VOL. XLVI, NO. 1 February - March 2018 NORTHERN INDIA ... · e-Newsletter VOL. XLVI, NO. 1 February - March 2018 Team NIRC. From the Desk of the Chairman... Dear Professional Colleagues,

NORTHERN INDIA REGIONAL COUNCILOF

THE INSTITUTE OF CHARTEREDACCOUNTANTS OF INDIA

e-Newsletter

VOL. XLVI, NO. 1

February - March 2018

Team NIRC

From the Desk of the Chairman...

Dear Professional Colleagues,

EDITORIAL BOARD

[email protected] ; [email protected]

CA. Pankaj Periwal, Chairman

CA. Nitin Kanwar, Vice-Chairman

CA. Pooja Bansal, Member

CA. Rajender Arora, Member

CA. Sumit Garg, Member

CA. Rakesh Makkar, Member

CA. Deepak Garg, Member

CA. Pankaj Periwal,Chairman 9417240316

CA. Nitin Kanwar,Vice-Chairman 9810387163

CA. Pooja Bansal, Secretary 9810550051

CA. Rajender Arora,Treasurer 9891112120

CA. Sumit Garg, NICASA, Chairman 9560064645

CA. Rakesh Makkar, NICASA, Member 9811104384

CA. Deepak Garg, NICASA, Member 9811064105

CA. Alok jain, Member 9899259011

CA. Rajesh Kr. Agrawal, Member 9868156062

CA. Rajinder Narang, Member 9416045023

CA. Swadesh Gupta, Member 9312580854

CA. Vivek Khurana, Member 9868520786

CA. Yogita Anand, Member 9582447118

Editor : CA. Pankaj Periwal

CA. Naveen N.D. Gupta 9810689998

CA. Sanjay Agarwal 9811080342

CA. Vijay Kumar Gupta 9810050029

CA. Sanjiv Kumar Chaudhary 9810127362

CA. Atul Kumar Gupta 9810103611

CA. Sanjay Vasudeva 9811153837

CA. Rajesh Sharma 9810277394

As I embark my new role as the 66th Chairman of NIRC of ICAI

effective from 27th February 2018, I carry with me the feeling of

gratitude and humility. I owe this position to my father Late

CA. S.S. Periwal, without his divine blessings it would not have

been possible for me to achieve this milestone. I am grateful to the

Almighty, my seniors in Council, my colleagues in the Regional

Council and members at large for posing this overwhelming

confidence and belief in me. I am deeply honored by the trust

bestowed upon me by the members of this noble fraternity. At the

same time I am aware of the magnitude of responsibility which this

position brings along. It is undoubtedly a great honor for me to be

blessed with an opportunity of serving the Northern India Regional

Council having more than 50000 Chartered Accountants as

members.

As I carry the baton of Chairmanship, I express my deep regard

and appreciation for the various initiatives taken by the Past

Chairman and ensure you all that we shall carry forward this legacy

with greater zeal and keeping intact high values of our noble

profession.

My heartiest congratulations to our newly elected

President CA. Naveen N.D. Gupta and Vice-President CA

Prafulla Premsukh Chhajed. I am sure that their rich

knowledge, experience and understanding about the industry and

profession will prove to be an asset for ICAI and we’ll work in a

cohesive manner towards the betterment of the profession. My

focus during the year would be on timely & proper implementation

of the Vision & Strategic Action Plan, 2018 as laid down by our

worthy President of ICAI. I congratulate, CA Nitin Kanwar, CA.

Pooja Bansal, CA. Rajender Arora, CA. Sumit Garg on being elected

as Vice Chairman, Secretary, Treasurer & NICASA Chairman of

NIRC respectively.

Vision for 2018

For Members

Date: 16th March, 2018Place: Ludhiana

CA. Pankaj Periwal,Chairman, NIRC of ICAI

Region are a vital segment of our functioning. The

election of office bearers in the most of the Branches are

over by now. I would like to congratulate the office

bearers and I am sure that they will work very hard to

ensure that the flag of ICAI continues to soar high. The

participation of Branches is very important to implement

the policies of Central and Regional Councils at the

ground level.It is of extreme importance that they

contribute in a more stronger and inclusive manner. I

invite the Office Bearers of all Branches of NIRC to share

their ideas and thoughts with us.

