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May 2019

Accounting and Auditing UpdateIssue no. 34/2019

© 2019 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved

The new leases standard (Ind AS 116) is applicable from 1 April 2019. To ease the implementation, the standard provides different transition options and practical expedients, which can be elected independently of each other or can also be elected on a lease-by-lease basis. Therefore, companies would need to evaluate the transition options and practical expedients available in the standard. The choice of transition option and practical expedient will affect the costs and timing of implementation of the standard. These choices will also affect financial statements for years to come. In this edition of Accounting and Auditing Update (AAU), we have included an article which discusses in detail the different transition options available to an entity under Ind AS 116 with the help of practical examples.

To address the diversity in the practice of accounting for uncertainties under income taxes, recently, IFRS Interpretations Committee (IFRIC) published a new guidance, IFRIC 23, Uncertainties over Income Tax Treatments. This guidance has also been incorporated in Ind AS. The interpretation clarifies how to apply the recognition and measurement requirements in International Accounting Standard (IAS) 12, Income Taxes when there is uncertainty over income tax treatments. Similar guidance is available in US GAAP. Our article on the topic discusses the guidance provided by the interpretation under IFRS/Ind AS as well as under US GAAP with the help of examples.

The Financial Stability Board (FSB) undertook a fundamental review of major interest rate benchmarks e.g. LIBOR, EURIBOR, etc. and issued its report in 2014. In the 2008 financial crisis, there were cases of widespread manipulation of some interest rate benchmarks. Additionally, with reduction in liquidity within the interbank unsecured funding market led to lack of reliability, transparency and robustness of some of these interest rate benchmarks. On the basis of review, FSB recommended replacement of existing interest rate benchmarks, such as Inter-Bank Offer Rates (IBORs) with alternative, nearly risk-free interest rates (alternate interest rates) that are based to a greater extent on transaction data.

The IBOR reform is likely to have an impact on financial reporting. Therefore, the International Accounting Standards Board (IASB) has added a project to consider the effects of IBOR reforms on financial reporting. Our article provides an overview of the accounting risks posed by these reforms, and the steps taken by IASB to mitigate these risks.

As is the case each month, we have also included a regular round-up of some recent regulatory updates.

We would be delighted to receive feedback/suggestions from you on the topics we should cover in the forthcoming editions of AAU.

Sai VenkateshwaranPartner and HeadCFO AdvisoryKPMG in India

Ruchi RastogiPartnerAssuranceKPMG in India

ED

ITOR

IAL


Table of contentsInd AS 116, Leases – Transition options : 01

Clarity on reflecting tax uncertainty : 09

Impact of IBOR reforms : 13

Regulatory updates : 17


Introduction

The new standard on leases i.e. Indian Accounting Standard (Ind AS) 116, Leases is applicable for accounting periods beginning on or after 1 April 2019. Ind AS 116 replaces Ind AS 17, Leases, the current standard for leases. The new standard brings a significant change in the lease accounting by lessees. It eliminates the classification of leases as either finance or operating lease as required under Ind AS 17. A lessee is required to recognise a right-of-use asset along with a lease liability on its balance sheet if it has the right to control the use of an identified asset in a contract (similar to current finance lease accounting model).

Implementation of the new standard is likely to pose many practical challenges for entities. Such challenges comprise of data collection, systems and processes and communication. To ease the implementation, the standard provides different transition options and practical expedients. Many of them can be elected independently of each other. Some can even be elected on a lease-by-lease basis.

An entity’s selected transition option will have a significant impact on the following:


Ind AS 116, Leases – Transition optionsThis article aims to:

• Provide an overview of the transition options and practical expedients available under Ind AS 116, Leases to a lessee and

• Discuss their applicability with the help of examples.

CHAPTER I | PAGE 01

Carrying amount of the assets and liabilities - and therefore, net assets - when the entity first applies the new standard

Costs, resources and timeline for the entity’s implementation project

Entity’s profit and profit trends in the post transition years, until the last lease in place on transition has expired

Data required to implement the new standard.

Accounting and Auditing Update - Issue no. 34/2019 | 02

The table below summarises the key options and practical expedients for transition to Ind AS 116:

Accordingly, if an entity chooses to apply the practical expedient, it will consider following:

Practical expedients for an Ind AS preparer (who is not a first-time adopter of Ind AS)

Lease definition

On transition to Ind AS 116, an entity has the option to apply:

• The new definition of a lease to all of their contracts or

• A practical expedient to ‘grandfather’ their previous assessment of which existing contracts are, or contain, leases.

If the practical expedient is chosen, then it applies to all contracts entered into before the date of initial application (i.e. entered before 1 April 2019), and the requirements of Ind AS 116 apply to contracts entered into (or changed) on or after the date of initial application.

Application of this practical expedient is an accounting policy choice to be applied consistently to all contracts on transition i.e. an entity takes the same approach to:

• Leases of all classes of underlying assets and

• Leases in which the entity is a lessee and leases in which the entity is a lessor.

The practical expedient is expected to provide significant relief to the entities as they would not be required to reassess their previous decisions about which existing contracts do and do not contain leases. However, it may not be adopted by all the entities, for instance, a power purchasing entity under a power purchase agreement which is an operating lease under the current requirements but not a lease under the new standard, may prefer to apply the new definition rather than bringing the power purchase agreement on the balance sheet.

Source: KPMG IFRG Ltd.’s publication ‘Leases transition options – What is the best option for your business? November 2018

Source: KPMG in India’s analysis, 2019

Transition approach/practical expedient

ScopeLessee or lessor?

Lease definition: Option to ‘grandfather’ the assessment of which contracts are leases

Accounting policy choice

Lessee and lessor

Recognition exemption

Short-term leases Class of underlying asset

Lessee

Leases of low-value items Lease-by-lease

Lessee

Retrospective vs modified retrospective

Accounting policy choice

Lessee

Modified retrospective: Practical expedients

• Measurement of the right-of-use asset

• Discount rates

• Impairment and onerous leases

• Leases with a short remaining term

• Initial direct costs

• Use of hindsight

Lease-by-lease

Lessee


For contracts entered into, before 1 April 2019

For contracts entered on or after 1 April 2019

Option to grandfather the lease definition

Do not reassess whether contracts are, or contain, leases on transition to Ind AS 116. Therefore,

• Apply Ind AS 116 to all existing contracts that meet the definition of a lease applying the requirements of Ind AS 17.

• Not apply Ind AS 116 to existing contracts that did not meet the definition of a lease applying the requirements of Ind AS 17.

Apply Ind AS 116

• Apply the definition of a lease under Ind AS 116 to assess whether contracts entered into after the date of initial application of the new standard are, or contain, leases.


Therefore, entities would be required to carefully evaluate whether to apply the new transition relief, balancing:

• The cost savings that would arise if they take the transition relief; against

• The potential impact of needing to apply the new lease accounting model to arrangements that would fall outside lease accounting under the new definition.

It is to be noted that the practical expedient is not intended to be an amnesty for the entities with respect to errors or omissions in its previous assessment of which contracts are, or contain, leases. Such errors or omissions are to be corrected in a normal way.

