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GAAP ReporterDecember 2015
Introduction
Dear Reader,
Grant Thornton in India presents ‘GAAP Reporter’, a quarterly bulletin that summarises significant accounting, auditing and related updates. This publication has been compiled to meet the needs of dynamic Indian businesses and focuses on key developments in India and across the globe.
To access the source of information, you can click the hyperlink text, wherever applicable; for complete details, please refer the original pronouncements.
We would be pleased to receive your feedback. Please write to us at [email protected] with your comments, questions or suggestions.
This edition covers updates for the quarter ended December 2015. It also covers recently issued IFRS 16, Leases. All abbreviations used in the publication are explained at the end of the publication.
Following is the index of updates summarised below:
India
MCA notifies the effective date for certain sections of the Companies (Amendment) Act, 2015 Auditing
MCA notifies the threshold and manner of communicating the identified frauds Auditing
Format for publishing financial results of listed entities under Regulation 33 of SEBI (Listing Obligations and Disclosure Requirements)
Regulations, 2015
Other
Format for publishing financial results of listed entities Other
SEBI requirements in relation to Scheme of arrangement Other
Relaxation of submission of IFRS financial results for specific periods Other
Format for statements/reports to be submitted to Stock Exchange(s) by specific listed entities Other
Amendment of format of Annual Return Other
Withdrawal of Guidance Notes on Accounting Other
Amendment to Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Amendment) Regulations,
2015
Other
The Companies (Meetings of Board and its Powers) Second Amendment Rules, 2015 Other
Companies (Share Capital and Debentures) Third Amendment Rules, 2015 Other
Amendment to Payment of Bonus Act Other
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International
Hot Topic
America
FASB simplifies the balance sheet classification of deferred taxes Accounting
ASB issues a SAS in relation to integrated audits Auditing
PCAOB adopts rules requiring disclosure of the Engagement Partner and Other Accounting Firms participating in an audit Auditing
Format for publishing financial results of listed entities under Regulation 33 of SEBI (Listing Obligations and Disclosure Requirements) Regulations,
2015
IASB issues lease standard, IFRS 16 Accounting
IASB postpones accounting changes for associates and joint ventures Accounting
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MCA notifies the effective date for certain sections of the Companies (Amendment) Act, 2015
MCA has notified 14 December 2015 as the effective date of section 13 and 14 of the Companies (Amendment) Act, 2015 (“Act”).
Section 13 of the Act relates to auditors’ reporting obligations in relation to fraud and company’s obligations to disclose in Board’s report the fraud reported by auditors to the board or audit committee but not required to be reported to Central Government. (Refer below “MCA notifies the threshold and manner of communicating the identified frauds”)
Section 14 of the Act relates to the Audit Committee providing omnibus approval for related party transactions subject to such conditions as may be prescribed. (Refer below The Companies (Meetings of Board and its Powers) Second Amendment Rules, 2015 )
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MCA notifies the threshold and manner of communicating the identified frauds
MCA has notified the Companies (Audit and Auditors) Amendment Rules, 2015, effective 14 December 2015, thereby providing the threshold for reporting the frauds identified by auditors in the course of performance of his duties as statutory auditor, as below:
1. Offence of fraud involves or expected to involve individually an amount of rupees 1 crore or above should be reported to the Central Government.
2. Offence of fraud below rupees 1 crore should be reported to the Audit committee or Board.
The notification also specifies the manner and the timing of communicating the frauds to the Central Government; or Audit Committee or Board, as the case may be, in addition to matters to be included in the Board’s report.
These provisions shall also apply, mutatis mutandis, to Cost Auditor and Secretarial Auditor during the performance of their duties under the Companies Act, 2013.
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India -Auditing Updates
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Format for financial results for listed entities having listed debt securities and/or non-cumulative re-deemable preference shares
SEBI has issued a circular providing the format for half yearly financial results and limited review report thereon for entities which have listed their debt securities or non-cumulative redeemable preference shares or both. Annual audited financial results should be in the format as is applicable to half yearly financial results.
The circular further requires these entities to submit either Form A (for audit report with unmodified opinion) or Form B (for audit report with modified opinion) along with audited financial results.
The circular is effective from 1 December 2015.
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Format for publishing financial results of listed enti-ties under Regulation 33 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
SEBI has issued a circular providing the format for publishing quarterly financial results and half yearly Statement of Assets and Liabilities, in addition to format for quarterly and annual segment information, if applicable.Annual audited financial results should be in the format as is applicable to quarterly financial results except that columns and figures relating to the last quarter, year to date results and corresponding three months in previous year may not be disclosed. It further provides format of report on interim financial results.