Let us respect the integrity of the profession

In the times of turbulence where the profession of

Chartered Accountants has been brought under

questioning lets, continue with dignity and remember:

“Keep integrity and your work ethics intact. So

what if that means working a little harder;

An honorable character is your best calling card,

and that’s something we all need to have.”

Changes are inevitable and not always controllable. What

can be controlled is how we manage, react to the events

and proactively move through the changed process while

still maintaining our work ethics.

With combined and co-operative efforts we can continue

to maintain the rich heritage of the profession and we can

take the profession to new milestones. Therefore, I look

forward towards all of you for your continuous support to

the profession. The feedback and suggestions of the

members on any aspect of profession will help us to grow

and we’ll try to improvise the needful. So please share

your opinions and suggestions.

I will like to end this message with an assurance that I will

try my level best to put my heart and soul towards the

betterment of the profession and to maintain the integrity

and respect that the word Chartered Accountant holds in

our country.

Let’s look for something Positive in each day, even if on

some days we have to look a bit harder for it,

Let us face the challenges together and emerge

successful in every given situation.

Today is not just another day; it’s a new opportunity,

another chance, a new beginning. We are in an era of

rapidly changing economic and financial environment. So

as professionals it is extremely important to stay updated

for discharge of our professional obligations in most

effective and efficient manner. Keeping these thoughts in

mind, efforts will be made to emphasize more on

interactive seminars and conferences from time to time. I

request all the members to share their ideas and

thoughts about topics which they feel are quintessential

and need to be discussed through seminars and

conferences. I shall try my level best to encourage new

expertise and at the same time seek enlightened

knowledge of the seasoned experts of respective fields.

We shall have major concentration towards improvement

of the existing infrastructure to enable smooth

administrative functioning with the use of latest

technology. In this technology driven era it is very

important to ensure that the updated information is

passed on to the members of the fraternity through

online portal of ICAI with just a single click.

For Students

Education is a passport to enter unbelievable potential of

the future. Tomorrow belongs to the people who prepare

for it today …and these people are our students who are

the pillars of ICAI. The future of quality of the profession

lies on the shoulders of the students. An attempt is being

made to provide them with the best study material,

affordable coaching, experienced faculties and other

supportive infrastructure so as to make their journey of

becoming a Qualified Chartered Accountant easier. It’s

our Endeavour not to just ensure academic development

of our students but to also equip students with the zeal,

confidence and ability to face the challenges present in

the real professional world. The ICAI has been making

perseverant efforts in this regard and my team intends to

take these efforts on new echelon. Some vital student

activities like Advanced computer training, Advanced

MCS classes, student conferences, cultural programs,

elocution contest, sports tournaments are amongst few

of the events that we intend to focus upon during next

one year.

New Office Bearers of the Branches

NIRC doesn’t work in isolation and all Branches of the

4

February 2018 - March 2018 NIRC NEWSLETTER

5The views expressed herein are personal views of the author and do not necessarily represent the views of the NIRCs

This led to the formulation of an Internal Advisory

Committee (“IAC”) by RBI to advise it on cases that may

be considered for reference for resolution under the

Insolvency Code. Focusing on large stressed accounts at

this stage, the IAC has recommended resolution of all

accounts with fund and non-fund based outstanding

amount greater than Rs. 5000 crores with 60% or more

classified as NPAs by banks as of March 31, 2016, and noted

that 12 accounts (aggregating about 25% of the current

gross NPAs) would qualify for immediate reference under

the Insolvency Code. For other NPAs, the IAC has

recommended that banks should finalize a resolution plan

within 6 months and if a viable resolution plan is not agreed

upon within such period, banks should be required to file for

insolvency proceedings under the Insolvency Code. Based

on IAC's recommendations, RBI issued directions to certain

banks for referring the 12 accounts to initiate the insolvency

process under the Code and thereafter followed by a second

list of 28 defaulters.

The legislative intent of the Insolvency Code was to

streamline the insolvency resolution and liquidation process

by providing a consolidated mechanism and platform to

ensure smooth and easy debt recovery, which appeared to

be a useful tool to address the issue of NPAs. However, an

issue which recently came into the limelight was the ability

of promoters to bid for their own defaulting companies. This

invited criticism on the ground of possible misuse of the

insolvency resolution process by defaulting promoters.