Recognition exemptions

On transition and subsequently, a lessee may elect not to apply the lease accounting model to:

Example: An entity has taken a laptop on lease for 12 months. There is a renewal option at the end of 12 months with no change in payments. The lease does not contain any purchase option. At the time of lease commencement, the lessee is not reasonably certain to exercise the renewal option.

In the given case, the lease qualifies for the short-term exemption because the lease term is not longer than 12 months and there is no purchase option in the contract.

However, modifying the given case, 10 months later, the lessee expects an ongoing need for the laptop throughout the second year. Also, the market prices of the laptop have increased and therefore, it is beneficial for the lessee to extend the lease. Accordingly, the lessee exercises the renewal option.

Since, there has been a change in the lease term, therefore, the lessee would account it as a new lease. The new lease term will be 14 months (two remaining months from the initial lease term plus 12 additional months), so it would not meet the definition of a short-term lease. The entity will be required to recognise a right-of-use asset and a lease liability for the lease of laptop.


The recognition exemptions are important as they impact the population of contracts that need to be restated on the date of initial application i.e. a lessee will not be required to calculate lease assets and lease liabilities on transition for leases to which one or both of the exemptions apply.

Short-term leases

The recognition exemption for short-term leases is an accounting policy election by class of underlying asset. As such, an entity applies this exemption consistently on transition and subsequently. For instance, if an entity applies the exemption to qualifying leases of office equipment but not to qualifying leases of motor vehicles on transition, then it would be required to apply the approach to similar new leases that it enters into after the date of initial application.

Leases of low value items

Unlike short-term lease exemption, an entity is not required to apply the low-value lease exemption to leases of the same type of underlying asset on transition and subsequently. The election for leases of low-value assets can be made on a lease-by-lease basis. The exemption intends to capture leases that are high in volume but low in value, for instance, leases of small Information Technology (IT) equipment (laptop, mobile phones, and tablets), leases of office furniture, etc.

If a lessee elects the short-term recognition exemption and there are any changes to the lease term - e.g. the lessee exercises an option not previously included in its determination of the lease term - or the lease is modified, then the lessee will have to account for the lease as a new lease.


Leases with a lease term of 12 months or less that do not contain a purchase option i.e. short-term leases.

Leases for which the underlying asset is of low value when it is new – even if the effect is material in aggregate.


Transition approach

Retrospective vs modified retrospective

The new standard provides two optional approaches to transition. The approaches and the corresponding impacts have been depicted below:

Application of transition approach

The transition approach is a two step process:

Step 1: A lessee first chooses to apply the practical expedient on lease definition.

Step 2: It then chooses whether to apply the retrospective or modified retrospective approach to which it is a lessee. The election (out of the two approaches) would be applied consistently to all of its leases in which it is a lessee.

Retrospective approach: Under this approach, the lessee applies the new standard retrospectively in accordance with Ind AS 8, Accounting Policies, Changes in Accounting Estimates and Errors. For this purpose, the lessee:

• Applies the new standard to all leases in which it is a lessee

• Applies the standard retrospectively to each prior period presented

• Recognises an adjustment in equity at the beginning of the earliest period presented and

• Makes the disclosures required by Ind AS 8 on a change in accounting policy.

An entity will require extensive information about its leasing transactions in order to apply the new standard retrospectively. Such information may include historical information about lease payments, discount rates and historical information that management would have used in order to make various judgements and assumptions. This information will be required not only at lease commencement date but also at each date on which

an entity would have been required to recalculate lease assets and liabilities on reassessment or modification of the lease.

The entity applying retrospective approach has the benefit of the practical expedient to grandfather the lease definition. However, other practical expedients available under modified retrospective approach are not available under the retrospective approach.

Modified retrospective approach: Under this approach, a lessee applies the new standard from the beginning of the current period. For this purpose, the lessee:

• Calculates lease assets and lease liabilities as at the beginning of the current period

• Does not restate its prior period financial information

• Recognises an adjustment in equity at the beginning of the current period and

• Makes additional disclosures specified in the standard.

Approach 31 March 2019 31 March 2020Date of equity

adjustment

Retrospective (No practical expedients)

Ind AS 116*Ind AS 116 1 April 2018

Ind AS 17*

Modified retrospective (With practical expedients)

Ind AS 17 Ind AS 116 1 April 2019


* The entity will apply Ind AS 17 when preparing its financial statements for 2018. It will then apply Ind AS 116 to prepare comparative financial information to be included in its 2019-20 financial statements.



A modified retrospective approach would be applied as follows:

The approach is expected to reduce the cost of transition on account of the following reasons:

• There is no requirement to restate the comparative financial information

• It is possible to apply the approach using only current period information and

• Additional practical expedients are available (discussed in detail below).

This option would lead to lack of comparability of financial information.

Modified retrospective approach - Practical expedients for leases previously classified as operating leases

The standard provides following practical expedients if an entity chooses to apply modified retrospective


Operating lease

Right-of-use asset

As if Ind AS 116 had always applied or based on lease

liability

Lease liability

Present value of remaining lease

payments

Finance lease

Right-of-use asset

Previous carrying amount of finance

lease asset

Lease liability

Previous carrying amount of finance

lease liability

Source: KPMG IFRG Ltd.’s publication ‘Leases transition options – What is the best option for your business?, November 2018

approach for transition to Ind AS 116:

Measurement of lease liability

For leases previously classified as operating leases, a lessee is required to measure the lease liability using its incremental borrowing rate at the date of initial application as the discount rate (and not interest rate implicit in the contract).

Example: A retailer J, enters into a lease for a retail store for a fixed rent of INR100 per annum paid at the end of each year. The lease commences on 1 April 2014 when J’s incremental borrowing rate is 7 per cent. The non-cancellable period of the lease is 10 years, renewable for a further five years.

Under Ind AS 17, J classifies the lease as an operating lease and recognises the lease payments as an expense on a straight-line basis.

J adopts the new standard following modified retrospective approach with a date of initial application being 1 April 2019. At that date:

a. J is not reasonably certain to exercise renewal options. Therefore, the remaining term of the lease is five years.

b. J’s incremental borrowing rate is 5 per cent.

Given the facts of the case, J will be required to measure lease liability as at 1 April 2019 based on the lease payments over the remaining lease term (five years at INR100 per annum) discounted at its incremental borrowing rate at that date i.e. 5 per cent - giving a lease liability of INR433.


Measurement of right-of-use asset

For leases previously classified as operating leases, a lessee is permitted to choose on a lease-by-lease basis, either of the following options to measure the right-of-use asset at the date of initial application:

• Option 1: At its carrying amount as if the standard had been applied since the commencement date but discounted using the lessee’s incremental borrowing rate at the date of initial application.

• Option 2: At an amount equal to lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in the balance sheet immediately before the date of initial application.



Example: Continuing with the above example, assuming there are no initial direct costs, J may calculate the carrying amount of the right-of-use asset in either of the following manner:

Option 1: Retrospective but using the incremental borrowing rate at 1 April 2019: Measure right-of-use asset at the present value of the lease payments over the 10 year term (10 years at INR100 per annum) discounted at J’s incremental borrowing rate on transition i.e. 5 per cent - giving an amount of INR772.

