow a common revenue recognition framework. Leases has been another topic which continued to remain at the top of the Financial Accounting Standards Board (“FASB”) agenda during the year.

updates

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Additional transition method

Entities can opt to apply the legacy guidance in ASC 840, including its disclosure requirements, in the comparative periods presented in the year of adoption of the new leases standard. Those entities who elect this transition option would still need to apply the modified retrospective transition method, but they would recognize a cumulative adjustment to the opening retained earnings in the period of adoption rather than in the earliest period presented. In simple words, the only difference is the timing of when an entity applies the modified retrospective transition provisions. Many companies are expected to elect the new transition method.

Practical expedient for lessors on combining lease and non-lease components

The practical expedient exempts entities (lessors) from separating non-lease components from the associated lease components if the non-lease components would otherwise have been accounted for in accordance with the new revenue standard and if both of the following criteria are met:

• The lease component and the associated non-lease components have the same timing and pattern of transfer.

A. Leases

Accounting for leases was the topic of most amendments and codification improvements issued this year, since various businesses and stakeholders have raised multiple concerns and clarifications of FASB on this aspect. Additionally, FASB has amended the guidance on accounting for stock compensation plans (ASU 2018-07) which will significantly impact the accounting for such plans issued to non-employees in consideration for acquisition of goods or services. FASB has also issued some guidance and updates on disclosure requirements relating to fair valuation and defined benefit obligations. Additionally, a specific guidance was also issued to address the impact on changes to the reported current and deferred tax due to the implementation of the Tax Cuts and Jobs Act 2017 (TCJA 2017). Some of the key updates during 2018 have been given below:

• The lease component, if accounted for separately, would be classified as an operating lease.

The new leases standard initially required lessors to separate a contract’s lease components from non-lease components, such as maintenance services or other activities that transfer a good or service to the lessee. The lease components were to be accounted for in accordance with the new leases standard while the non-lease components were to be accounted for in accordance with other guidance (for e.g., the new revenue standard). Consideration in the arrangement would then be allocated to the lease and non-lease components. Under this practical expedient, lessor would be required to determine if the non-lease components are the predominant components in the contract. If non-lease components are assessed as the predominant components, the combined contract would be accounted based on the principles of ASC 606; otherwise the combined contract would be accounted as an operating lease as per the principles of ASC 842. An entity that avails this practical expedient for a class of underlying asset must apply the expedient to all qualifying leases in that class and provide certain disclosures.

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B. Stock compensation to non-employees

Practical expedient on land easements

Land easements (right of way on land not owned by the entity) that exist or expired before an entity’s adoption of ASC 842 and were not previously accounted for as leases under ASC 840 are not required to be evaluated by the entity under ASC 842 if it elects to avail this practical expedient. Such an entity should apply the expedient consistently to all its existing or expired land easements that were

not previously accounted for as leases under ASC 840. Further, once an entity adopts ASC 842, it will be applicable prospectively to all new (or modified) land easements to determine whether the arrangement should be accounted for as a lease.

The above additional transition method and practical expedients does not change the original adoption dates of ASC 842.

FASB issued ASU 2018-07, which aligned the accounting treatment for share-based payments issued to non-employees with the treatment applicable for share-based payments issued to employees with a few exceptions. Consequently, non-employee share-based payment awards will be required to be measured at grant date fair value of the share-based payment award.

The ASU however retains the existing recognition guidance, which requires entities to recognize cost relating to the non-employee awards in the same period and in the same

manner (i.e., capitalize or expense off) as they would if they paid cash for the goods or services. As a result, if the non-employee does not provide goods or services on a straight-line basis over the vesting period, the timing of recognition for non-employee awards will continue to differ from the timing of recognition for employee awards (which is recognized on a straight-line basis during the vesting period).

The guidance is effective for respective entities in annual periods after 15 December 2018 and 2019.

C. Disclosure-related updates

As part of the FASB’s disclosure effectiveness project, few changes in the disclosure requirements relating to fair value measurement (ASU 2018-13) and defined benefit obligations (ASU 2018-14) have been made. Some of the disclosures that have been added for public entities are:

a. Disclosure of the range and weighted average of significant unobservable inputs used to develop Level 3 measurements, as well as the method used for calculating the weighted average,

b. Disclosure of changes in unrealized gains/losses in other comprehensive incomes for

recurring Level 3 measurements.

The above two changes are effective for fiscal years, and interim periods within those years, beginning after 15 December 2019.

c. An explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period.

d. Weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates.

The above two changes are effective for fiscal years, and interim periods within those years, beginning after 15 December 2020.

TCGA 2017, which was enacted in December 2017, reduced the corporate tax rates from 35% to 21% for corporates. It also changed the tax structure from a global tax to a territorial tax model. Earlier, under the global tax model, US entities were required to pay tax on the profits of foreign subsidiaries at higher of (i) the local tax rate or (ii) the US tax rate (tax paid to local authorities taken as a credit). The adjustments to the reported current and deferred tax balances on account of TCJA 2017

are permitted to be reclassified to retained earnings (instead of recognizing them as a tax expense in the profit and loss). This accounting treatment is specific for the impact arising from TCJA; the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The act is applicable to all entities for an annual period beginning on or after 15 December 2018.

D. Tax impact of Tax Cuts and Jobs Act (TCJA) 2017

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