By Himanshu V. Kishnadwala
Chartered Accountant
MULTIPLE KEY AUDIT MATTERS IN INDEPENDENT
AUDITORS’ REPORTS
RELIANCE INDUSTRIES LTD. (31st MARCH,
2019)
From Auditor’s Report on Consolidated
Financial Statements
KEY AUDIT MATTERS
Key Audit Matters are those matters that, in our professional judgement,
were of most significance in our audit of the Consolidated Financial Statements
for the financial year ended 31st March, 2019. These matters were
addressed in the context of our audit of the Consolidated Financial Statements
as a whole, and in forming our opinion thereon, and we do not provide a
separate opinion on these matters. For each matter below, our description of
how our audit addressed the matter is provided in that context. We have
determined the matters described below to be the Key Audit Matters (KAMs) to be
communicated in our report.
We have fulfilled the responsibilities described in the auditor’s
responsibilities for the audit of the Consolidated Financial Statements section
of our report, including in relation to these matters. Accordingly, our audit
included the performance of procedures designed to respond to our assessment of
the risks of material misstatement of the Consolidated Financial Statements.
The results of audit procedures performed by us and by other auditors of
components not audited by us, as reported by them in their audit reports
furnished to us by the management, including those procedures performed to
address the matters below, provide the basis for our audit opinion on the
accompanying Consolidated Financial Statements.
KAM: Capitalisation of property, plant and
equipment, intangible assets and related depreciation and amortisation
The holding company has identified capitalisation of property, plant and
equipment as a KAM. As a part of the gasification project, the holding company
has incurred additional capital expenditure for modification of power plant
equipments, i.e., gas turbines, auxiliary boilers, HRSGs, process furnaces,
etc., to make them compatible with multiple feedstock, including those received
from petcoke gasifier. Currently, all units of the gasification complex, its
associated utilities and offsites have been started and the complex is under
stabilisation. The testing phase of the project is under progress as at 31st
March, 2019 as it has not achieved the quality and efficiency parameters.
Accordingly, significant level of judgement is involved to ensure that
capitalisation of property, plant and equipment meet the recognition criteria
of Ind AS 16 Property, Plant and Equipment, specifically in relation to
determination of the trial run period and costs associated with trial runs for
it to be ready for intended use. As a result, the aforesaid matter was
determined to be a KAM.
The auditors of Reliance JioInfocomm Limited (‘RJIL’), a subsidiary of
the holding company, have reported a KAM on capitalisation of property, plant
and equipment / intangible assets and amortisation / depreciation of spectrum
costs and related tangible assets as it is a material item on the balance sheet
of the subsidiary in value terms. The property, plant and equipment and
intangible assets of the subsidiary as at 31st March 2019 is Rs.
134,000 crores. While the subsidiary has capitalised the wireless
telecommunication project, it continues to augment capacity therein and
continues to invest in setting up the wireline telecommunication project. Items
of property, plant and equipment and intangibles are capitalised when they are
ready for use as intended by the management.
Further, spectrum costs and the related tangible assets are amortised /
depreciated to appropriately reflect the expected pattern of consumption of
expected future economic benefits from continued use of the said assets (Refer
Note B.3 [e] of the Consolidated Financial Statements). Determination of timing
of capitalisation as well as rate of amortisation / depreciation in order to
ensure compliance with the stipulation of the applicable Accounting Standards
involve estimates, significant use of technology and significant judgement. Accordingly,
valuation and completeness are key assertions related to capitalisation of
property, plant and equipment and intangible assets, while accuracy is the key
assertion in respect of depreciation / amortisation charge.
How our audit addressed the KAM
Our audit procedures included and were not limited to the following:
Assessing the nature of the costs incurred to substantially modify the
existing power plants to test whether such costs are incurred specifically for
trial runs and meet the recognition criteria as set out in paras 16 to 22 of
Ind AS 16.
Evaluating the assessment provided by
third-party vendors involved in the construction and testing process to
determine whether capitalisation ceased when the asset is in the location and
condition necessary for it to be capable of operating in the manner intended by
the management.