Under the Insolvency Code, the insolvency resolution

professional is required to “invite prospective lenders,

investors, and any other persons to put forward

resolution plans”. In view thereof, promoters were also

able to bid for their debtor companies 'as any other

person'. Take for instance the case where the National

Company Law Tribunal admitted the insolvency application

filed by the debtor company (Synergies-Dooray Automotive

Massive expansion and investments, primarily funded

through bank loans (despite a weak promoters' equity

base), has given rise to companies which have over

leveraged their balance sheets. Coupled with the economic

slow-down, industry conditions and global financial crisis in

the past, this led to these companies becoming financially

stressed. While, certain companies were able to sustain

themselves through swapping loans, many have already

reached a point where they have financially broken down.

Bhushan Steel, Lanco, Essar Steel, Kingfisher, Monnet Ispat

and Alok Industries, are just a few reported examples of

such broken down stories.

The rise in the number of non-performing assets (“NPAs”)

was therefore an inevitable consequence. The past decades

have seen various leg islations and schemes being

introduced from time to time to deal with the issue of debt

recovery from corporates such as the Recovery of Debts

Due to Banks and Financial Institutions Act, 1993; the

Securitization and Reconstruction of Financial Assets and

Enforcement of Security Interest Act, 2002

(“SARFAESI”); the Sick Industrial Companies (Special

Provisions) Act, 1985 (“SICA”), the insolvency/winding up

process provided under the Companies Act, 1956 and later

Companies Act, 2013; and the Corporate Debt

Restructuring Scheme and the Strategic Debt Restructuring

Scheme introduced by RBI.

The Insolvency and Bankruptcy Code, 2016 (“Insolvency

Code”), enacted to consolidate the laws in India relating to

reorganization and insolvency resolution process for all

forms of corporate entities including individuals, in a time

bound manner, has now become the latest game changer.

With the amendments introduced by Banking Regulation

(Amendment) Ordinance, 2017, followed by the

subsequent Central Government's order dated May 5,

2017, the Reserve Bank of Indian (“RBI”) was authorized

to issue directions to banks to initiate insolvency resolution

process in respect of defaults, under the Insolvency Code,

and to issue directions with respect to stressed assets.

Is the New Insolvency & Bankruptcy code ( IBC) a LADOO ?

CA. Sangeeta Gulati



creditor, in respect of a corporate debtor under the

insolvency resolution process or liquidation under the

Insolvency Code;

where any connected person in respect of such person

meets any of the criteria specified in the above

categories.1

has been subject to any disability corresponding to the

aforesaid categories under any law in a jurisdiction

outside India.

This Ordinance is being touted by the Government as means

to curb instances of fraud being perpetuated through abuse

of the process under the Insolvency Code. However, this

move is also being criticized by many as reducing the

competitiveness of the bids (since promoters who could

have upped the bidding have been taken out of the

equation, which would ultimately result in lower proceeds

for the lenders). In fact, as per certain analysts, this may

even lead to a consolidation of power in the hands of few

players (especially in the steel sector where various steel

companies are being put under the auction hammer soon).

So, has the Government, in a knee-jerk reaction to prevent

further controversies, oversimplified this issue by

introducing blanket disqualifications as opposed to

following a process of case to case determination by NCLT

on credibility of resolution plans/bids submitted by the

promoters?

The actual ramifications of this Ordinance would become

clearer once the bidding results are out and the insolvency

resolution plans are implemented. However, in the

meanwhile, it is pertinent to note that the prohibition under

the Ordinance is not limited to promoters who are wilful

defaulters, but also includes within its purview, persons who

have executed enforceable guarantees in favour of creditors

in respect of the debtor company under the insolvency

resolution process, and all of their connected persons.

Therefore, even promoters who are not classified as wilful

defaulters may be disqualified from submitting a resolution,

and lose out on the opportunity of restructuring their

company which may have been just a victim of adverse

industry conditions. Debt resolution of small and medium

enterprises may also become more challenging as there

may not be many bidders, besides promoters, who would be

interested in such companies. Valuations may in fact be

lower as other bidders would tend to place lower bids and

purchase the assets at the cheapest cost possible (as

opposed to promoters who may have driven up the bid

numbers given their personal attachment to the

companies).