Considering that J choses to depreciate right-of-use asset on a straight-line basis over the lease term, the carrying amount of the right-of-use asset on transition date is 5/10 x INR772 = INR386.

The balance amount of INR47 (i.e. INR433-INR386) will be debited to retained earnings.

Option 2: Equal to lease liability: Measure the right-of-use asset at an amount equal to lease liability i.e. INR433.

The initial carrying amount under option 1 is lower than option 2 as option 1 reflects the right-of-use asset amortisation profile (depreciated on a straight-line basis) whereas option 2 reflects the lease liability amortisation profile (measured using the effective interest rate method).

The depreciation charge under both options can be calculated as follows:

Option 1: 1/5 x INR386 = INR77

Option 2: 1/5 x INR433 = INR87

Source: KPMG IFRG Ltd.’s publication ‘Leases transition options - What is the best option for your business? November 2018

Example: An entity M leases a vehicle for use in its business for an annual rent of INR100. The lease commenced on 1 April 2017. The lease include a three-year non-cancellable period, renewable at M’s option for a further period of two years at the same rental.

In 2017, M assesses that it is reasonably certain to exercise the renewal option and that the lease term is five years. In the absence of any indicators for a finance lease, M classified the lease as an operating lease.

M adopts the new standard using a modified retrospective approach with the date of initial application being 1 April 2019. At that date, M assesses that it is no longer reasonably certain to exercise the renewal option i.e. the remaining term of the lease is one year.

Accordingly, on 1 April 2019, M can choose to account for the lease in any of the following ways:

a. M can apply the Ind AS 116 model and recognise a right-of-use asset and a lease liability. Under this approach, M will measure the lease liability at INR100, discounted at its incremental borrowing rate at 1 April 2019. Right-of-use asset can be measured retrospectively or at an amount equal to lease liability.

b. M can use the practical expedient to account for the lease as a short-term lease. Under this approach, M will not recognise a right-of-use asset or a lease liability. Instead, it would recognise an expense of INR100 and will disclose as part of total short-term lease expense.


Other practical expedients

When applying a modified retrospective approach to leases previously classified as operating leases, a lessee may elect to use one or more of the following practical expedients:

Discount rate: An entity may apply a single discount rate to a portfolio of leases with reasonably similar characteristics (such as leases with a similar remaining lease term for a similar class of underlying asset in a similar economic environment).

Impairment and onerous losses: A lessee could rely on its assessment of whether leases are onerous applying Ind AS 37 immediately before the date of initial application as an alternative to performing an impairment review.

If a lessee chooses this practical expedient, it should adjust the right-of-use asset at the date of initial application by the amount of any provision for onerous leases recognised in the balance sheet immediately before the date of initial application.

This practical expedient relates only to measurement on transition. Subsequently, the entity will be required to account for the right-of-use asset in accordance with Ind AS 116 i.e. it would depreciate the right-of-use asset under Ind AS 16, Property, Plant and Equipment and tests it for impairment under Ind AS 36, Impairment of Assets.

Leases with a short remaining term: An entity may account for leases for which the lease term ends within 12 months of the date of initial application as short-term leases. The use of this practical expedient is independent of the entity’s ongoing accounting policy for short-term leases after transition.



Initial direct costs: A lessee may exclude initial direct costs from the measurement of the right-of-use asset at the date of initial application.

The practical expedient is relevant for measurement of right-of-use asset using option 1 wherein the entity measures the right-of-use asset based on the lease liability adjusted for prepaid/accrued lease payments. Under option 2, an entity does not adjust the right-of-use asset for historical amounts, e.g. initial direct costs or historical lease modifications. (Refer ‘measurement of right-of-use asset’ section above)

The financial reporting impact of this expedient would be to reduce the carrying amount of the right-of-use asset as at the date of initial application.

Use of hindsight: An entity may use hindsight, such as in determining the lease term if the contract contains options to extend or terminate the lease.

Leases previously classified as finance leases

For leases that were classified as finance leases under

Consider this…

Lease definition - practical expedient

• Entities should evaluate whether grandfathering their previous assessment of which existing contracts are, or contain, leases will be beneficial considering the costs and other factors involved. This option is available to both a lessee as well as a lessor transitioning to the new standard.

• Once adopted, the practical expedient to grandfather will apply to all contracts entered before the date of initial application i.e. 1 April 2019. Ind AS 116 will apply to all contracts entered into on or after 1 April 2019.

Transition approach

• The standard provides two optional approaches to a lessee for transition i.e. retrospective and modified retrospective. There are several practical expedients, an entity may make use of while applying modified retrospective approach.

• A lessee will have to first choose to apply the practical expedient on lease definition and then have to decide whether to apply the retrospective or modified retrospective approach to leases in which it is a lessee.

• Following modified retrospective approach on transition, for leases previously classified as operating leases:

– A lessee is required to use the incremental borrowing rate as at the transition date for measurement of lease liability.

– A lessee is permitted to choose on a lease-by-lease basis, either of the following options to measure the right-of-use asset:

i. At its carrying amount as if the standard had been applied since the commencement date but discounted using the lessee’s incremental borrowing rate at the date of initial application.

ii. At an amount equal to lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in the balance sheet immediately before the date of initial application.

Lessor

• A lessor is not required to make any adjustments on transition for leases except in case of sub-leases.

Ind AS 17, an entity may recognise:

• A right-of-use asset measured initially at the previous carrying amount of the finance lease asset under Ind AS 17

• A lease liability measured at the previous carrying amount of the lease liability under Ind AS 17.

LessorA lessor is not required to make any adjustments on transition for leases in which it is a lessor (except for sub-leases) and would be required to account for its leases in accordance with Ind AS 116 from the date of initial application.

Income as depicted in the financial statements may differ from taxable income for many valid reasons. Financial reporting is governed by the principles of accounting standards, while the tax charge is based on the tax related standards and the tax laws of the respective jurisdiction. In practice, several interpretations are possible of tax laws for a particular transaction or circumstance and requires entities to make significant judgements. This may lead to difference in opinion, until a relevant taxation authority or court takes a decision. Such tax matters are referred as uncertain tax positions. Therefore, this may affect the accounting for an entity’s tax charge, tax asset or liability which could be different from positions taken while filing the tax returns.

Under the Generally Accepted Accounting Principles in the United States (US GAAP), the Financial Accounting Standards Board (FASB) has already published an interpretation on the above subject, which is popularly known as FASB Interpretation Number (FIN) 48, subsequently codified as a part of Accounting Standard Codification (ASC) 740. However, there was no specific guidance under the existing International Accounting Standard (IAS) 12, Income Taxes under International Financial Reporting Standards (IFRS) on how to account for the uncertain income tax positions leading to lack of consistency in accounting practices.

The IFRS Interpretations Committee (IFRIC), observed there was a diversity in the practice of accounting for uncertainties. To address this, they published a new guidance, IFRIC 23, Uncertainties over Income Tax Treatments.