In respect of the KAM reported by the auditors of RJIL, we performed
inquiry of the audit procedures performed by them to address the same. As
reported by the subsidiary auditor, the following procedures have been
performed by them:
(i) Testing the design, implementation and operating effectiveness of
controls in respect of review of capital work in progress, particularly in
respect of timing of the capitalisation with source documentation;
(ii) Testing controls over determination of
expected economic benefits from the use of relevant assets and monitoring
actual consumption thereof to true-up (sic) the expected pattern of
consumption during an accounting period;
(iii) Testing, including substantial involvement of internal telecom and
information technology specialists, to validate the expected pattern of
consumption of the economic benefits emanating from the use of the relevant
assets, as well as testing the relevant application systems used in monitoring
of actual consumption of the expected economic benefits;
(iv) Substantive testing procedures, including testing necessary
authorisations for capitalisation of items of PPE and intangible assets,
testing supporting documentation for consumption of capital goods inventory,
comparison of actual pattern of consumption of benefits for the current year
with the budget and testing the mathematical accuracy of computation of amortisation
/ depreciation charge for the year.
Obtained and read the financial statements of RJIL to identify whether
disclosure for capitalisation of property, plant and equipment and intangible
assets including spectrum and related amortisation / depreciation has been
appropriately disclosed in the consolidated financial statements of the group.
KAM: Changes in useful life and residual
value of plant and machinery
As at 31st March, 2019 the holding company had a gross block
of Rs. 228,340 crores in plant and machinery which constitutes 52.1% of the
property, plant and equipment. In the current year, the holding company has
revised the useful life and residual value of the plant and machinery used in
the refining segment. Assessment of useful lives and residual values of plant
machinery in an integrated and complex plant involves management judgement,
consideration of historical experiences, anticipated technological changes,
etc. (Refer Note 1.7 of the Consolidated Financial Statements). Accordingly, it
has been determined as a KAM.
How our audit addressed the KAM
Our audit procedures included and were not limited to the following:
(a) Evaluating the reasonableness of the assumptions considered by the
management in estimation of useful life and residual values;
(b) Examining the useful economic lives and residual value assigned with
reference to the holding company’s historical experience, technical evaluation
by third party and our understanding of the future utilisation of assets by the
holding company;
(c) Assessing whether the impact on account of the change has been
appropriately recognised in the financial statements;
(d) Review of the disclosures made in the financial statements in this
regard.
KAM: Estimation of oil reserves and decommissio-ning
liabilities
Refer to Note 30.2 on proved reserves and production, both on product
and geographical basis, and Note C(A) on estimation of oil and gas reserves,
Note C(C) on depreciation, amortisation and impairment charges and Note B.3(k)
on provisions. The determination of the holding company’s oil and natural gas
reserves requires significant judgements and estimates to be applied. Factors
such as the availability of geological and engineering data, reservoir
performance data, acquisition and divestment activity, drilling of new wells
and commodity prices, all impact the determination of the holding company’s
estimates of oil and natural gas reserves. The holding company bases its proved
reserves estimates considering reasonable certainty with rigorous technical and
commercial assessments based on conventional industry practice and regulatory
requirements. Estimates of oil and gas reserves are used to calculate depletion
charges for the holding company’s oil and gas assets.
The impact of changes in estimated proved reserves is dealt with
prospectively by amortising the remaining carrying value of the asset over the
expected future production. Oil and natural gas reserves also have a direct
impact on the assessment of the recoverability of asset’s carrying values
reported in the financial statements. Further, the recognition and measurement
of decommissioning provisions involves use of estimates and assumptions
relating to timing of abandonment of well and related facilities which would
depend upon the ultimate life of the field, expected utilisation of assets by
other fields, the scope of abandonment activity and pre-tax rate applied for
discounting. Accordingly, the same is considered as a KAM. The auditors of
Reliance Holding USA Inc. (‘RHUSA’), a subsidiary of the holding company, have
also reported a KAM on the aforesaid topic.
How our audit addressed the KAM
Our procedures have focused on the management’s estimation process in
the determination of oil and gas reserves and decommissioning liabilities. Our
work included, and was not limited to, the following procedures:
(I) Understand the holding company’s process and controls associated
with the oil and gas reserves estimation process;
(II) Evaluate the objectivity, independence and competence of the
internal specialists involved in the oil and gas reserves estimation process;
(III) Test that the updated oil and gas reserve estimates were included
appropriately in the holding company’s consideration of impairment, accounting
for amortisation / depletion and disclosures of proved reserves and proved
developed reserves in the financial statements;
(IV) Test the assumptions used in determining the decommissioning
provisions. And compare these assumptions with the past year and inquire for
reasons for any variations;
(V) In respect of the KAM reported to us by the auditors of RHUSA, we
performed an inquiry of the audit procedures performed by them to address the
same. As reported to us by the subsidiary auditor, they have performed
procedures in relation to the approach used; test of controls performed with
regard to data input into the system for calculation of oil and gas reserves;
audit report issued by external experts appointed by the subsidiary relating to
the audit of the key data and assumptions used by the management for estimating
the oil and gas reserve and the future net income as at the year-end;
competence and objectivity of the external experts; calculation of the
depletion charge and future net income and reasonableness of the discount rate
used by the subsidiary for calculating the future net income for impairment
calculation;
(VI) With respect to RHUSA, obtain and read its financial statements to
identify whether the disclosures on estimation of oil reserves have been
included in the Consolidated Financial Statements of the group.