Limited) and vide its order dated August 2, 2017, approved

the resolution plan of Synergies Castings Limited where the

cost of the scheme (i.e. the proposed payments to creditors

and insolvency process cost) was Rs. 54 crores while the

company owed Rs. 972 crores to the lenders. This has been

challenged by its financial creditor, Edelweiss Asset

Reconstruction Co. Ltd., before the National Company Law

Appellate Tribunal, for alleged fraud by the debtor company

as per media reports and is currently pending final

adjudication. Another example is that of Essar Steel

Limited's insolvency resolution, where reportedly one of its

own promoters has also submitted its expression of interest

and intends to file its resolution plan.

With bidding for major companies like Essar Steel, Bhushan

Steel, Bhushan Steel and Power, Alok Industries Ltd.,

Monnet Ispat and Energy Limited to apparently start soon

as part of insolvency proceedings, the above instances led

to big industry players (often those intending to bid for such

stressed assets) questioning the credibility of the

insolvency process if the existing promoters were able to re-

acquire their own defaulting companies with a major

haircut.

What followed was the passing of the Insolvency and

Bankruptcy Code (Amendment) Ordinance, 2017 by the

Government on November 23, 2017 (“Ordinance”). This

Ordinance primarily disqualifies a person from submitting a

resolution plan if such person, or any other person acting

jointly with such person, or any person who is a promoter or

in the management or control of such person:

is an undischarged insolvent;

has been identified as a wilful defaulter in accordance

with RBI guidelines;

whose account is classified as an NPA and a period of 1

year or more has lapsed from the date of such

classification and who has failed to make payment of all

overdue amounts with interest thereon;

has been convicted for any offence punishable with

imprisonment for 2 years or more;

has been disqualified to act as a director under the

Companies Act, 2013;

has been prohibited by the Securities and Exchange

Board of India from trading in securities or accessing the

securities market;

has indulged in preferential transaction, undervalued

transaction or fraudulent transaction in respect of which

NCLT has passed an order under the Insolvency Code;

has executed an enforceable guarantee in favour of a



mechanism, may render such schemes more viable and

enforceable as both promoters and banks / lenders would

be required to adhere to certain haircuts, funded interest,

moratorium period, new funding, etc. which may be agreed

to before the NCLT and any non-compliance would be

strictly dealt with.

Waiving off / changing management might also be helpful

for certain companies but the same cannot be uniformly

applied to all companies.

Promoters' personal guarantee: The above can be

coupled with promoters' personal guarantee wherein all the

assets of promoters, whether in India, abroad, in trust, with

family including children, shall be applied if the promoters

are still defaulters.

Involvement of Asset Reconstruction Companies:

Extending/allowing asset reconstruction companies to

control sick companies and banks to involve/sell distressed

assets, can be another viable option”.

By appropriately implementing the aforesaid measures, the

Government may be able to improve the conditions of debt

ridden companies and the overall economy by adequately

dealing with the issue of NPAs. While, it remains to be seen

whether the Government's attempt to implement these

measures is going to be successful in adequately addressing

the growing problem of NPAs, however, a positive and firm

start has definitely been made in the right direction.

All these are required not to make our Reform s a SWEET

PALATBLE IRRESTIBLE LADOO TO EAT .

Sangeeta Gulati

( Author is a working member and views are expressed

are her own )

In addition to the recent developments under the

Insolvency Code, the Government has also recently,

announcing its approval of a recapitalization plan for

infusing capital into public sector banks to the extent of Rs.

2,11,000 crores over the next 2 years through a mix of

bonds and cash Infusion, inter alia with the objective of

cleaning up of NPAs. However, while this recapitalization

may be a welcome move for the banks, one cannot resort to

recapitalization alone to resolve the issue of NPAs.

. Infusion of cash will partially improve the balance sheets

of Public sector banks which would pave the way for them to

be sold and also will help banks to write off some of their 10

lakh crore bad loans currently on their books

Infusion will be done in 3 parts , Government will directly

pay banks Rs 18000 Crores by buying their shares and will

encourage banks to buy Rs 58000 Crores from market . Bulk

of Rs 1.35 Lakh Crores is expected to come from

recapitalisation bonds somewhere in 2019 . The impact of

such bond on Economy needs to be carefully watched.