The circular is effective from 1 December 2015.
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SEBI requirements in relation to Scheme of arrange-ment
SEBI has issued a circular primarily providing requirements (i) before the Scheme of arrangement is submitted for sanction by the Honourable High Court and (ii) after the Scheme of arrangement is sanctioned. Requirements include filing auditor’s certificate to the effect that the accounting treatment contained in the scheme is in compliance with all the Accounting Standards specified by the Central Government under Section 133 of the Companies Act, 2013 read with the rules framed thereunder or the Accounting Standards issued by ICAI, as applicable, and other generally accepted accounting principles. Earlier this requirement was part of the listing agreement and the format of the certificate was separately prescribed in SEBI circular dated 25 March 2014; now both the requirement for certificate and the format has been combined in the new circular.
The circular provides formats for complaints report and auditor’s certificate.
The circular is effective from 1 December 2015.
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Relaxation of submission of IFRS financial results for specific periods
SEBI has issued a circular relaxing the requirements in relation to voluntary submission of IFRS financial results. As a result, listed entities that had exercised the option to submit IFRS consolidated financial statements for the first quarter of financial year 2015-16, can continue to submit IFRS consolidated financial statements for the quarter ended 31 December 2015 and quarter and year ending 31 March 2016.
The relaxation granted is without any prejudice to the requirements of the Companies Act, 2013 in relation to reporting of Financial Statements.
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India -Other Updates
Format for statements/reports to be submitted to Stock Exchange(s) by specific listed entities
SEBI has issued a circular providing the format of statements/ reports to be filed by listed entity which has listed its securitised debt instruments.
The statements and reports are required to be submitted to the Stock Exchange(s) within seven days from the end of the month/actual payment date, on a monthly basis.
This circular is effective from 1 December 2015.
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Amendment of format of Annual Return
MCA has modified Companies (Management and Administration) Third Amendment Rules, 2015, effective 16 November 2015, thereby amending the Annual Return – Form No. MGT-7
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Withdrawal of Guidance Notes on Accounting
The ICAI has withdrawn the following Guidance Notes :
1. Guidance Note on Treatment of Reserve Created on Revaluation of Fixed Assets
2. Guidance Note on Accounting for Depreciation in Companies
3. Guidance Note on Some Important Issues Arising from the Amendments to Schedule XIV to the Companies Act, 1956
4. Guidance Note on Applicability of Accounting Standard (AS) 20, Earnings Per Share
5. Guidance Note on Remuneration Paid to Key
Management Personnel-Whether a Related Party Transaction
These Guidance Notes were withdrawn as they were no longer considered relevant in view of the requirements of Companies Act, 2013.
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Amendment to Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015
SEBI has notified the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2015, effective 1 April 2016. This amendment now requires top five hundred listed entities, based on market capitalisation (calculated as on 31 March of every financial year), to include business responsibility report in their annual report describing the initiatives taken by them from an environmental, social and governance perspective, in the format specified by SEBI from time to time. Earlier this requirement was applicable only to top hundred listed entities, based on market capitalization as on 31 March of every financial year
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The Companies (Meetings of Board and its Powers) Second Amendment Rules, 2015
MCA has notified the Companies (Meetings of Board and its Powers) Second Amendment Rules, 2015, effective 14 December 2015, thereby prescribing the conditions to make an omnibus approval by audit committee for related party transactions proposed to be entered. Such conditions include criteria to be considered to include a related party transaction for an omnibus approval.
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Omnibus approval is valid for one year.
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Companies (Share Capital and Debentures) Third Amendment Rules, 2015
MCA has notified the Companies (Share Capital and Debentures) Third Amendment Rules, 2015, effective 6 November 2015, thereby including companies, if permitted by a Ministry or Department of the Central Government or by Reserve Bank of India or by the National Housing Bank or by any other statutory authority, to issue debentures for a period exceeding ten years but not exceeding thirty years.
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Amendment to Payment of Bonus Act
MLJ has published Payment of Bonus (Amendment) Act 2015, applicable from 1 April 2014, thereby increasing the number of employees eligible for bonus under the Payment of Bonus Act and the amount thereof.