The interpretation clarifies how to apply the recognition and measurement requirements in IAS 12 when there is uncertainty over income tax treatments. In such a circumstance the entity would recognise its current and deferred tax asset or liability by applying the requirements in IAS 12 based on taxable profit (tax loss), tax bases, unused tax losses, tax credits and tax rates which are determined by applying this interpretation.

IFRIC 23 only applies to tax treatments within the scope of IAS 12, i.e. tax treatments that relate to income tax positions and does not apply to non-income based taxes or levies as the IFRIC was concerned that a broader scope may create conflicts within the existing IFRS.


Clarity on reflecting tax uncertaintyThis article aims to:

• Discuss the accounting guidance in the situations when there is uncertainty over income tax treatments under IFRS/Ind AS and US GAAP.

CHAPTER II | PAGE 09



An ‘uncertain tax treatment’ is a tax treatment for which there is uncertainty over whether the relevant taxation authority will accept the tax treatment under the tax law.

Examples of uncertain tax positions are as follows:

• Deductions on tax returns that may be disallowed by tax authorities such as research and development credit

• Transactions structured to utilise existing carried forward tax losses that may otherwise expire if unused

• Transactions that could affect an entity’s non-taxable or tax exempt status

• Unresolved dispute between the entity and relevant tax authority on tax amount due.

In India, Appendix C has been added to Ind AS 12, Income Taxes which contains same guidance as IFRIC 23 in order to keep Ind AS converged with IFRS. The Ministry of Corporate Affairs has notified Appendix C to Ind AS 12 on 30 March 2019.

Key interpretations coveredThere are four key interpretation issues addressed in IFRIC 23, which we will discuss along with US GAAP applicability (where the difference is significant) with examples for better understanding.

The first one is unit of account, whether an entity considers uncertain tax treatments separately or together. This is similar to US GAAP.

The uncertain tax treatments of an entity with one or more of them, are considered individually or together as a group based on the approach which predicts the expected resolution of the uncertainty.

The factors considered by an entity in determining the better approach include:

a. How it prepares and supports the tax treatment; and

b. The approach that the entity expects the tax authority to take during an examination.

Company ABC Ltd. provides intra-group loans to its subsidiary companies. There are few loans, which are at a lower rate than the market rate. However, the overall interest on all loans is at appropriate market rate. The lower interest rate may be challenged by the taxation authorities. In considering whether uncertain tax treatments should be considered separately for each loan receivable or combined with other loan receivables, Company ABC Ltd. should adopt the approach that better reflects the way the taxation authority would examine and resolve the issue.

The second one is detection risk on the examination by taxation authorities. This is similar to US GAAP, when a company considers the uncertainty, it would assume that the Taxation Authorities have full knowledge of all relevant information in assessing the proposed tax treatment.

The third one is recognition and measurement. The key test is whether it is probable (i.e. more likely than not) that the taxing authority will accept the company’s tax treatment as reported in the income tax filing. If yes, the company records the same amount in the financial statements as submitted (or planned to be submitted) in the income tax return.

If no, the company reflects the effect of the tax uncertainty following the method that it expects will better predict the resolution of the uncertainty:

• Most likely amount method: The single most likely amount in a range of possible outcomes; or

• Expected value method: The sum of the probability-weighted amounts in a range of possible outcomes.

The principles of US GAAP slightly differs on this interpretation. Under US GAAP, a company only includes the income tax effects of its tax position in the financial statements when it is more likely than not that the position will be sustained in this first step. If the more-likely-than-not threshold is not met, then no tax benefit is recognised. In a second step, the company measures the tax effects of positions that meet the recognition threshold using the largest amount that is more than 50 per cent likely of being realised upon settlement with the taxing authority (the cumulative-probability approach).


The following flowchart should reflect the basis of the conclusion of an entity regarding the recognition and measurement of tax uncertainties under IFRS:

ABC Ltd. takes an INR1 million deduction on its income tax return. However, ABC Ltd. expects that it is not probable that the deduction will be accepted by the Taxation Authorities.

Likelihood of tax deduction accepted by the Taxation Authorities is explained in the table below:

Probability %

Cumulative probability %*

Amount

Based on probability, amount will be allowed**

40% 40% 1.00 million

0.40million

30% 70%*** 0.60 million***

0.18 million

30% 100%*** 0.25 million***

0.08 million

Total 0.66 million

* Relevant under US GAAP ** Relevant under IFRS*** The largest amount that is > 50% likely of being realised

Under IFRS

Using the most likely amount method, the tax deduction used in computing the tax benefit in the financial statements would be INR1 million, because this outcome has the highest likelihood of all scenarios.

However, the spread of probabilities show three large percentage probabilities that are fairly close; this makes it difficult to conclude that a single outcome is most likely. Therefore, in this fact pattern, we believe that the expected value method better predicts the resolution of the uncertainty. Using the expected value method, the tax deduction used in computing the tax benefit in the financial statements would be INR0.66 million.

Assuming a tax rate of 35 per cent, ABC Ltd. records the following entry to adjust the current income tax expense initially recorded on the basis of the tax return.

Debit* Credit*

Income tax expense 0.12 million -

Tax payable - 0.12 million

*(INR1 million – 0.66 million)*35%


When should you recognise?

How should you measure?

Is it likely that the taxation authorities will accept a tax treatment in the returns?

Amount in financial statements is different from tax returns. Account for uncertainity

Probable

Amount in financial statements should be consistent with

tax return

Most likely method (when

possible outcomes are binary or

concentrated on one value)

Expected Value method (range of

possible outcomes, neither binary nor concentrated on

one value)

Not probable

Source: KPMG in India’s analysis, 2019 read with KPMG IFRG Ltd.’s publication ‘Income tax exposures - IFRIC 23 clarifies the accounting treatment’ dated 7 June 2017


Under US GAAP

It is more likely than not that some level of tax benefit will be sustained. Accordingly, ABC Ltd. concludes that the recognition threshold is met, and measures the tax benefit at INR0.6 million using the cumulative-probability approach. (This is the largest amount that is >50% likely of being realised on settlement with the Taxation Authority.)

Applying the tax rate of 35 per cent, ABC Ltd. records the following entry to reflect the tax uncertainty.

Debit* Credit*

Income tax expense 0.14 million -

Tax payable - 0.14 million

*(INR1 million – 0.60 million)*35%

The fourth and last one is changes in facts and circumstances. When the facts and circumstances change or when new information becomes available to an entity, it should reassess the judgement or estimate used to determine the accounting for its uncertain tax treatment.

In determining whether a change in facts and circumstances occurred after the reporting date should be accounted for as an adjusting event or not, an entity applies the requirements of IAS 10, Events occurring after the Reporting Period.

Under US GAAP, only information available at the reporting date is considered, which is an exception to the general subsequent events guidance within US GAAP.

Company ABC Ltd. claimed a tax-deduction for a particular expense item. In the prior year, Company ABC Ltd. had concluded that it was probable that the taxation authority would accept the tax deduction. However, during the current year, ABC Ltd. is alerted by its tax advisor that another company in the jurisdiction with a similar issue was denied a tax deduction in a ruling by the Supreme Court. The recent court ruling is considered a change in facts and circumstances. As a result, ABC Ltd. has to reassess the uncertain tax treatment, taking into account the recent Supreme Court decision.