Recapitalisation of banks is definitely a welcome step , but

are we saying that 2.00 lakh Crores of capitalisation is good

enough for the entire cleaning of NPA and no further NPA will

be reported .

Are we sure of current NPA number, the numbers as

depicted by banks & RBI are also different .

Will the Government continuously keeps recapitalising the

Public banks as & when the NPA keeps swelling ?

There are so many bottle necks which needs to be carefully

blocked as of now otherwise the entire process will again

take a clean swipe as earlier reforms have taken and net

result will be ----that public sector banks have swollen NPA

on their balance sheet with clear dent in Economy

“The reason why corporate debt restructuring and strategic

debt restructuring failed to a certain extent earlier, was

because companies wanted capital infusion to run while

banks, who were already suffering, refused to further lend

money to such companies which led to these companies

being unable to come out of the self-sustaining / revival

packages earlier provided by the Government.

Are there any options to loom out this issue . Some

resolutions which can therefore be examined are:

Introduction/Reinforcement of self-sustaining/revival

package by the Promoters: One such example can be

schemes such as the “5/25 refinancing scheme”, which

provided for longer gestation periods for repayment loans

with promoters being at the helm of the company's affairs.

In these schemes, promoters can be given the chance to

seek for maximum amortisation period say up to 20-25

years, depending upon the nature of industry and viable

business model. Although such schemes do not require

intervention of the NCLT, however, routing the scheme

through the NCLT as part of the insolvency resolution


K G Somani & Co, Chartered Accountants requires the following:

15 Articles for Statutory Audit, Internal Audit, Financial Advisory and Taxation. Should have cleared both groups of IPCC.

7 Chartered accountants for-

A. Statutory Audit - 2

B. Internal Audit - 2

C. Insolvency and bankruptcy practice - 3

Contact: 01123252225

Email at [email protected]

2.

1.

Membership of a club, health and fitness centre;

Rent-a-cab, life insurance and health insurance except

where––

the Government notifies the services which are

obligatory for an employer to provide to its employees

under any law for the time being in force; or

Such inward supply of goods or services or both of a

particular category is used by a registered person for

making an outward taxable supply of the same category

of goods or services or both or as part of a taxable

composite or mixed supply; and

Travel benefits extended to employees on vacation such

as leave or home travel concession;

(C) Works contract services when supplied for construction

of an immovable property (other than plant and

machinery) except where it is an input service for further

supply of works contract service;

(D) Goods or services or both received by a taxable person

for construction of an immovable property (other than

plant or machinery) on his own account including when

such goods or services or both are used in the course or

furtherance of business.

Explanation.––For the purposes of clauses (c) and (d),

the expression “construction” includes re-construction,

renovation, additions or alterations or repairs, to the

extent of capitalisation, to the said immovable property;

(E) Goods or services or both on which tax has been paid

under section 10 (composition scheme);

(F) Goods or services or both received by a non-resident

taxable person except on goods imported by him;

(G) Goods or services or both used for personal

consumption;

(H) Goods lost, stolen, destroyed, written off or disposed of

by way of gift or free samples; and

(I) Any tax paid in accordance with the provisions of

sections 74, 129 and 130.

The entire concept of Input Tax Credit i.e. the cases where you

are eligible to claim the credit and the details about ineligible

credit are creatively presented in form of infographics attached

below. Kindly refer the same for more clarity & to get

summarised version of the concept.

Goods & Service Tax (GST) is a milestone in the India's indirect

system, which came into force at a historic midnight session on

1st July 2017 in the Central Hall of the Parliament.

GST is seen as the biggest tax reform since independence as it

is a destination based tax system unlike earlier VAT, Service

Tax laws etc. It is levied at multiple stages of production and

distribution of goods & services with GST Credit available of

taxes paid on the inputs & input services & the same can be

adjusted against the GST to be paid on the outward supplies.