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International – Accounting Updates
IASB issues lease standard, IFRS 16
IASB has issued IFRS 16, Leases on 13 January 2016. This standard replaces IAS 17, Leases and related interpretations viz. IFRIC 4, Determining whether an Arrangement contains a Lease; SIC-15, Operating Leases—Incentives; and SIC-27, Evaluating the Substance of Transactions Involving the Legal Form of a Lease.
Key changes include:
1. Eliminates the requirement to classify a lease as either operating or finance lease in the books of lessee
2. Introduces a single lessee accounting model, whereby requires lessee to recognize assets and liabilities for all leases. Entity may elect not to apply this accounting requirement to short term leases and leases for which underlying asset is of low value
3. Requires lessee to classify cash payments for principal and interest portion of lease arrangement within financing activities and financing/operating activities respectively in the cash flow statements
4. Requires entities to determine whether a contract conveys the right to control the use of an identified asset to assess whether that contract is, or contains, a lease
IFRS 16 substantially carries forward lessor accounting requirements in IAS 17, Leases.
IFRS 16 becomes effective for annual periods beginning on or after 1 January 2019. Earlier application is permitted for entities that apply IFRS 15, Revenue from Contracts with Customers at or before the date of initial application of IFRS 16.
Entity shall apply this standard either retrospectively to each prior reporting period presented or record a cumulative effect of initial application of the standard as an adjustment to the
opening balance of equity at the date of initial application.
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IASB postpones accounting changes for associates and joint ventures
IASB has deferred the effective date of applying the amendments to IFRS 10, Consolidated Financial Statements and IAS 28, Invetsments in Associates and Joint Ventures, issued in September 2014, until completion of broader review that may result in simplification of accounting of transactions covered in the amendment and of other aspects of accounting for associates and joint ventures.
The amendments relate to recognition of gains or losses when assets are sold or contributed between entities and its associates/ joint ventures. Such recognition depends on whether the transaction constitutes business. The amendments were previously effective for annual periods beginning on or after 1 January 2016, earlier application permitted.
Though IASB has deferred the effective date, earlier application continues to be permitted.
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America - Accounting Updates
FASB simplifies the balance sheet classification of deferred taxes
FASB has issued an ASU 2015-17 (Topic 740 – Income Taxes) to reduce the complexity involved in the classification of deferred taxes in the balance sheet. It requires entities to classify all deferred tax assets and liabilities as noncurrent in a classified balance sheet. It may be applied either prospectively or retrospectively to all periods presented.
It eliminates the earlier requirement of presenting deferred tax assets and liabilities as current and non-current in the balance sheet determined based on the classification of the related asset or liability for financial reporting. It does not remove the requirement of netting off the deferred tax assets and liabilities by tax jurisdictions.
For public business entities: Effective for financial statements issued for annual periods beginning after 15 December 2016 and interim periods within those annual periods.
For all other entities: Effective for financial statements issued for annual periods beginning after 15 December 2017, and interim periods within annual periods beginning after 15 December 2018.
Earlier application is permitted as of the beginning of an interim or annual reporting period.
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ASB issues a SAS in relation to integrated audits
ASB has issued SAS No. 130, An Audit of Internal Control over Financial Report That is Intergrated with an Audit of financial statements, that deals with an Audit of Financial Statements that deals with integrated audits. The issue of this standard has moved the guidance in relation to integrated audits from the attestation standards to the GAAS. AT Section 501 and the related interpretation will be withdrawn, once the standard becomes effective.
SAS No. 130 includes the following key changes:
• Auditors are required to examine and report directly on the effectiveness of internal control over financial reporting. There is no longer an option to examine and report on management’s assertion about the effectiveness of internal control over financial reporting.
• Clarifies that risk factors the auditor is required to evaluate in the identification of significant classes of transactions, account balances, and disclosures and their relevant assertions are the same in the audit of internal control over financial reporting as in the audit of the financial statements.
• The term significant account or disclosure replaced with significant class of transactions, account balance, or disclosure to align with terminology used in existing GAAS.
• Auditors to apply the requirements of AU-C 610, Using the Work of Internal Auditors, while using the work of others in the audit of internal control over financial reporting.
The standard is effective for integrated audits for periods ending on or after 15 December 2016.
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PCAOB adopts rules requiring disclosure of the Engagement Partner and Other Accounting Firms participating in an audit
PCAOB has adopted rules requiring auditors to disclose specific information about the Engagement Partner and other accounting firms involved in public company audits.