No new disclosure requirements have been introduced under IFRIC 23 but reinforces the need to comply with existing disclosure requirements about:

• Judgements made

• Assumptions and other estimates used

• The potential impact of uncertainties that are not reflected.


Under US GAAP, specific disclosures are required with an emphasis on the amounts of unrecognised tax benefits recorded. These include a tabular roll forward, the amount of unrecognised tax benefits that, if recognised, would affect the effective tax rate, interest, and penalty items, the amount of unrecognised tax benefits that are reasonably possible to change within the next 12 months and a description of open tax years by major jurisdiction.

Effective date and transition

Internationally, IFRIC 23 applies to annual reporting periods beginning on or after 1 January 2019 with earlier application permitted. In India, Appendix C is applicable for annual periods beginning on or after 1 April 2019.

An entity shall apply IFRIC 23/Appendix C either:

• Retrospectively in accordance with IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors if possible without the use of hindsight

• Retrospectively with the cumulative effect of applying the interpretation recognised at the date of initial application as an adjustment to the opening balance of retained earnings. Comparative information need not be restated.

Source: IFRS Perspectives: Uncertainty over incomes tax treatments: IFRIC 23 brings change; https://advisory.kpmg.us/articles/2017/ifric-23-tax-uncertainties.html

Introduction: IBOR reform

Globally, reference interest rates (such as Inter-Bank Offer Rates (IBOR)) underpin a large volume and broad range of financial products and contracts. Consequently, many reference interest rates are now deeply embedded in the financial systems.

In the 2008 financial crisis, there were cases of widespread manipulation of some interest rate benchmarks. This, coupled with reduction in liquidity within the interbank unsecured funding market has compounded the lack of reliability, transparency and robustness of some of these interest rate benchmarks. Accordingly, the Financial Stability Board (FSB)1 undertook a fundamental review of the major interest rate benchmarks. On the basis of the review, FSB recommended the replacement of existing interest rate benchmarks, such as IBORs with alternative, nearly risk-free interest rates (alternate interest rates) that are based to a greater extent on transaction data.

Some jurisdictions have implemented these recommendations by replacing their existing interest rate benchmarks with alternative interest rates. However, this has led to uncertainty about the long-term viability of some existing interest rate benchmarks and other risks and challenges such as contract identification and management, operational and accounting risk and challenges.

In this article we aim to provide an overview of the accounting risks posed by these reforms, and the steps taken by standard setters internationally to mitigate these risks.

Accounting risksIn December 2018, the International Accounting Standards Board (IASB) added a project to consider the effects of the unprecedented reform of IBOR on financial reporting. There were two groups of issues that were identified to have significant financial reporting implications:

• Pre-replacement issues: Issues affecting financial reporting in the period before replacement of IBOR with an alternate interest rate, and

• Replacement issues: Financial reporting issues arising once the IBOR had been replaced.

The IASB has considered these issues as part of two different projects. In its meetings in the months of February’19 and March’19, it considered the pre-replacement issues and the possible impact on hedge accounting requirements which require forward looking analysis. It evaluated how these issues would create uncertainties regarding the amount and timing of future cash flows of the hedged items and hedging instruments2. These uncertainties could result in discontinuation of hedge accounting for hedging


Impact of IBOR reformsThis article aims to:

• Summarise the amendments proposed to be made to the hedge accounting standards as a result of the IBOR reforms.

CHAPTER III | PAGE 13

1. FSB is an international body that monitors and makes recommendations about the global financial system. The report on IBOR reforms issued by FSB ‘Reforming Major Interest Rate Benchmarks’ was published in July 2014.

2. Uncertainties would be created with regard to decisions of what will be the alternate interest rate, and when will the existing IBOR be replaced.



relationships that would otherwise qualify for hedge accounting, or prevent entities from designating new hedging relationships. As a result, the changes in the fair value of the derivative (i.e. hedging instrument before discontinuation) are recognised in profit or loss, instead of Other Comprehensive Income (OCI). As per IASB, discontinuing all affected hedging relationships solely due to uncertainty related to the IBOR reform would not provide useful information to users of financial statements.

Considering this, IASB decided to propose exceptions to specific hedge accounting requirements in the accounting standards dealing with hedge accounting (IFRS 9, Financial Instruments and IAS 39, Financial Instruments: Recognition and Measurement3) in order to provide relief during this period of uncertainty. Accordingly, in May 2019, IASB issued an exposure draft- Interest Rate Benchmark: Proposed amendments to IFRS 9 and IAS 39 (exposure draft), modifying specific hedge accounting requirements in the aforementioned standards.

Impact on hedge accounting

Hedge accounting criteria

As part of their business activities, entities may enter into different transactions, exposing themselves to different business risks. Some of these risks could affect the profit or loss or, in limited circumstances, the OCI. As part of their risk management activities, entities may use financial instruments to manage the exposures arising from these risks. In this case, they may apply hedge accounting provided that all of the qualifying criteria in IFRS 9 (or IAS 39) are met, this criteria4 is illustrated in figure 1 on the right:

Figure 1: Hedge accounting criteria

Impact on hedge accounting and relief provided

Considering the uncertainties that the pre-replacement issues would create in certain hedge accounting criteria, IASB through its exposure draft has proposed amendments that would allow companies to disregard some of the uncertainties related to IBOR reform when applying these requirements.

IASB stated its intention to provide targeted relief to preparers for hedges of interest rate risk only (that are affected by the IBOR reforms), by amending both IFRS 9 and IAS 39 in three areas:

• The ‘highly probable’ requirement

• Prospective assessments of hedging relationships, and

• Previously qualifying risk components.5

Eligible hedging instrument

Formal designation and documentation

Eligible hedged item

Hedge effectiveness requirements

• All derivatives measured at FVTPL

• Certain non derivative assets/liabilities

• Identification of hedging intrument/hedged item

• Nature of risk being hedged

• Determining hedge effectiveness

• Recognised assets/ liabilities

• Unrecognised firm commitments

• Highly probable forecast transactions

• Risk components

• Economic relationship

• Non dominance of credit risk

• Hedge ratio requirements

(Emphasis added in impact areas)

Source: KPMG in India’s analysis, 2019 read with Insights into IFRS, KPMG IFRG Ltd’s publication, September 2018

3. IASB decided to propose amendments to IAS 39 as well because IFRS 9 allows entities, when they first apply IFRS 9, to choose as an accounting policy to continue to apply the hedge accounting requirements of IAS 39.

4. Criteria pertains to IFRS 9. The hedge accounting criteria specified in IAS 39 is:• Formal designation and documentation• Effectiveness of hedging relationship is reliably measurable• Hedge is highly effective, and• Forecast transaction is highly probable.