The seamless flow of input tax credit is the beauty of Goods &

Service Tax regime. So, whatever input goods, input services

and/or capital goods are being utilised for the business

purpose, shall be allowed as input tax credit to the registered

buyer who in turn is making taxable supplies. In other words,

we can say that, any person procuring input goods, input

services & capital goods and utilising the same for purpose

other than business or for making exempted supplies shall not

be eligible to claim the credit of taxes paid by them on the

inward supplies.

Where the goods or services or both are used by the registered

person:

Partly for effecting taxable supplies including Zero rated

supplies under this Act or Integrated Goods & Service

Tax Act, and

Partly for affecting exempt supplies under the said Acts,

The amount shall be restricted to so much of the input

tax credit as is attributable to the said taxable including

zero-rated supplies.

Further, section 17(5) of CGST Act 2017 specifies various input

goods, input services and capital goods whose credit shall not

be allowed. The taxpayer must take care that he doesn't book

the credit of such ineligible items because if undue or excess

credit is booked by the taxpayer, then as per section 50(3) of

the CGST Act 2017, he is required to reverse such undue or

excess credit booked along with the interest @ 24% p.a.

These ineligible items are:

(A) Motor vehicles and other conveyances except when they

are used––

(i) For making the following taxable supplies, namely:—

further supply of such vehicles or conveyances ; or

transportation of passengers; or

imparting training on driving, flying, navigating such

vehicles or conveyances;

(ii) For transportation of goods;

(B) The following supply of goods or services or both—

Food and beverages, outdoor catering, beauty treatment,

health services, cosmetic and plastic surgery except where an

inward supply of goods or services or both of a particular

category is used by a registered person for making an outward

taxable supply of the same category of goods or services or

both or as an element of a taxable composite or mixed supply;

“Tax net has expanded. The country's market has been integrated. Inspector raj is over. The tax burden on the masses has gone down. It is a win-win situation for all…”

Hon'ble Finance Minister, Sh. Arun Jaitley


CA. Divya Bansal



9


Ind AS – 20 AS-12It covers Government assistance. Such Government assistance should be disclosed.

It does not cover Government assistance

Government grants: It should be recognized as income, on a systematic and rational basis, over the periods necessary to match them with the related costs. As a corollary, and by way of abundant precaution, the Standard reiterates that government grants should not be credited directly to shareholders’ interests This means crediting to Capital Reserve or reduction from asset is not allowed.

For Depreciable Assets: Both Capital approach (less from asset) and Deferred approach is allowed.Non - Depreciable Assets: Its Capital Reserve if conditions complied. Deferred if conditions are not complied. Promoters Contribution: Equity.

Promoters Contribution: Grants should be recognized as income, on a systematic and rational basis, over the periods necessary to match them with the related costs. Such grants shall not be treated as capital receipt.

Promoters Contribution: Credited to Capital Reserve under the head shareholders’ funds

Non – Monetary Grants: NMG are recorded at Full Fair Value only.

Non – Monetary Grants: NMG are recorded at concessional price (acquisition cost) or nominal value.

Covers Forgiven loans as a grant. AS-12 has forgone Forgiven loans

Concessional loans are treated at par with Ind AS-109 Financial Instruments by effective interest method.

No guidance on concessional loans as per AS-12.

Giving back the grant is known as “Repayment of Government Grant”.

Giving back the grant is known as “Refund of Government Grant”.

“Repayment of Government Grant” as per Ind AS-20 is known as change in Accounting estimates.

“Refund of Government Grant” as per AS-12 as well as by AS-5 is known as Extra – ordinary activity.

Grants for the compensation of past losses or grants for immediate financial support should be transferred to P/L a/c or even deferred if conditions are yet to be complied.

Grants for the compensation of past losses or grants for immediate financial support should be transferred to Extra – ordinary activity.

Ind aS-20 deals with accounting of disclosures for government grants and disclosures for other forms of government assistance.

Some important points on Ind aS-20

Government assistance, according to the Standard, is action by the government aimed at providing economic benefits to some constituency by subsidizing entities that will provide them with jobs, services, or goods that might not otherwise be either available or available at a desired cost. Depending on the nature of the assistance given and the associated conditions, government assistance can be of many types, including


CA. Chandan Narang

IND AS 20 / IAS 20: ACCOUNTING FOR GOVERNMENT GRANTS AND DISCLOSURE OF GOVERNMENT ASSISTANCE


45IND AS 20 / IAS 20: ACCOUNTING FOR GOVERNMENT GRANTS AND DISCLOSURE OF GOVERNMENT ASSISTANCE

grants, forgivable loans, and indirect or nonmonetary forms of assistance, such as technical advice, free legal

advice, guarantee. Government assistance may not be recorded but requires disclosure.