KAM: Litigation matters (oil and gas)
The holding company has certain significant open legal proceedings under
arbitration for various complex matters with the Government of India and other
parties, continuing from earlier years, which are as under:
(i) Disallowance of certain costs under the production-sharing contract
relating to Block KG-DWN-98/3 and consequent deposit of differential revenue on
gas sales from D1D3 field to the gas pool account maintained by Gail (India)
Limited (Note 30.3 and 30.4 [b]);
(ii) Claim against the holding company in respect of gas said to have
migrated from neighbouring blocks (KGD6) (Note 30.4 [a]);
(iii) Claims relating to limits of cost-recovery, profit-sharing and
audit and accounting provisions of the public sector corporations, etc.,
arising under two production-sharing contracts entered into in 1994 (Note 30.4
[c]);
(iv) Suit for specific performance of a contract for supply of natural
gas before the Hon’ble Bombay High Court (Note 30.4 [d]). Due to the complexity
involved in these litigation matters, management’s judgement regarding
recognition and measurement of provisions for these legal proceedings is
inherently uncertain and might change over time as the outcomes of the legal
cases are determined. Accordingly, it has been considered as a KAM.
How our audit addressed the KAM
Our audit procedures included, and were not limited to, the following:
(a) Assessing management’s position through discussions with the
in-house legal expert and external legal opinions obtained by the holding
company (where considered necessary) on both the probability of success in the
aforesaid cases and the magnitude of any potential loss;
(b) Discussion with the management on the
developments in these litigations during the year ended 31st March,
2019;
(c) Roll out of inquiry letters to the holding company’s legal counsel
(internal / external) and studying the responses received from them. Assessing
that the accounting / disclosures made by the holding company are in accordance
with the assessment of the legal counsel;
(d) Review of the disclosures made in the financial statements in this
regard;
(e) Obtaining a representation letter from the management on the
assessment of these matters.
KAM: IT systems and controls over financial
reporting
We identified IT systems and controls over financial reporting as a KAM
for the holding company because its financial accounting and reporting systems
are fundamentally reliant on IT systems and IT controls to process significant
transaction volumes, specifically with respect to revenue and raw material
consumption. Automated accounting procedures and IT environment controls, which
include IT governance, IT general controls over programme development and
changes, access to programmes and data and IT operations, IT application
controls and interfaces between IT applications, are required to be designed
and to operate effectively to ensure accurate financial reporting.
How our audit addressed the KAM
Our procedures included and were not limited to the following:
(I) Assessing the complexity of the IT environment by engaging IT
specialists and through discussions with the head of IT;
(II) Assessing the design and evaluation of the operating effectiveness
of IT general controls over programme development and changes, access to
programmes and data and IT operations by engaging IT specialists;
(III) Assessing the design and evaluation of the operating effectiveness
of IT application controls in the key processes impacting financial reporting
of the holding company by engaging IT specialists;
(IV) Assessing the operating effectiveness of controls relating to data
transmission through the different IT systems to the financial reporting
systems by engaging IT specialists.
KAM: Impairment of goodwill
The group’s balance sheet includes Rs. 11,997 crores of goodwill,
representing 1% of its total assets. In accordance with Ind AS, goodwill is
allocated to cash generating units (CGUs) which are tested annually for
impairment using the discounted cash-flow approach of each CGU’s recoverable
value compared to the carrying value of the assets. A deficit between the
recoverable value and the CGU’s net assets would result in impairment. The
impairment test includes sensitivity testing of key assumptions, including
revenue growth, operating margin and discount rate. The annual impairment
testing is considered a significant accounting judgement and estimate and a KAM
because the assumptions on which the tests are based are highly judgemental and
are affected by future market and economic conditions which are inherently
uncertain.
How our audit addressed the KAM
With respect to goodwill relating to material subsidiaries, our audit
procedures included and were not limited to
the following:
(i) Obtaining and reading the financial statements of the material
subsidiaries. Assessing the appropriateness of the methodology applied in
determining the CGUs to which goodwill is allocated;
(ii) Assessing the assumptions around the key drivers of the cash flow
forecasts including discount rates, expected growth rates and terminal growth
rates used, including engaging valuation specialists in certain cases;
(iii) Assessing the recoverable value headroom by performing sensitivity
testing of key assumptions used;
(iv) Discussing potential changes in key drivers as compared to previous
year / actual performance with management in order to evaluate whether the
inputs and assumptions used in the cash flow forecasts were reasonable.