The following information will be required to be disclosed:
1. The name of the engagement partner
2. The names, locations, and extent of participation of other accounting firms that took part in the audit, if their work constituted 5 percent or more of the total audit hours; and
3. The number and aggregate extent of participation of all other accounting firms that took part in the audit whose individual participation was less than 5 percent of the total audit hours
The above information will have to be disclosed by filing a new PCAOB Form, Form AP, Auditor Reporting of Certain Audit Participants, for each issuer audit. This form will have to be filed within 35 days (10 days in case of an initial public offerings) after the date the auditor’s report first included in a document filed with the SEC .
The rule is subject to approval by SEC. If approved by the SEC, the disclosure requirement for the engagement partner will be effective for auditor’s reports issued on or after 31 January 2017, or three months after SEC approval of the final rules, whichever is later. For disclosure of other audit firms participating in the audit, the requirement will be effective for reports issued on or after 30 June, 2017.
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America - Auditing Updates
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Hot Topic
Format for publishing financial results of listed enti-ties under Regulation 33 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
SEBI released a circular on 30 November 2015, effective 1 December 2015, providing the format for publishing interim financial results and segment information, applicable to listed entities. Further, it provides format for (i) half-yearly statement of assets and liabilities; and (ii) annual financial results which is similar to quarterly financial results format except that columns and figures relating to the last quarter, year to date results and corresponding three months in previous year may not be disclosed. It also provides format of review/audit report on interim financial results and Form A (audit report with unmodified opinion) or Form B (for audit report with modified opinion) to be submitted along with audited financial results.
Following are the key highlights of the formats prescribed:
• Companies applying Ind AS for the first time should provide the following additional disclosures:
(a) Reconciliation of equity in accordance with previous GAAP to Ind AS, at the:
(i) date of transition to Ind AS
(ii) end of comparable interim period
(iii) end of latest period presented in the entity’s most recent annual financial statements in accordance with previous GAAP
(b) Reconciliation of total comprehensive income in accordance with previous GAAP to Ind AS, for the:
(i) comparable interim period
(ii) latest period presented in the entity’s most recent annual financial statements as per previous GAAP
• Comparatives should be Ind AS compliant, in case of companies applying Ind AS
• Classification/disclosure of items in the financial results should be in accordance with Schedule III to Companies Act, 2013 or its equivalent formats in other statutes, as
applicable
Though the disclosures include reconciliation of total comprehensive income in accordance with previous GAAP to Ind AS for the comparable interim period and latest period presented in the entity’s most recent annual financial statements as per previous GAAP, it is relevant to note that financial results format do not require the entities to present total comprehensive income.
In case of Ind AS reporting entities, it seems that the format requires entities to present audited Ind AS compliant previous year ended results commencing from the very first interim results for the fiscal 2017
Key differences in terminology used in and the presentation as required under Ind AS as compared to financial results format:
It is relevant to note that the financial results format does not require entities to present other comprehensive income and total comprehensive income. Further, financial results format uses certain terms like exceptional and extra-ordinary items which are not defined in Ind AS.
Ind AS 1, Presentation of Financial Statements, does not permit classification of expenses by function. However, financial results format requires entities, which propose to follow functional classification in the annual profit and loss account, to present expenses by function from the first quarter of the financial year.
Format of Statement of Assets and Liabilities requires entities to present minority interest separately from equity and liabilities. While this terminology and the presentation is in accordance with generally accepted accounting principles in India, Ind AS uses the term “non-controlling interest” and requires it to be presented as part of equity.
Summing up
Financial results format may not be in compliance with the Ind AS presentation requirements in addition to different terminologies being used. Further, disclosures relating to total comprehensive income reconciliation may not be helpful in the absence of presentation of total comprehensive income in the interim / annual financial results.
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ASB – Auditing Standards Board
ASU - Accounting Standards Update
FASB – Financial Accounting Standards Board
GAAP – Generally Accepted Accounting Principles
GAAS – Generally Accepted Auditing Standards
IASB – International Accounting Standards Board
ICAI – Institute of Chartered Accountants of India
IFRS – International Financial Reporting Standards
IFRIC- International Financial Interpretations Committee
Ind AS – Indian Accounting Standards
ISA – International Standards on Auditing
MCA – Ministry of Corporate Affairs
MLJ - Ministry of Law and Justice
PCAOB – Public Company Accounting Oversight Board (United States)
SAS – Statement on Auditing Standards
SEBI – Securities and Exchange Board of India
SEC – Securities and Exchange Commission
SIC- Standards Interpretations Committee
Key terms used in this publication
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