IAS – 41: Ind AS-20 does not covers the Government grants related to IAS 41. Grants received for Biological

assets are covered specifically by Ind AS-41 itself. But grants related to agriculture produce is to be covered

by Ind AS – 20.

General Grants: Government grants to all : like LPG Subsidy to all companies is not covered by IAS – 20. This is because Ind AS – 20 is applicable to entity specific grants.

Fair value: The amount for which an asset could be exchanged between a knowledgeable, willing buyer and

a knowledgeable, willing seller in an arm’s-length transaction.

Forgivable loans: Those loans that the lender undertakes to waive repayment of under certain prescribed conditions.

Do you know

Government grant is not revenue but other income.

P r o b l e m s a n d s o l u t i o n s

Problem 1: Zallosh Limited received a grant of ₹ 60,00,000 to compensate it for costs it incurred in planting trees over a period of five years. Zallosh Ltd. will incur such costs in this manner:

Year Costs

1 ₹ 20,00,000

2 ₹ 40,00,000

3 ₹ 60,00,000

4 ₹ 80,00,000

5 ₹ 100,00,000

Total c osts thus incurred will aggregate to ₹ 300 lakhs, whereas the grant received is ₹60,00,000.

Required:

Based on the provisions of IAS 20, how would Brilliant Inc. treat the “grant” in its books?

Solution:Applying the principle outlined in the Standard for recognition of the grant, that is, recognizing the grant as income “over the period which matches the costs” using a “systematic and rational basis”.

Year Grant recognized as deferred

1 ₹ 60,00,000 x (20/300) = ₹ 4,00,000

2 ₹ 60,00,000 x (40/300) = ₹ 8,00,000

3 ₹ 60,00,000 x (60/300) = ₹ 12,00,000

4 ₹ 60,00,000 x (80/300) = ₹ 16,00,000

5 ₹ 60,00,000 x (100/300) = ₹ 20,00,000


Problem 2: Xellon Ltd received a land by paying ₹ 6,00,000 to the government for construction a factory run by a group of minority. The FV of the land at present is ₹ 50,00,000. The life of the factory is estimated to be 25 years. Pass journal entries as per Ind AS-20 for acquisition of land.

Solution:Land Account Dr `50,00,000 (as per Ind AS-20 NM grant recorded @FV)

To Ca sh `6,00,000

To De ferred Grant `44,00,000

(The grant will be deferred over 25 years to P/L ₹ 176000 p.a.)

Problem 3: Forgivable loans: Natushara Bevan Cosmo is an export company has received the attention of the State government of Gujarat. A loan outstanding ₹ 700 lakhs payable to ICICI Bank was waived by the government by 10%. Account as per Ind AS-20.

Solution: Loan from ICICI Account Dr ₹ 70 lakhs

To Income ₹70 lakhs

P roblem 4: Concessional loans: Manusumti Watkar Ltd is dealing in organic farming as one of the business activities. The company had taken a loan of ₹ 200 lakhs from Canara Bank under the instruction of government. Manusumti is required to pay just 6% as interest. The market rate is 8%. Account as per Ind AS-20. Even the repayment of 10% of the loan will be additionally waived if the loan is repaid within 4 years. The company decides to repay the loan at the end of 4 years.

Solution:Calculation of PV of Loan: (same as Ind AS-109 amortized cost) ₹ lakhs

Year Cash flows

PVF 8% PVCF Opn.balance

EffectiveInt

CashFlows

Amort. Bal.

0 172.05

1 12 0.9259 11.111 172.05 13.764 (12) 1.764 173.81

2 12 0.8573 10.288 173.81 13.905 (12) 1.905 175.72

3 12 0.794 9.53 175.72 14.06 (12) 2.06 177.78

4 192� 0.735 141.12 177.78 14.222 (192) --- ---

PV = 172.05

The difference between 200 and 172.05 will be deferred in the ratio of interest and principal benefit. The benefit for 4 years = 1.764 : 1.905 : 2.06 : {2.222+20 principal) = 1.764 : 1.905 : 2.06 : 22.222.