KAM: Revenue recognition
The accounting policies of the group for revenue recognition are set out
in Note B3(p) to the Consolidated Financial Statements. The auditors of
Reliance JioInfocomm Limited (‘RJIL’), a subsidiary of the holding company,
have reported revenue recognition as a KAM due to the high volume of the
transactions, the high degree of IT systems involvement and considering that
accounting for certain tariff schemes involves exercise of judgements and
estimates, thereby affecting occurrence, cut-off and accuracy assertions in
respect of revenue recognition. Reliance Retail Ventures Limited (‘RRVL’), a
subsidiary of the holding company, trades in various consumption baskets on a
principal basis and recognises full value of consideration on transfer of
control of traded goods to the customers which most of the time coincides with
collection of cash or cash equivalent. The auditors of the subsidiary have reported
revenue recognition as a KAM due to the high volume of the transactions and
reconciliation of mode of payments with revenue recognised.
How our audit addressed the KAM
Our audit procedures included and were not limited to the following:
(a) Obtaining and reading the financial statements of RJIL and RRVL to
identify whether the revenue recognition policies are included in the
consolidated financial statement of the group;
(b) In respect of the KAM reported by the auditors of RJIL, we performed
an inquiry of the audit procedures performed by them to address the same. As reported by the subsidiary auditor, the
following procedures have been performed by them:
(i) involvement of IT specialists and testing of the IT environment inter
alia for access controls and change management controls over the subsidiary
company’s billing and other relevant support systems;
(ii) evaluation and testing of the design and operating effectiveness of
the relevant business process controls, inter alia controls over the
capture, measurement and authorisation of revenue transactions and involvement
of IT specialists for testing the automated controls therein;
(iii) evaluation of substantive testing involved, testing collections,
customer ratings for new products and tariffs introduced in the year, testing
the reconciliation between revenue as per the billing system and the financial
records and testing supporting documentation for manual journal entries posted
in revenue to ensure veracity thereof;
(iv) validation of the judgements and estimates exercised by the
management regarding the application of revenue recognition accounting standard
with respect to certain tariff schemes, particularly in view of adoption of
Ind AS 115;
(c) In respect of the KAM reported to us by the auditors of RRVL, we
performed an inquiry of the audit procedure performed by them to address it. As
reported to us by the subsidiary auditor, the following procedure had been
performed by them:
(v) Evaluation of the design, testing of the implementation of internal
controls and review of the operating effectiveness of the controls relating to
reconciliation of consideration with store sales by selection of samples from
different stores and dates throughout the period of audit and re-performance of
the reconciliation between store sales and the mode of payment collection
report.
KAM: Inventory
The auditors of Reliance Retail Ventures Limited (‘RRVL’), a subsidiary
of the holding company, have reported existence of inventory as a KAM due to
involvement of high risk on the basis of and the nature of the retail industry
wherein value per unit is relatively insignificant but high volumes are
involved which are dispersed across different points of sale and warehouses.
Refer Note B.3(i) to the Consolidated Financial Statements of the group.
How our audit addressed the KAM
Our audit procedures included and were not limited to the following:
In respect of the KAM reported to us by the auditors of RRVL, we
performed an inquiry of the audit procedures performed by them to address the
same. As reported to us by the subsidiary auditor, the following procedures
have been performed by them:
(I) Evaluation of the design and testing of the implementation of
internal controls relating to physical inventory counts on a test basis;
(II) Performance of test of controls over verification of documentary
evidence of controls including the calculation of shrinkages;
(III) Performance of test of details through sample selection of stores
as part of the inventory verification programme, including verification of
inventory from floor to documentary evidence and vice versa and
verification of shrinkage.