5. IBOR- Possible changes to support hedge accounting, KPMG IFRG Ltd’s publication, February 2019


Proposed relief in each of these areas are discussed below:

The ‘highly probable’ requirement

Existing hedging relationship

For a forecast transaction to qualify as an eligible hedged item in a cash flow hedge, it must be ‘highly probable’. The IBOR reforms put pressure on the highly probable requirement, since uncertainty exists regarding how the reform will affect the hedged cash flows because the details of the replacement of interest rate benchmarks are unknown. For example, an entity designates as the hedged item highly probable future LIBOR cash flows of an existing floating rate liability. At some point in time, these forecast LIBOR cash flows may no longer meet the highly probable requirement. This is because the underlying contracts are expected to be amended with the result that the cash flows will be based on an alternative interest rate, rather than LIBOR.

IFRS 9 and IAS 39 require entities to discontinue hedge accounting prospectively when the hedging relationship no longer meets the qualifying criteria (in this case when the ‘highly probable’ requirement does not meet). Considering the consequences of this, IASB in its exposure draft proposed to provide an exception in relation to the highly probably requirement during this period of uncertainty, and allow companies to focus on the existing IBOR-based contractual cash flows of a hedged item and ignore potential future modifications related to uncertainty associated with the IBOR reform that could change those hedged cash flows. Accordingly, in the above example, the entity should assume that no amendments will be made as a result of the IBOR reform to the hedged item’s contractual terms that reference LIBOR.

Discontinued hedging relationship

In case of a discontinued cash flow hedge (for any reason), IFRS 9 and IAS 39 specify when the amounts accumulated in the cash flow hedge reserve (in OCI) would be reclassified to profit or loss:

• Any amount remaining in the cash flow hedge reserve would be reclassified to profit or loss in the same period or periods during which the hedged cash flows affect profit or loss, assuming that interest rate benchmark on which the hedged cash flows are based is not altered as a result of interest rate benchmark reform.

• Where the hedged future cash flows are no longer expected to occur, the amount is immediately reclassified to profit or loss.

In light of the IBOR reforms, entities may conclude at some point that the hedged future cash flows are no longer expected to occur. This will result in immediate reclassification of amounts accumulated in the cash flow hedge reserve (with respect to those hedging relationships) to profit or loss.

Considering that this would not provide useful information to the users of financial statements, IASB in the exposure draft has proposed an exception, by which companies may be able to ignore potential future modifications related to uncertainty associated with the IBOR reform when assessing whether IBOR cash flows that were previously hedged in discontinued cash flow hedges are still expected to occur.

Prospective assessment of hedging relationships

A hedging relationship qualifies for hedge accounting only if there is an economic relationship between the hedged item and the hedging instrument6 (as per IFRS 9) or the hedge is expected to be highly effective (as per IAS 39)7. Demonstrating this requires the estimation of future cash flows because both assessments are prospective in nature. Due to the IBOR reform, at some point in time, it is possible that entities would not be able to demonstrate the existence of an economic relationship/effectiveness of a hedge, resulting in prospective discontinuation of hedge accounting.

The proposed relief may allow companies to perform a prospective assessment assuming that the IBOR on which the hedged item and hedging instrument are based is not altered as a result of the reform. Similarly, where an entity designates a highly probable forecast transaction as the hedged item, potential future amendments to such contracts related to IBOR reform may not affect the prospective assessment.

Previously qualifying risk components

Entities can designate items in their entirety or a component of an item (i.e. risk component8) as the hedged item. To be eligible for designation as a hedged item, a risk component needs to be separately identifiable, and the changes in the cash flows or fair value of the item attributable to changes in that risk component should be reliably measurable. For example, where an entity issues a five-year floating-rate debt


6. An economic relationship under IFRS 9 means that the hedging instrument and the hedged item have values that generally move in the opposite direction because of the same risk- i.e. the hedged risk.

7. The condition of existence of an economic relationship (as per IFRS 9) or that the hedge is highly effective (as per IAS 39) is collectively referred to as ‘prospective assessment’ in the exposure draft.

8. Risk component includes the changes in the cash flows or fair value of an item attributable to a specific risk or risks.

Consider this…

• It is to be noted that the exceptions in the exposure draft are intended to address only the uncertainties arising from the IBOR reform. Accordingly, if the hedging relationship fails any of the other criteria, the entity must discontinue hedge accounting as required by IFRS 9 or IAS 39.

• The comment period for the exposure draft ends on 17 June 2019. Considering the urgency of the matter, IASB intends to issue final amendments to IFRS 9 and IAS 39 by the end of this year.

• The Financial Conduct Authority (FCA)9 has announced that it will phase out LIBOR by the end of 2021. Instead, rates will be calculated on the basis of actual transactions executed by the central banks in the given currency areas. Further, pursuant to EU Regulation 2016/1011, the method used to calculate Euribor and Eonia is also to be overhauled by 2020. Both the financial and corporate communities should not underestimate the consequences of this impending shift.

• The IASB is yet to consider whether and, if so, how to address any issues that might affect financial reporting when an existing interest rate benchmark is replaced with an alternative interest rate, i.e. replacement issues. The IASB noted that a range of issues could arise at different points in time due to the uneven timing of the replacement coupled with different approaches to replacement and different interest rate benchmarks being considered in different markets. IASB will be monitoring developments in this area. As more information becomes available, IASB will assess the potential financial reporting implications of the replacement and determine whether it should take any action and, if so, what.

• Given the large volume of transactions and contracts that are based on LIBOR in India, similar amendments are expected to be made in Ind AS 109, Financial Instruments.



9. The Financial Conduct Authority is the conduct regulator for financial services firms and financial markets in the UK.

instrument that bears interest at three-month LIBOR + 1 per cent, the entity could designate as the hedged item either the entire debt instrument or the three-month LIBOR (risk component).

The IASB observed that as the IBOR reform progresses, it would affect an entity’s ability to conclude that an interest rate benchmark is a separately identifiable component of an instrument. This would result in the prospective discontinuation of hedge accounting. Accordingly, the exposure draft proposes that the separate identification requirement for hedges of the benchmark component of interest rate risk should be applied only at the inception of those hedging relationships affected by IBOR reform.

Effective dateThe IASB has proposed that the amendments would be applicable for annual periods beginning on or after 1 January 2020, with earlier application permitted. The proposed exceptions should be applied to all hedging relationships that are affected by the uncertainties arising from IBOR reform, and should continue to be

applied until the earlier of when:

• The uncertainty over the timing and amount of the resulting cash flows no longer exists, and

• The hedging relationship is terminated.

DisclosuresApart from the disclosures specified by IFRS 7, Financial Instruments: Disclosures, it is proposed that entities specifically disclose the extent to which the application of the reliefs have affected hedge accounting.

Extension of deadline for filing ‘e-Form ACTIVE’

Background

On 25 February 2019, Ministry of Corporate Affairs (MCA) amended the Companies (Incorporation) Rules, 2014 and introduced Rule 25A. The Rule 25A specified that every company incorporated on or before the 31 December 2017 should file the particulars of the company and its registered office, in ‘e-Form ACTIVE’ (Active Company Tagging Identities and Verification) on or before 25 April 2019 (excluding companies under process of liquidation/dissolution or amalgamated). The attachments to ‘e-From ACTIVE’, inter alia, include a photograph of the registered office showing name of the company, address of the registered office, photograph of inside office along with at least one director/key managerial personnel who is signing the form, etc.