Journal for yr 1: (₹ lakhs)

Cash A/C Dr 200.00

To Loan from Canara Bank 172.05

To Deferred grant 27.95

Finance cost A/C Dr 13.764 (trf to P/L)

To Cash 12

To Loan from Canara Bank 1.764

Deferred grant A/C. Dr 1.764

To Profit / Loss Account 1.764



IND AS 20 / IAS 20: ACCOUNTING FOR GOVERNMENT GRANTS AND DISCLOSURE OF GOVERNMENT ASSISTANCE

Problem 5: On 1 October 2016 Epsilon opened a new factory in an area designated by the government as an economic development area. On that day the government provided Epsilon with a grant of $20 million to assist them in the development of the factory. This grant was in two parts:

(i) $12 million of the grant related to the construction of a large factory at a cost of $60 million. The land was leased so the whole of the $60 million is depreciable over the estimated 30 year useful life of the factory.

(ii) The remaining $8 million was received subject to keeping at least 200 employees working at the factory for a period of at least five years. If the number drops below 200 at any time in any financial year in this five year period then 20% of the grant is repayable in that year. From 1 October 2016 : 250 workers were employed at the factory and estimates are that this number is likely to increase over the next four years. Your assistant has recognised the $12 million received in respect of the factory as a credit to the income statement in the current year, on the basis that the factory has been constructed and brought into use. He has not recognized any of the $8 million employment grant on the basis that this is potentially repayable. He has charged $2 million in depreciation to the income statement. Comment.

Solution:Accounting for government grants is dealt with by Ind AS 20 – accounting for government grants and disclosure of government assistance. The basic principle of Ind AS 20 is that grants should be recognised as income over the periods necessary to match them with the related costs which they are intended to compensate, on a systematic basis.

Where the grant relates to an asset Ind AS 20 allows deferred method of presentation in the balance sheet. In this case this would mean recognising $400,000 ($12 million x 1/30) as a credit to the income statement in the current year with the balance of $11·6 million ($12 million – $400,000) shown in the balance sheet as a liability. $400,000 of this amount would be shown as a current liability with the balance of $11·2 million shown as a non-current liability.

The same principle applies to the grant related to the employment of staff. The grant is probably not going to be repaid so delaying recognition is inappropriate. Unless the likelihood of repayment is remote then it would be appropriate to disclose the possible repayment as a contingent liability. $1·6 million ($8 million x 1/5) of the employment grant should be recognised in the income statement for the current year. Ind AS 20 allows this amount either to be shown as ‘other income’ or as a reduction in the relevant expense. The unrecognised balance of $6·4 million ($8 million – $1·6 million) would be shown as deferred income, with $1·6 million shown as a current liability and $4·8 million as a non-current liability.

But has the company followed AS-12 or IAS – 20 the grant related to the asset would have even be reduced from the asset.


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OBITUARY

NIRC deeply mourns the sad demise of CA. S.K Gupta

Past President (1973-74) of The Institute of Chartered Accountants of India who

passed away on 6th March, 2018.

NIRC deeply mourns the sad demise of CA. P.N Mehta

Past Chairman (1968-69) of Northern India Regional Council

of The Institute of Chartered Accountants of India who passed

away on 6th March, 2018.

The views expressed herein are personal views of the author and do not necessarily represent the views of the NIRCs


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A View at the Elections of New Office bearers of NIRC of ICAI


A View at the Annual Award Function of NIRC of ICAI held on 24.02.2018

A View at the Seminar on Bank Audit held on 11nd March, 2018

A View at the Cricket Tournament for members (NPL-2017-18) (Final Match)

A View at the Seminar on International taxation held on 23rd February, 2018

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February 2018-March 2018

*�Class�Center�-�Shakarpur,�Vishwas�Nagar,�East�Azad�Nagar�&�Prashant�Vihar

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Documents

VOL. XLVI, NO. 1 February - March 2018 NORTHERN INDIA ... · e-Newsletter VOL. XLVI, NO. 1 February - March 2018 Team NIRC. From the Desk of the Chairman... Dear Professional Colleagues,