KAM: Transfer of the fibre undertakings
Pursuant to a Composite Scheme of Arrangement between Reliance
JioInfocomm Ltd. (RJIL), Jio Digital Fibre Private Limited (JDFPL) and Reliance
JioInfratel Private Limited (RJIPL) (the Scheme), RJIL has demerged its optic
fibre cable undertaking to JDFPL upon the scheme becoming effective on 31st
March, 2019. As per the scheme, RJIL transferred the undertaking to JDFPL at
book value and adjusted the carrying amount of net assets in reserves. Further,
JDFPL applied the purchase method of accounting in accordance with Ind AS 103
as mentioned in the scheme and recorded assets and liabilities of the
undertaking at their respective fair values and issued equity shares of Rs. 3
crores (fair value Rs. 497 crores) and optionally convertible preference shares
with surplus rights (OCPS) of Rs. 544 crores (fair value Rs. 77,701 crores) to
the company, being the shareholders of RJIL. Pursuant to the receipt of these
equity shares and OCPS, the holding company in its standalone financial
statements (SFS) has allocated its cost of investments in RJIL to RJIL and JDFPL
and elected to value its investment in OCPS at fair value through other
comprehensive income (FVTOCI).
Subsequently, the holding company sold its controlling equity stake in
JDFPL to Digital Fibre Infrastructure Trust resulting in a gain of Rs. 246
crores recognised in the consolidated statement of profit and loss. The
management has determined that the holding company has no control or
significant influence over JDFPL post the controlling stake sale. Further, the
remaining equity investment in JDFPL is measured at FVTPL and OCPS is measured
at FVTOCI in the Consolidated Financial Statements (Refer Note 2.2 of the
same). The auditors of RJIL have also reported a KAM in respect of the
accounting treatment applied for the scheme in its financial statements. The
above is considered as a KAM as the same has been reported as a significant
transaction that occurred during the current year which involves exercise of
judgement and interpretation of the relevant Indian Accounting Standards and
applicable tax and other statutes / regulations.
How our audit addressed the KAM
Our audit procedures included and were not limited to the following:
(i) Obtaining and reading the composite scheme of arrangement for
demerger of the optic fibre cable undertaking;
(ii) Obtaining the memo prepared by the holding company in consultation
with external experts (including related assumptions and accounting policy
choice) on the accounting treatment to be applied in the financial statements;
(iii) Evaluating whether the accounting treatment of the said
transaction is in line with the applicable Indian Accounting Standards;
(iv) Performing substantive testing procedures, including involvement of
valuation specialists for testing of the valuation reports provided by the
management for appropriateness of assumptions involved and testing of the
computation;
(v) Assessing whether the accounting entries recorded in the books are
in line with the accounting treatment assessed above, including the
arithmetical accuracy of the same;
(vi) In respect of the KAM reported by the auditors of RJIL, we
performed inquiry of the audit procedures performed by them to address the
same.
As reported by the subsidiary auditor, the following procedures have
been performed by them:
(I) Evaluation and testing of the internal controls over the
management’s assessment of the accounting treatment of the said transaction in
terms of the applicable Indian Accounting Standards and applicable tax and
other statutes / regulations, identification of assets and liabilities related
to each of the two undertakings;
(II) Substantive testing procedures including involvement of tax
specialists to validate the management position on tax implications of the
transaction and testing of tax computation for appropriate application of tax
laws, involvement of valuation specialists for testing of the valuation reports
provided by the management for appropriateness of assumptions involved and
testing of the computation, accounting of the transactions and the disclosures
for compliance with the requirements of the applicable accounting standards.
KAM: Impairment of assets of subsidiaries of
Reliance Industrial Investments and Holding Limited
The auditors of Reliance Industrial Investments and Holdings Limited (‘RIIHL’),
a subsidiary of the holding company, have reported a KAM on the impairment of
investment and loans given to subsidiaries as the recoverability assessment
involves significant management judgement and estimates (Refer Note B.3 [j] of
the Consolidated Financial Statements). Though these investments and loans are
eliminated at the consolidated level, the assets of the RIIHL subsidiaries are
included on a line-by-line basis in the Consolidated Financial Statements.
Accordingly, the impairment of these assets is considered to be a KAM.
How our audit addressed the KAM
Our audit procedures included and were not limited to the following:
(a) Obtaining and reading the financial statements of RIIHL and its
subsidiaries to identify whether any impairment has been recorded in the
current year;
(b) In respect of the KAM reported to us by the
auditors of RIIHL, we performed an inquiry of the audit procedures performed by
them to address the KAM. As reported to us by the subsidiary auditor, the
following procedures have been performed by them for material subsidiaries:
(i) Assessment of
the net worth of RIIHL subsidiaries / associates on the basis of latest
available financial statements;
(ii) Assessment of the methodologies applied to
ascertain the fair value or, as the case may be, value in use of the assets of
the subsidiaries / associates, where the net worth was negative;
(iii) Assessment of the accuracy and reasonableness
of the input data and assumptions used to determine the fair value of
subsidiaries’ assets, cash flow estimates, including sensitivity analysis of
key assumptions used.