Failure to file ‘e-Form ACTIVE’ on or before 25 April 2019 by a company would be marked as ‘ACTIVE-non-complaint’. If a company files ‘e-Form ACTIVE’ on or after 26 April 2019, then it would need to pay a fee of INR10,000 and company shall be marked as ‘ACTIVE-Compliant’.

New development

The MCA through its notification dated 25 April 2019 further amended Rule 25A and extended the date of filing the required particulars of the company and its registered office, in ‘e-Form ACTIVE’ by 15 June 2019.

Source: MCA notification G.S.R.330 (E) dated 25 April 2019

Amendment to SEBI (Infrastructure Investment Trusts) Regulation

Securities and Exchange Board of India (SEBI) issued a notification on 22 April 2019 and issued amendments to Securities and Exchange Board of India (Infrastructure Investment Trusts (InvITs)) Regulations, 2014.


Regulatory updates

CHAPTER IV | PAGE 17


Amendment to SEBI (Real Estate Investment Trusts) Regulation

SEBI issued amendments to SEBI (Real Estate Investment Trusts) Regulations, 2014, on 22 April 2019.

The amended regulation has reduced minimum amount of subscription from any investor in initial public offer or follow on offer to INR50,000. Also, trading lot for trading of units on stock exchange should consist of 100 units in public offer.

Source: SEBI notification no. SEBI/LAD-NRO/GN/2019/09 dated 22 April 2019

MCA issued an amendment relating to one-time return of deposits and Form DPT-3

Background: The MCA through its notification dated 22 January 2019 made certain amendments to the Companies (Acceptance of Deposits) Rules, 2014

(Deposit Rules). Following are the key amendments relating to return of deposits:

• Annual return (Rule 16): Every company (other than a government company) should use form DPT-3 (return of deposits) to file:

a. A return of deposit

b. Particulars of a transaction not considered as deposit or

c. Both

This return should be filed with the Registrar of Companies (ROC) on or before 30 June, of every year (comprising information contained therein as on 31 March of that year duly audited by the auditor of the company).

(Emphasis added to highlight change)


Key amendments issued are as follows:

Source: SEBI notification no. SEBI/LAD-NRO/GN/2019/10 dated 22 April 2019 and SEBI circular no. SEBI/HO/DDHS/ DDHS/CIR/P/2019/59 dated 23 April 2019

Description Overview of the amendments

Reduction in minimum subscription amount

The regulation has reduced minimum amount of subscription from any investor in initial public offer or follow on offer to INR1,00,000 from INR10,00,000. Also, trading lot for trading of units on stock exchange should consist of 100 units in public offer.

Enhancement in borrowing limits

The limit of aggregate consolidated borrowings and deferred payments net of cash and cash equivalent has been enhanced to 70 per cent.

Also, a new requirement has been introduced with respect to the said borrowings if it exceeds 49 per cent. This includes obtaining credit rating of ‘AAA’, manner of utilisation of funds, approvals from 75 per cent of unit holders, valuation of the assets on quarterly basis, etc.

Modification in date of submission of reports to stock exchange

An InvIT is required to submit half yearly report by investment manager to the stock exchange for the half year ending 30 September only within 45 days from the end of half year.

However, where borrowing and deferred payments exceed 49 per cent then it is required to submit quarterly report to stock exchange within 30 days from end of every quarter ending June and December.

Framework for private placement of units of unlisted InvIT

New chapter has been introduced which envisages framework for private placement of units of InvIT. This new chapter deals with raising of funds and investments by private placement, disclosure requirements, surrender of certificate, listing of units, etc.

Enhanced financial disclosure for InvITs

SEBI vide circular dated 23 April 2019, issued guideline for determination of allotment and trading lot size for InvITs. The guideline requires additional disclosure where consolidated borrowing exceeds 49 per cent. Disclosures includes asset cover available, debt-equity ratio, debt service coverage ratio, interest service coverage ratio and net worth.



• One-time return (Rule 16A): A one-time return is required to be filed by every company (other than a government company) with respect to the receipt of money or loan outstanding from 1 April 2014 till 22 January 2019 but not considered as deposits. Further, MCA through its notification dated 12 April 2019, changed the period for the one-time form from 22 January 2019 to 31 March 2019 (i.e. information to be provided from 1 April 2014 to 31 March 2019).

Additionally, MCA clarified that on account of a delay in deployment of revised DPT-3 form on MCA portal, no additional fees as applicable under the Companies (Registration Offices and Fees) Rules, 2014 would be levied while filing of the one-time return upto 30 days from the date the new form would be deployed on the MCA portal.

• Revised Form DPT-3: A revised Form DPT-3 has been issued.

New development

Following are the recent amendments issued by the MCA:

• Date of filing of one-time return of deposits: On 30 April 2019, MCA amended Rule 16A to provide that every company (other than a government company) would need to file with the ROC a one-time return in Form DPT-3 by 29 June 2019 (i.e. within 90 days from 31 March 2019) along with specified fees. Earlier the requirement was to file one-time return within 30 days from the date the new form would be deployed on the MCA portal.

• Upload of electronic Form DPT-3: On 19 May 2019, MCA has uploaded revised electronic Form DPT-3 on its portal. The revised form can be used for filing of both annual and one-time return.

The electronic form has following differences as compared to the format of Form DPT-3 issued by MCA on 22 January 2019:

– Point 9 – This deals with details of total number of deposit holders as on 1 April. The electronic DPT-3 form additionally requires total number of deposit holders at the end of financial year as well.

– Point 12 – This deals with details of liquid assets, where companies are mandatorily required to provide amount of deposits maturing by the end of financial year. The electronic form clearly specifies that this information is to be provided for deposits maturing on or before 31 March next year.

– Point 16 – The electronic form inserted a new clause, which requires companies to provide details of credit rating obtained such as name of the agency, rating and date of the rating obtained.

Also refer to KPMG in India’s First Notes on ‘MCA issued an amendment relating to one-time return of deposits and Form DPT-3’ dated 8 May 2019.

Source: MCA notification G.S.R. 341 (E) dated 30 April 2019

ITFG clarifications bulletin 19

The Ind AS Technical Facilitation Group (ITFG) of the Institute of Chartered Accountants of India (ICAI) issued its ITFG clarifications bulletin 19 on 9 May 2019. The bulletin provide clarifications on the following six issues:

1. Retrospective application of Ind AS 110, Consolidated Financial Statements on purchase of additional shares in subsidiary.

2. Assessment of performance obligation satisfied over time and measurement of extent of performance obligation or satisfied at a point in time.

3. Application of method of transitional provisions (Appendix C) of Ind AS 115, Revenue from Contracts with Customers in case of first time adoption of Ind AS.

4. Application of capitalisation rate as per Ind AS 23, Borrowing Costs for qualifying assets acquired under business combination as per Ind AS 103, Business Combinations.

5. Presentation of comparative figures in financial statements in case of business combination under pooling of interest method as per Appendix C to Ind AS 103.

6. Application of Ind AS road map.

Source: ITFG clarifications bulletin 19 issued by ICAI dated 9 May 2019

MCA notified amendments to NCLT Rules

Background: Section 245 of the Companies Act, 2013 (2013 Act) deals with class action suit that can be filed by a certain number of members or depositors (or any class of members/depositors).

A class action suit can be filed if members/depositors are of the opinion that management or affairs of the company are being conducted in a manner prejudicial to the interests of the company or its members/depositors. The 2013 Act lays down the various situations where class action suit could be filed.


Requisite number of members/depositors needed to file class action suit: The number of members/ depositors required to file class action suits are as follows:

Type of company Members Depositors

Company with share capital

The number of members would be lower of (A) or (B) as follows:

A. (a) 100 members or (b) prescribed percentage of the total number of its members, whichever is less

B. Any member(s) holding not less than prescribed percentage of the issued share capital of the company (subject to the condition that the applicant(s) has (have) paid all calls and other sums due on his/her (their) shares).

The requisite number of depositors provided would be lower of the following:

A. (a) 100 depositors or (b) prescribed percentage of the total number of its depositors whichever is less, or

B. Any depositor(s) to whom the company owes prescribed percentage of its total deposits.

Company without share capital

Not less than one-fifth of the total number of its members.

Same as above.

New development

On 8 May 2019, MCA has notified requisite percentage of the members/depositors who may apply for a class action suit. The percentages are as follows:

Type of company Members Depositors


Listed company

The requisite number of members would be lower of (A) or (B) as follows:

A. (a) At least five per cent of the total number of its members or

(b)100 members, whichever is lower or

B. Member(s)holding not less than two per cent of its issued share capital.

A. The requisite number of depositors would be lower of the following:

(a) At least five per cent of the total number of its depositors

(b) 100 depositors, whichever is lower or

B. Depositor(s) to whom a company owes five per cent of its total deposits.


Unlisted company

The number of members would be lower of (A) or (B) as follows:

A. (a) At least five per cent of the total number of its members

(b) 100 members, whichever is lower or

B. Member(s) holding not less than five per cent of its issued share capital.

Same as above.

The above amendments come into force on the date of their publication in the official gazette.

Also refer to KPMG in India’s First Notes dated 23 May 2019 on ‘MCA notified amendments to NCLT Rules’.

Source: MCA notification G.S.R.351 (E) dated 8 May 2019




Appointment of Chief Risk Officer (CRO) for NBFCs

Reserve Bank of India (RBI) issued a notification on 16 May 2019 and decided that NBFCs with asset size of more than INR50 billion should appoint a CRO with specified role and responsibilities. The CRO is required to function independently so as to ensure highest standards of risk management.

Additionally, NBFCs are required to adhere to the instructions with regard to role and responsibilities of CRO which include experience or professional qualification, tenure of appointment, removal/transfer, independence, direct reporting requirement, involvement in process of identification, measurement and mitigation of risks, etc.

Source: RBI/2018-19/184, DNBR (PD) CC. No.099/03.10.001/2018-19 dated 16 May 2019

Reporting relating to GAAR and GST in Tax Audit Report deferred till 31 March 2020

Background

The Central Board of Direct Taxes (CBDT) through its notification (no. G.S.R. 666(E)) dated 20 July 2018 amended the Income-tax Rules, 1962 with respect to the Tax Audit Report (Form 3CD). This form is required to be certified by an auditor under Section 44AB of the Income-Tax Act, 1961 (IT Act).

The amendment relates to 15 areas in the Form 3CD i.e. six are modifications in the existing clauses and nine are new clauses.

Of the nine clauses, two clauses were deferred upto 31 March 2019. Those clauses are as follows:

• Clause 30C - Disclosure regarding General Anti-Avoidance Rules (GAAR): This clause requires a taxpayer to report the nature and tax impact of impermissible avoidance arrangement as referred to in Section 96 of the IT Act, if any. Section 96 of the IT Act provides that an arrangement would be presumed to be impermissible if the main purpose of whole or part of the arrangement is to obtain a tax benefit.

• Clause 44 - Break-up of total expenditure between Goods and Services Tax (GST) registered vendors and unregistered vendors: This clause requires an assessee to report break-up of total expenditure incurred during the year between:

a. Expenditure incurred relating to entities not registered under GST and

b. Expenditure incurred relating to entities registered under GST.

Additionally, the expenditure relating to GST registered vendors is required to be further bifurcated between:

a. Expenditure in relation to goods or services exempt from GST

b. Expenditure towards entities registered under composition scheme and

c. Expenditure towards other registered entities.

Keeping in view the complexity involved in reporting under the above clauses (i.e. clause 30C and clause 44) and the representations received, the CBDT through its circular (no. 6/2018) dated 17 August 2018 deferred the reporting under these clauses up to 31 March 2019.

The reporting requirement under other clauses came into effect from 20 August 2018.

New development

On 14 May 2019, CBDT through its circular (no. 9/2019) has further deferred the reporting under clause 30C and clause 44 of the Tax Audit Report till 31 March 2020. The decision has been made on the basis of the representations received by the CBDT.

Source: CBDT circular no. 9/2019 dated 14 May 2019

KPMG in India’s IFRS institute

Visit KPMG in India’s IFRS institute - a web-based platform, which seeks to act as a wide-ranging site for information and updates on IFRS implementation in India.

The website provides information and resources to help board and audit committee members, executives, management, stakeholders and government representatives gain insight and access to thought leadership publications that are based on the evolving global financial reporting framework.

.

MCA notified amendments to NCLT Rules

23 May 2019

Background

Section 245 of the Companies Act, 2013 (2013 Act) deals with class action suit that can be filed by a certain number of members or depositors (or any class of members/depositors).

However, the 2013 Act was silent on the percentage of members/depositors required to file a class action suit.

Recent development

On 8 May 2019, the Ministry of Corporate Affairs (MCA) has notified requisite percentage of the

members/depositors who may apply for a class action suit through an amendment to National Company Law Tribunal (NCLT) Rules.

The amendments are applicable from 8 May 2019.

This issue of First Notes provides an overview of amendments notified by MCA to the NCLT Rules.

.

First Notes

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2019 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The KPMG name and logo are registered trademarks or trademarks of KPMG International.

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Introducing

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Voices on Reporting KPMG in India is pleased to present Voices on Reporting (VOR) - a series of knowledge sharing calls to discuss current and emerging issues relating to financial reporting.

On 22 May 2019, KPMG in India organised a special session of VOR webinar to discuss significant impact areas of Ind AS 116, Leases on life sciences sector.

Also we discussed other important updates e.g. Appendix C, Uncertainty over Income Tax Treatments of Ind AS 12, Income Taxes. The new guidance seeks to bring clarity to the accounting for income tax treatments that are yet to be accepted by tax authorities. The appendix is effective for accounting periods beginning on or after 1 April 2019.

accounting and auditing update - assets.kpmg · the new leases standard (ind as 116) is applicable...

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